COMMISSIONER OF L"ICOME-TAX, MADRAS A v.

T.S.PL.P. CHIDAMBARAM CHETI1AR (DEAD) THROUGH

L. Rs.

January 21, 1971

[J, C. SHAH, C.J., K. S. HEGDE AND A. N~ GROVER, JJ.) B

Income Tax Act, 1922, s. 34(1) (a) Requirements of-Assessee not disclosing part of money repaid against loan and interest--!! undisclosed amou.1t not taxable and to be presumed adjuslo?d against principal-System of accounts maintained by assessee-lf relevam in relation to concealed income. ·

The asscssee's father made various loans to P in 1932. Jn July, 1932 P executed a mortgage of some of his properties in favour of the assessee's father for , a sum of Rs, 2.76 lakhs, After the mortgagee bad instituted a suit in December, 1940 claiming a sum of Rs. 5.50 Jakhs in elusive of principal and interest, a compromhe decree was passed in October, 1943 for a sum of Rs. 3 50 lakhs in full satiS'faction of the mortgagee's claim,

When the income-tax assessment proceedings of the assessee for the assessment year 1944-45 as karta of his Hindu Undivided Family were pending, the Income Tax Officer, Trichy, received information from the Income Tax Officer, Erode, that the mortgagor had secretly paid to the mortgagee a sum of Rs. 1.50 lakhs during the year ended on April l, 1944, :and that this was not included in the compromise decree. As the assessee denied receivin~ this amount and the• Assessing Officer had no Qther material before him, he made a note in the order sheet that the I.T,0,, Erode should be asked to give further details, and in the mean time, the assessment for 1944-45 should not .be held up.

On receiving further information, the Assessing Officer .cari1e to believe that a sum of Rs. I.SO lakhs had escaped assessment and after issuing the assessee a notice under s. 34(1)(a), he included the additional sum and taxed him on that basis.

The Appellate Assistant Commissioner set aside the order and directed the I, T.O. to re-do t.he assessm"nt after giving the assessec an opportunity to cross-examine the witnesses on the basis of whose state ments he had rached his conclusion, A:ftcr examination of further wit nesses and other evidence, a fresh order of assessment was made on the assessee under s. 23(3) read with s. 34 and this was affirmed by the Appellate Assistant Commissioner as well as by the Tribunal. Although the High Court, upon a reference, found that the assessment under s. 34 was valid and' the I.T.O, had rightly acted in giving effect to the order of the Appellate Assistant Commissioner to re-do the assessment, it held, purporting to rely on the decision in C.I.T. Bihar and Orissa v. Kameshwar Singh, 2. I.T.R. 94, that :the sum .pf Rs, 1,50,000 received by the assessee during tile relevant accounting was not taxable as the assessee maintained hi ac<;<iunts according to .the Chetty system and must be presumed to have appropriated the amount towards the .principal amount due to the mortgagor. ·

On appeal to this Court by the assessee as well as by the department,

HELD : The assessee's appeal must be dismissed and that of the Department allowed;

(i) There was no force in the contention that as the Income Tax Offi-· cer had before him the information about payment of a sum of Rs. 1.50 lakhs at the time be made the initial assessment and did not choose to act on the information, it was not open to him thereafter to initiate proceedings under s. 34.

On the facts found, underassessment due to non-disclosure of material facts was established. At the .time be issued notice under s. 34(1)(a) on the basis of the material before him, the Income-tax Offi<ier could have formed the necessary belief and stated in the notice that be bad formed such belief; the requirements of s. 34(1)(a) were therefore fully satisfied.

[432 FJ

Calcutta Discount Co. Ltd. v. lncomt-tax Ofjictr, Companlts Distrlci I, ' Calcutta and anr. [1961] 41, I.T.R, 191; referred 10.

(ii) The only ground on which the assessment order was set aside by the Appellate Assistant Commissioner was that the assessee had not been

given a proper opportunity to put forward his case. He did not bold that the notice under s. 34(1)(a) was invalid. There was therefore no force in the contention that a fresh notice should have been issued to the . assessee under s. 34(1) (a). [433 DJ

 (iii) The High Court was in error in thinking that the decision of the Judicial Committee in Kameshwar Singh's case had laid down the rule that whenever any amount is received by a creditor which he has not speci-· fically appropriated either towards the principal or the interest due to him, the taxing authorities should proceed on the basis of the presumption that it has been appropriated towards the principal.

In the present case it was evi.:ent that after secretly receiving the amount of Rs. 1.50 lakbs, the creditor did not enter it in bis account-books with a view to evade tax. U he intended to appropriate that amount towards the principal, there was no need for him not to enter that receipt in his accounts. The fact that the assessee was maintaining the Cbetty system of accounts wasimmaterial on the facts of the case. The system of maintaining accounts is wholly irrelevant because the receipt in question had not been entered in the accounts at all. [437 Al

CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 365 and 671 of 1967.

Appeals from the judgment and order dated January 6, 1966 of the Madras High Court ial Tax Case No. 143 of 1963 (Reference No. 37 of 1963).

B. Sen, B. D. Sharma and R. N. Sachthey, for the appe!Jant (in C.A. No. 365 of 1967) and the respondent (in C.A. No. 671 of 1967).

T. A. Ramachandran and D. N. Gupta, for the responent~ (in C.A. No. 365 of 1967) and the appella, nts (in C.A. No. 671 of 1967).

The Judgment of the Court was delivered by

Hegde J.-The first of these two appeals (both by certificate) viz. that filed by the Commissioner of Lncome Tax succe":' and the second, that fileif by the legal representatives of the "''essee

fails. The facts as found by the Tribunal and set out in the starement of the case, relevant for the purpose of these appeals are as follows:

The relevant assessment year is 1944-45, correspondiJ;.g to the accounting year ended on April 12, 1944. The assessee is one Chidambaram Chetti<1r (since deceased).

The father of 1ihe B assessee Palaniappa Chettiar was a momy lender. He had made various advances to .one Nallathambi Sakkarai Manradiar, who will hereinafter be referred to as the Pattayagar, a prominent landlordin Coimbatore District, on promissory notes. The total principal advanced by the. father of the assessee upto July 6, 1932 amounted to Rs. 1,38,535; The interest on the same came to Rs. 1,34,965. On July 6, 1932, a furtl1er advance of Rs. 2500 C was made to the Pattayagar and for the amounts due from him, the Pattayagar executed a mortgage of some of his properties in favour. of the assessee's father for a sum of Rs. 2, 76,000. Till 1938, only a sum of Rs. 13,620 w11s paid by the mortgagor in part payment of th~ debt due from him. On December 14, 1940 D the II!Ortgagee instituted a suit on the foot of the mortgage bond claiming a sum of Rs. 5,50,573 inclusive of principal and interest.

On September 19, 1943, the claim was compromised and on October 5, 1943, a cgnipromise decree was passed for a sum of Rs. 3,50,500 in full satisfaction of the :mortgagee's claim. The decree amount was made payable on or before October 1, 1944.

The debt under the compromise decree was subsequently dis- E . charged.

For the assessment year 1944-45, the assessec .:.:hldambaram Ch11ttiar, as karta of his Undivided Hindu Family was assessed under s. 23(3) of the Income Tax Act, 1922 (to be hereinafter referred to as the Act), on February 12, 1946, on a total income of Rs. 78,556 which, on appeal was reduced to Rs. 53,153. F ( When the assessment proceedings of the assessee were pending

before the Income-ta2C Officer, Trichy, that Income-tax Officer received informationfrom the Ir.come-tu Officer, Erode that the mortgagor bad paid secretly to the mortgagee a sum of Rs. 1,50,000 during the year ended on A\>ri! -1; 1944 d that the same was not included in the compromise decree. When the Income-tax Officer asked the assessee about the same, be denied G having received any amount secretly. Apart from the information conveyed by the Income-tax Officer, Erode, the Assessing Officer had no other material before him to show that any amount had been paid secretly by the mortgagor to the mortgagee. Hence on May 27, 1945, the Income-tax Officer made the following note in the order sheet : H "It is denied that there was any secret understanding not to show the payment of Rs. 1,50,000. The

receipt of this amount is entirely denied ... The Incometax Officer, Erode should be asked to give further details and to ask the Pattayagar {o produce evidence of the payment. In any event, this should come up for consideration only in the assessment year 1944-45 as only the exces over Rs. 2,76,000 plus legal expenses can be treated as interest income in the han<ls of the 115sessee and so, the assement for 1944-45 should not 'be held up pending further investigation."

After sometime the Assessing Officer made further enquiry into the information given by the Income-tax Officer, Erode and thereafter he came to believe that a sum of Rs. 1,50,000 had escaped assessment by reason of. the omission of the assessee to disclose fully and truly all materia'l facts necessary for his assessment for the assessment year 1944-45. He accordingly issued a notice under s. 34(l)(a) on March 9,-1953. In reply to that notice, the asses see filed a return similar to the one filed by hlm earlier.

He denied having received Rs. 1,50,000 secretly from the mortga- D gor. The Income-tax Officer did not accept the plea of the assessee.

He accordingly included an additional sum of Rs. 1,50,000 to the income of the assessee earlier determined for the assessment year 1944-45 and taxed him on that basis. In appeal, the Appellate Assistant Commis§ioner set aside the order of the Income-tax Officer and directed the Income-tax Officer to re-do the assessment after giving the assessee an opportunity to crossexamine the parties examined by the Income-tax Officer on the basis of whose statements he had come to the conclusion that a sum of Rs. 1,50,000 had been secretly paid to the mortgagee by the mortgagor.

Thereafter the Income-tax Officer further inquired into the matter; Pattayagar's books of account were got produced to prove that an additional sum of Rs. 1,50,000 had F been paid to the assessee. Some witnesses were also examined in the presen.ce of the assessee to prove that fact. After doing fresh order of assessment was made on the assessee under s. 23 3) read with s: ~4. His order Wa$ ajlirmed by the Appellate Ass tant Comm1ss1oner as well as by the Tribunal. At the instance of the assessee, the following three questions were submitted to the G High Court under s. 66(1) of the Act.

"(1) Whether assessmeut under section 34 wa:s valid and proper?

(2) Whether the Income-tax Officer rightly acted in giving effect to the order of the Appellate Assistant Commissioner setting aside the assessment to re-do the. same. acpording to law after. giving an opportnmty to the appellant to place all his cards before the Department ?

(3) Whether Rs. 1,50,000 is taxable as income of A the year of account ?"

The High. Court answered the first two questions against the assessee and the third question against the Department. The legal representatives of the assessee are challengip.g the High Court's decision on the first two questions and the Commissioner is chal • B lenging the High Court's decision on the third question.

' We shall first take up the assessee's appeal. There is hardly any merit ih that appeal. It was urged on behalf of the representatives of the assessee that as, even when the original assessment proceedings for pie relevant year were before the Income-tax Officer, 'he had before him the information giyen by the Income- C tax Officer, Erode, but yet, he did not choose to act on that information, it was not open to him thereafter to initiate proceedings under s. 34. We are unable to accept this contention. On the facts found by the .Tribunal, ill is established that the assessee's father 1'ad clearly suppressed the receipt of Rs. 1,50,000 from the mortgagor. The assessee had a duty to disclose fully and truly o all material facts necessary for his assessment.

Herein we are not dealing with a case coming under s. 34(1 ){b). All that we have to see is whether the requirements of s. 34(1)(a) are satisfied.

This Court in Calcutta Discount Co. Ltd. v. Income-Un: Officer, Companies District I, Calcutta and anr., (') ruled that to confer jurisdiction on the Income-tax Officer to fake action under s. 34, ( 1) (a), two conditions must be saisfied viz. ( 1) he has reason to E believe that there was under-assessment and (2) that h,,. :nust have reason to believe that the under-assessment has resulted from nondisclosure of material facts. On the facts found, underassessment is established and it is also established that the underassessment was due to non-disclosure of material facts.

There can be no doubt that at the time he issued notice under s. 34(l)(a) on the F basis of the material before him, the Income-tax Officer could have formed the necessary belief. In the notice issued he says that he had formed that belief. In our opinion the requirements of s. 34(1)(a) are fully satisfied. The fact that there was some vague information before the Income-tax Officer that the assessee's father had secretly received a sum of Rs. 1,50,000 from the mort- G gagor was by itself not sufficient to bring to tax that amount particularly in view of the fact that the assessee had stoutly denied that fact and the court records did not support that information. It is true that the Income-tax Officer could have made further enquiry into the matter but the fact that he did not make any further enquiry does not ta\:e the case out of s. 34(1)(a) particularly when H the assessee had failed to place truly and fully all the material facts before him. The remark of the Income-tax Officer that "in

(IJ [1961] 41l.T.R.191

• .i

:~ -r I

any event this (the receipt of Rs. 1,50,000) should come up for consideration only in the assessment year 1944-45 as only the excess over Rs. 2, 7 6,000 plus legal expenses can be treated as interest income in the hands of the assessee and so, the assessment for 1944-45 should not be held up pending further investigation" in the order sheet does not amount to a decision taken by him.

It may be noted that those remarks were not made in the order assessing tile income of the assessee. It must also be remembered that the Income-tax Officer, at the time he made th'.ose remarks was not satisfied about the correctns of the information given by the Income-tax Officer, Erode. Hence those remarks must be treated as casual observations and not a decision taken on the basis of c facts found.

We see no substance in the contention that the 1ncome4ax Officer did not give effect to the order of the Appellate AssiStant Commissioner when the latter asked him to reassess the income of the assessee. The only ground on which the assessment order was set aside by the Appellate Assistant Commissioner was that the D assessee had not been given a proper opportunity to put forward his case.

The Appellate Assistant Commissioner did not hold that the notice issued by the Income-tax Officer under s. 34(l)(a) was an invalid notice. Therefore there was no need for the Incomctax Officer, Trichy to issue a fresh notice to the assessee under J. 34(1)(a) as contended on behalf of the assessee's representatiwa.

E All that the Income-tax Officer had to do was to afford proper opportunity to the assessee to show that in fac; t he had not received the aforementioned sum of Rs. 1,50,000. That opportunity had been given.

In view of our above conclusion Civil Appeal No. 671 of 1967 fails and the same is dismissed.

Now coming to the appeal filed by the C<>mmissi~ of Income-tax, the High Court came to the conclusion that the sum of Rs. 1,50,000 received by the assessee during the relevant

account year must be presumed to have been appropriated by the assessee towards the principal amount due to the mortgagor and hence the same cannot be considered as an income of the assessee G during that year.

The assessee was maintaining his account!I in accordance with what is known as Chetty system of accounts. The material on record shows that according to the Chetty system of accounts, the creditor appropriates a receipt first towards the cost of litigation, then towards the principal amount due .and the balance towards the arrears of interest. The High Court was of H the view that the sum of Rs. 1,50,000 secretly received by the creditor must be deemed to have been kept in suspense. As the debator had not given any direction about the appropriation of that amount it was open to the creditor to appropriate the same 14-J.817Sl'pC1;71

towards the principal amount and further he must be presumed to A have appropriated that amount towards the principal amount before s. 34 proceedings were started against him firstly because of the system of accounts maintained by !rim and secondly because every one must be deemed to have, i\Cled in a manner least disadvantageous to him. In support of this conclusion reliance was placed by the High Court on the decision of the Judicial Committee in The Commissioner of Income-Tax, Bihar and Orissa v.

Kameshwar Singh('). In that case, nature of several receipts by the assessee came up for consideration. For our present purpose

we nd only refer to two of them. One Damodar Das Burman owed to the assessee in *e Fasli ye11r 1332 Rs. 3,09,281. ])(Iring

the currency of the debt the debtor had made regular payments to c .t!te assessee over a number of years, the total of which payments

\VBS .not stated. Those payments were entered in the deposit i:egister maintained by the assessee but no allocation thereof were made as betw.een principal and interest, and no part of those payments were carried to the interest register maintained by the assessee. Conse- . quently""11D part of these payments was subje<'ted to tax until the Fasli year 1331, in which year for the first time the Income-tax D Officer cme to know about the deposit register maintained by the assessee.

In that year, the deposit register showed a receipt of Rs.-38,091 and on this the officer claimed and was paid tax on the footing that it was attributable1 to interest and not to principal.

The result is that against the total interest on the debt, viz. :Rs. 3,09,281, no sums had been attributed by the assessee to interest out of the payments made to him by the debtor. But the Income-tax Officer had himself treated the sum of Rs. 38,091 received in the year Fasll 1331 as interest and taxed it accordingly.

That left Rs. 2, 7l,190 as the balllJ!l.ce of the total interest on the debt, during its currency towards which balance the assessee made . no attributions of interest out of the payments received by him from the debtor during its currency. No tax accordingly had been paid in respect of any of these receipts other than on Rs. 38,091.

Theref_ore the question before the Court was how in those circumstances should be received of Rs. 2,78,000 itn the Fasli year 1332 be treated.

Dealing with that question the Judicial Committee observed:

"Now, where interest is outstanding on a principal sum due and the creditor receives an open payment from the debtor without any appropriation of the payment as betweeri capital and interest, by either debtor or creditor, the presumption is that the payment is attributable in the first instance towards the outstanding interest. . . . . . . . This presumption is no doubt operative primarily in questions between debtor and creditor, but

.. (I) [1933] 2 l.T.R. 94.

in their Lordship's view, the Income-tax Officer, finding that the assessee received a payment from his debtor of Rs. 2,78,000 in the year i:<asli 1332 and that the assessee had not up till then credited himself as having received any interest receipts to the Revenue Authorities was CJI• titled in the circumstances to treat this sum of Rs. 2, 78,000 as applicable to the outstanding interest to the extent of Rs. 2,71,190 and accordingly to treat the payment lo that extent as income of the assessee in the year of payment."

From the facts noted above, it is clear that what presumption should be drawn in regard to appropriation of an open payment depends on the circumstances of a case. Now we shall proceed to deal with the second receipt namely that from Kumar Guesh Singh. In the Fasli year 1332 Kumar Ganesh Singh owed the assessee 32 lacs as principal and Rs. 6,09,571 as interest, or a total of R1i. 38,09,571 in all, in respect of an unsecured loan. In that year the assessee and his debtor entered into an arrangement whereby, as the Commissioner stated "the assessee-took over from the debtor in satisfaction of this amount the following items of property movable or immovable :-

J. The Kajora Colliery valued at

2. Shares in different companies valued at

3. Bills received by the abo\'C brokers (i.r. Gan(sh Singh"s firm)

4. Decree

5. Tra.nsfcr of loan to the Aer~ United Co.

6. Pronotcs and hand-norcs (of third partic~)

7. Hand-notes fron1 Kumar Ganesh Singh

Rs. 7.31.339:.

Rs. 94.125/·

Rs. 4818091- Rs. 1,42,594/-

Rs. 10.00.ocr,-

Rs.

52. IC)f'- Rs. 17.34.59~/- ~---

Rs. 38.09.569/· ____ .....,..__

The question for decision was whether as a result of the abo~~ settlement, it could be said that in the account year the assessee

had received a sum of Rs. 6,09,571-due to him as interest. The Judicial Committee came to the conclusion that the first six items G mentioned above amountiing to Rs. 20,74,973 may perhaps

reaaonably enough be regarded as the equivalent of cash, but the seventh item of Rs. 17,34,596 consisting of the debtor's ownpromissory notes, was clearly not the equivalent of cash. A debtor who gives his creditor a promissory note fpr' t'l.te sum he owes caa in no sense be said to pay his creditor; he merely gives him a document or voucher of debt possessing certain legal attriliu~ H The next question was whether the receipt of Rs. 20,74,973 can be said to include a receipt of interest of Rs. 6,09,571 ? The Judicial Committee answered that question thus :

"He (Counsel for the Crown) relied on the already invoked in the case of Damodar Das Burman above, that a creditor is presumed to apply payments received from his debtor towards the extinction of interest claims before capital claims.

But the situation which their Lordships are now considering differs materially from that which existed in the case of Damodar Das Burman.

Jn that case, apart from other specialities there was no settlement, but merely an open payment to account.

Here there was an arrangement effecting the whole indebetedness whereby certain assets were' accepted in part satisfaction and promissory notes were taken for the balance. The basis of ihe presumption, namely, that it is to 'he, creditor's advantage to attribute payments to . interest in! the first place, leaving the interest-bearing

capital outstanding, is gone. Moreover, if the question

we!'Q' one between Kumar Ganesh Singh and the assessee, i.e. between debtor and the creditor, the assessee might UJ? to the last moment appropriate the Rs. 20, 7 4,973 to capital account . . . . . . Their Lordships have also not omitted to bear in mind the provi- -sions of ss. 60 and 61 of the Indian Contract Act, though these were not relied on in argument as applicable to the case. In the result their Lordships are of opinion that having regard to the nature of the transaction, the assessee is entitled to say that he has accepted the first six items in discharge pro tanto of his debtor's capital !iabr-' lity and that the capital debt now stands discharged to that ' extent. No part of the sum of Rs. 20,74,973 accordingly was received by the assessee as taxable income in the year of computation."

Here again we notice that the conclusion drawn by the Judicial F Committee depended on the facts and circumstances before them.

Though the factum qf settlement of the debt was relied upon as one of the circumstances, for finding out the meaning of appropriation, it was by no means a conclusive circumstanre. Evidently their Lordships bore in mind the possibility of the assee not being able to realise the debts under the hand-notes. Under those

circumstanci:s it w'as advantageous to the assessee to appropriate G

, the money value of the properties received towards _the capital, otherwise there was a possibility of his having to pay income-tax on a receipt which ultimately may not prove to be an income. It is under those circumstances-their Lordships observed :

"that in a question with the revenue the tax-payer is entitled to appropriate payments as between capital and interest in the manner least disadvantageous to himself."

In our opinion the High Court was in error in thinking that the decision o{ the Judicial Committee in Kameshwar Singh's case ( 1) has laid down a firm rule that whenever an assessee receives a payment and does not appropriate the saip.e either towards the principal or interest, he must be deemed to have appropriated B the same towards the p(incipal. The decision in question, in our opinion, does not Jay down the rule that whenever any amount is received by a creditor which he has not specifically appropriated either towards the principal or the interest due to him, the taxin~

authorities should proceed on the basis of the presumption that it has been appropriated towards the principal.

On the facts of that case it was clear that it was advantageous to the creditor to c

appropriate the receipt towards the principal. But turning to the facts of the present case the total amount due to the assessee was over 6 lakhs. Out of that the principal amount was less than lakhs. The compromise decree was for Rs. 3,50,500. The creditor secretly received Rs. 1,50,0001-. He does not enter the same in his account books. Evidently he did not enter the same in his accoujttbooks with a view to evade tax.

H he intended to appropriate that amount towards the principal, there i.x._as no need for him not to enter that receipt in his accounts. Obviously he appropriated the amount towards the interest due to him and that is why he did not enter that receipt in the accounts so as to facilitate evading payment of tax on that amount. The fact that the assessee was maintaining Chetty system of accounts is immaterial on the facts of the case. The system of maintaining accounts is wholly irrelevant because the receipt in question had not been entered in the account at all. Hence, in our opinion, the High Court erred in answering the third question against the Department.

We accordingly allow Civil Appeal No. 365 of 1967 and answer the third q_Qestion referred to the High Court in favour of the Revenue namely that the receip¥of Rs. 1,50,000/ is taxable as income of the year of acoount. The assessee shall pay the costs of these api; eals-hearing fee one set.

R.K.P.S.

Civil Appeal 365 of 1967 allowed.

Civil Appal 671 of 1967 dismissed.

(I) [1933] 21. T. R. 94.

COMMISSIONER OF L"ICOME-TAX, MADRAS

T.S.PL.P. CHIDAMBARAM CHETTIAR (DEAD) THROUGH L.Rs

C. SHAH, C.J.

K. S. HEGDE

A. N~ GROVER, JJ.

Income Tax Act, 1922

s. 34(1)

Income Tax Officer, Trichy

Erode

s. 34(1)(a)

s. 23(3)

s. 34

s. 34

s. 34

s. 34(1)(a)

s. 34(1)(a)

s. 34(1)(a)

s. 34(1)

Kameshwar Singh's

B. Sen

B. D. Sharma

R. N. Sachthey

T. A. Ramachandran

D. N. Gupta

Hegde

April 12, 1944

Chidambaram Chetti<1r

Nallathambi Sakkarai Manradiar

Coimbatore District

July 6, 1932

Pattayagar

14, 1940

September 19, 1943

October 5, 1943

October 1, 1944

s. 23(3)

Income Tax Act, 1922

May 27, 1945

s. 34(l)(a)

March 9,-1953.

s. 23

s. 66(1)

section 34

s. 34

s. 34(1 )

s. 34(1)(a)

s. 34

s. 34(l)(a)

s. 34(1)(a)

s. 34(1)(a)

s. 34(l)(a)

s. 34

Damodar Das Burman

Kumar Guesh Singh

Kumar Ganesh Singh

Kumar Ganesh Singh

Hand-notes fron1 Kumar Ganesh Singh

Rs.

ss. 60 and 61

Indian Contract Act

Kameshwar Singh


43·8

COMMISSIONER OF INCOME TAX, ASSAM AND.

NAGALAND ETC. v.

SHRI G. HYATT January 21, 1971

[J. C. SHAH, C.J., K. S. HEGDE AND A. N. GROVER, JI]

Inaome-tax Act 1961, ss. 17 and 56-Contribution to unrecognised provident fund-Interest thereon-Whether caxab/e under s. 56.

On the question whether an amount representing the interest on the amount of the assessee's own contributions to an unrecognised provident fund was assessable µnder the -residuary s. 56 of the Income-tax Act, 1~61.,

HELD : The arlii; mnt was liable to be assessed.

The receipt of aninterest of any investment is a gain made by the investor and there'fore the same is

1income''.

In view of s. 17(1)(iv), all receipts•bf profits in.lieu of salary have to be considered as salary.

In defining the expression 'profits in lieu of salary','ithe legislature exclucieclfrom the scope of that expression any D payments received by the assessee' from a provident fund, his own contributions to the fund or any interest on such contributions.

TherE1iore this receipt cannot be considered as salary, though undoubtedly that is an income.

As the income in question is not salary and the same cannot be said to be either interest on the securities; income from house property, profits and gains of business of profession or capital gains, it IJlas to be considered as 'income from other sources' and brought to tax un\ler s. 56.

Section 56( I) provides that income of every kind which is not to be excluded from the total income under the Act shall be chargeable to incometax' under any of the heads specified in s. 14 item "A" to "E". [439 C-GJ CIVIL APPELLATE JuR1smcT10N : Civil Appeal No. 1174 of 1967. .

Appeal from the judgment and order dated August 22, 1966 of the Assam & Nagaland High Court in Income-tax Reference No. 3 of 1966.

Jagadish Swarup, Solicitor-General, G. C. Sharma, R. N.

Sachthe, v and B. D. Sharma, for the appellant,

T. A. Ramachandran, for the respondent.

The Judgment of the Court was delivered by Hegde, J.

The Commissioner of Income-tax, Assam and Nagaland has brought these appeal by certificate.

The assessment with which we are concerned in this appeal is for the assessment year 1'963-64, the relevant accounting year Tu the financial year 1962-63.

The assessee was the manager of a Tea Estate under the managing agency of Ml s. Gilla, nders Arbuthnot & Co. Ltd.

The said Co. had a Provident Fund scheme for its employees.

But that provident fund was not a recognised one.

The assessee retired during the previous year relevant to assessment year 1963-64 and received out of this provident fund an

A amount of Rs. 27 ,948/- which represented the interest on the amount of his own contribution to the fund, The Income-tax Officer assessed this amount as the assessee's income from other sources. That order was confirmed appeal by the Appellate Assistant Commissioner.

But on further appeal to the tribunal by the assessee, the tribunal came to the conclusion that the re- B ceipt in question being profits 'in lieu of salary', the same was his salary as defined in s. 17 of the Income-tax Act, 1961 (to be hereinafter referred to as the Act) ; the SaJ!le having not been assessed as his salary, the assessment order relating to that item of receipt WJIS not legal.

At the instance of the Commissioner, the tribunal referred the following question of law to the High C Court of Assam and Nagaland for its opinion :

"Whether on the facts and circumstllillces of the case and having regard to the provisions of section 17(3)(ii) of the Income-tax Act, 1961 the amount Rs. 27,948/- representing the interest on the amount of the assessee's own contpbutions to an unrecognised B provident fund was assessable under the residuary section 56 of the said Act?"

The High Court answered that question in the negative and in favour of the assessee. While'it came• to the conclusion that the receipt in question cannot be considered as salary as defined in s. 17, in its view the same was exempt from payment of tax E in view of s. 17 ( 3 )(ii). The Commiss10ner is challenging the above conclusion.

The receipt of Rs. 27,948/- is undoubtedly an income as defined by s. 2(24). The receipt of an interest on any investment is a gain made. by the investor and therefore the same is

11 "income". The next question is whether the said income is exempt from tax or if it is not exempt under what head the same has to be brought to tax ?

Section. 14 of the Act gives the heads of income. They are : <A) Salanes; (B) Interest on securities; (C) Income from house prperty;. (D) Profits and gains of business or profession; G (E) Capital gams and (F) Income from other sources. ·

The salaries are brought to tax under s. 15 and "the income from. other sources" is brought to tax under s. 56.

In this appeal we re not. co?cerned with the other heads of income The slary 1~. defined m s. 17 as including any "profits in lieu of o_r m add1t10n to any salary or wages" [s. 17(1) (iv)].

Sub- H section ( 3) of s. 17 say:; :

"profits in lieu of salary" includes.- * •

SUPREME COURT REPORTS

[1971 ]3 S.C.R

(ii) any payment. . . . . . . . . . due to or received by an assessee from an employer or a former employer or from a provident or other fund (not being an approved superannuation fund) to the extent to which it does not consis~ of contribution by the assessee or interest on such contributions." (emphasis supplied)

The contributions to recognised provident funds are dealt with by other provisions of the Act. Herein we are concerned with the contribution to an unrecognised provident fund.

The learned judkes of the High Court opined that the receipt by he assessee with which we are c0111cemed is exempt from. the payment of tax in view of s. 17(3}(ii). In our opinion they were clearly in error in arriving at that conclusion. Deductions from salaries are dealt with by s. 16. In view of s. 17 (1 )(iv), all receipts of profits in lieu of salary have to be considered as salary. ; But then the question is what is meaint by "profits in lieu of salary". In defining the expression "profits in lieu of salary",

the legislature excluded from the scope of that expression any payments received by the assessee from a provident fund, his own contributions to the fund or any interest on such contributions.

From that it follows that 'the receipt of Rs. Z7 ,948/- by the assessee in the relevant accounting year cannot be considered as salary though undoubtedly that is an income.

Section 17 has nothing to do either with deductions or with exemptions. It is merely a provision defining the expression "salary".

As the ihcome in question is not salary and the same cannot be said to be either_ interest on the securities; income from house property; profits. and gains of business or profession or capital gains. it' has to be considered as "income from other sources" and brought to tax under s.

56. Section 56 ( 1) provides.,. that income of every kind which is not to be excluded from the total income under the Act shall be chargeable to

income-tax under the head income "from other sources" if it is nof chargeable to income-tax under any of the heads specified in s. 14 items 'A' to 'E'. -

In our opinion the meaning of s. 17 ( 3 )(ii) is plain and unambiguous.

Hence there is no need to call into aid any. of the rules of CQDStruction as was sought to be done by the High Court.

The respondent was not represented before this Court.

We are obliged to Mr. T. A. Ramachandran for cceding t~ our reqiiest to appear on his behalf an amicus curiae and assist us at the time of hearing of the appeal.

For the reaso$ mentioned above we allow this appeal, discharge the answer give11 by the High Court and answer the question referred to the High Court in the affirmative and in favour of the Department. Under the circumstances of the case we make no order as to costs.

Y.P.

Appeal al/owed.

G. HYATT

C. SHAH, C.J.

K. S. HEGDE

A. N. GROVER

Inaome-tax Act 1961

ss. 17 and 56

s. 56

s. 56

Income-tax Act

s. 17(1)(iv)

s. 56

Section 56( I)

s. 14

Assam & Nagaland High Court

Jagadish Swarup

G. C. Sharma

R. N.

Sachthe

B. D. Sharma

T. A. Ramachandran

Hegde

s. 17

Income-tax Act, 1961

High C Court of Assam and Nagaland

section 17(3)(ii)

Income-tax Act, 1961

section 56

s. 17

s. 17

s. 2(24)

s. 15

s. 56

s. 17

s. 17(1)

s. 17

s. 17(3}(ii)

s. 16

s. 17

Section 17

s.

56

Section 56

s. 14

s. 17

T. A. Ramachandran


CHHUGAMAL RAJPAL v.

S. P. CHALIHA & ORS.

January 21, 1971

(J. C. SHAH, C.J., K. S. HEGDE AND A. N. GROVER, JJ.J

Income-tax Act, 1961, s. 147, 148 and 151-lssue of notice under s. 148-Assessment of escaped income-Requirement of s. 147(a) and

(b) must be satisfied and reasons recorded before the issue of notice under s. 148-Report to Commissioner under s. 151 (i) must disclose .existence of ground'S for issue of notice-Conzmissioner 1nust apply 1nind before -grantinK sanction.

The appe.lant, a partnership firm, filed its return of income for the .assessment year 1960-61 and subsequently produced before the Income :tax Officer its relevant books of accounts and papers. It also produced before him the statement showing various creditors from whom it had borrowed on Hundis during the accounting year in question, giving full names and addresses of the alleged creditors. After enquiry the Income- tax Officer made an assessment.

On June 3, 1966 the' Income-tax Officer issued to the appellant a notice under s. 148 of the Income-tax Act, 1961.

The notice was issued after four years but before 8 years of the end of the original assessment year. The appellant challenged the validity of the notice as well as the proceedings taken on the strength of that notice in a writ petition under Arts. 226 and 227 of the Constitution. The High

Court dismissed the petition.

By special leave appeal was filed in thi< Court.

On direction given by the Court the report submitted by tho Income-tax Officer to the Commissioner and 1 the Commissioner's order thereon were produced. Jn the report it was said that it appeared that the alleged creditors of the appellant were name lenders and transactions were bogus; hence proper investigation regarding those loans was necessary.

Question No. 8 on the report was whether the Commissioner was satisfied that the case was fit for the issue of notice under s. 148. Against this the commissioner had noted 'yes'.

On these facts this Court, HELD: Under s. 148 and s. 151(2) the Income-tax Officer must record his reasons for issuing the notice under s. 148. There must be prima facie grounds for taking action under s. 148 Further before issufog such a notice the provisions of els. (a) and (b) of s. 147 must be satisfied. [447 B, E] In this case the Income-tax Officer appears to have had a vague feeling that the transactions were bogus and that the alleged creditors were only name lenders.

According to him proper investigation regarding the loans was necessary.

That is not the same thing as saying that there are reasons to issue notice under s. 148. [447 A-CJ

In these circumstances it could not be held that the Income-lax Officer had any material before him which could satisfy the requirements of either cl. {a) or cl. (b) of s. 147. Therefore he C?uld not ha.vc issued a notice under s. 148. Further the report submitted by him under s. 151'(2) did not mention any reason for coming to the conclusion that it was a fit case for the issue of the notice under s. 148. The Commissioner also mechanically accorded permission. Thus the important safeguards provided in ss. 147 and 151 were lightly treated by the income-tax Officer as well as by the Commissioner. [447 F-448 BJ The appeal must accordingly be allowed.

ClIHUGAMAL v. s. P. CHALIHA (Hegde, J.) 443

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1311 of 1967.

Appeal by special leave from the judgment and order dated January 17, 1967 of the Patna High Court in C.W.J.C. No. 952 of 1966.

M. C. Chagla, N. D. Karkhanis, S. P. Chowdhury, Bhumnesh Kumari, for the appellant.

S. C. Manchanda, R. N. Sachthey and B. D. Sharma, for the respondent.

. C The Judgment of the Court was delivered by

Hegde, J, This is an assessee's appeal by special leave against the judgmqnt of the High Court of Patna dismissing in limini its writ petition under Arts 226 and 227 of the Constitution of India.

The assessee is having construction contracts under the Railways as well as the Government. It is a partuership firm. For the assessment year 1960-61, relevant to the accounting year 1959-60, after the assessee submitted its income-tax return, it was asked by the Incol))t:-tax Officer during the income-tax assessment proceedings to produce before him its books of account E and the other relevant papers.

The assessee also produced before him a statement showing various creditors from whom it had borrowed on Hundis during the accounting year in ques1ion. 11). that statement it gave the full names and addresses of the alleged creditors.

After enquiry, the assessee's total income was

assessed at Rs. 69,886/-. On June 3, 1966, the 1st respondent (Income-tax Officer , Ward 'A', Muzalfarpur) issued to the assessee a notice under s. 148 of the Indian Income-tax Act,

1961. The material portion of that notice reads as follows :

"Notice under s. 148 of the Income-tax Act, 1961.

Income-Tax Officer, Muzaffarpur Dated, the 3-6-1966.

M/s. Chugamal Rajpal, Muzaffarpur.

Whereas (I) have reason to believe that your income chargeable the income of 1960-1961 in rspect of which you are assessable to tax for the assessment year 19 19 has escaped assessment within the

meaning of section 14 7 of the Income Tax Act, 1961.

I therefore propose to re-assess the income for the said assessment year and I hereby require you to deliver to me within 30 days from t.'te date of service of this notice a return in the prescribed form of your income

The income

assessable relevant to the assessment year 1960-61

in respect of which you are assessable for the said assessment year.

2. The notice is being issued after obtaining the necessary satisfacti0tn of the Commissjoner of Income- Tax, Bihar and Orissa, Patna.

Sd/- S. P. Chaliha Income-Tax Officer, Ward A, Muzaffarpur."

The assessee challenged the validity of that notice as well as proceedings taken on: the strength of tha< notice on various E grounds. As we are accepting the co; ntention of the assessee that the impugned notice is invalid inasmuch as it did not comply with the requirements of s. 151 (2) of the Act, we have not thought it necessary to examine the other contentions advanced on behalf of the assessee.

In this case the notice was issued after four years but before eight years of the date of the original F assessment.

Section 151(2) of the Act reads:

"No notice shall be issued qnder Section 148 after the expiry of four years from the end of the relevant assessment year, unless the Commissioner is satisfied on the reasons recorded by the Income-tax Officer that it is a fit case for the issue of such notice.',''

section 148 prescribes : " ( 1) Before making the assessment, re-assessment or re-computation 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-sectioo (2) of Section 139 and

.....

ClillUGAMAL v. s. P. CHALIHA (Hegde, /.) 445

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 ncome-tax Officer shall, before issuing any notice under this section, record his reasons for doing

so." Section 14 7 deals with income escaping assessment. At this stage we need not refer to that section : We shall refer to that provision at a later stage. Section 139(2) says: "In the case of any person who, in the Incometax Officer's opinion, assessable under this Act, whether on his own total income or on the total income of any other person during the previous year, the Income-tax Officer may, before the end of the relevant assessment year; serve a notice upon him requiring him to furnish, within thirty days from the date of service of the notice, a return of his income or the income of such other person during the previous year, in the prescribed form and verified in the prescribed manner. and setting forth such other particulars as may be prescribed."

(proviso is not necessary for our present purpose) When this appeal came up for hearing on the last occasion, as we found the affidavit filed by the Income-tax Officer to be vague and indefinite, we directed the learned Counsel for the Department to produce before us the records of the Income- tax Officer to show that the Income-tax Officer had complied with the requirements of s. 148 and s. 151 (2) of the Act. When the appeal was talcn .up for hearing on the 18th January 1971, only the report suomitted by the Income-tax Officer to the Commissioner and the order of the Commissioner was produced. The order .sheet recording the reasons of the Income-tax Officer as required by s. 148(2) was not produced. Hereinbelow we have sent out the report of the Income-tax Officer as well as the order of the Commissioner : -G "Report in Connection with. the starting of proceeding 1 under Section 147 of the --t Incometax Act, 1951. ·

Name ofD:strict Ward of Circle....

A Ward, Muzaffarpur G.l.R. No....

. . 303-C. 1.

l. NJm'! and address of the as5es'!ee

2. Status

3. Assec.sment year for which notice under

M/s. ChugamaJ RajpaJ, Muzaffarpur.

R.F.

s.148 is proposed to be issued 1960-61.

4. Whether it is a new case or on~ in which re-assessment (or recon1putation) has to be made Re-assess1ncn1

5. If a case of reassessment (or rccomputation) the income. (or loss or depreciation allowance) originally assessed/determined. Rs. 73,604/-

6. Whether the case falls under cl. (a) or (b) ofs.147 147(a)

7. B:ief re1sons for starting PrOC!cdings under s. -147 (indicate the items which are

b.!lievd to h:tve escaped assessment)

8. Whether the Con1missioner is scitisfied that

it is a fit case for the issue of notice under

se::lion 148.

Kindly see overleaf

Sd/- S. P. Chaliha. l.T.0., 30-4·66 A-Warci, Muzaffarpur.

Yes Sd/- K. Narain

13-5·66 - Con1missioner of tncon1e-tax.

Bihar and Orissa, Patna

9. Whe1her the Board iS satisfied that it is a Secretary, Board of Revenue. fit case for the issue of notice under s.148.

During the year the assessee has shown to have taken loans from various parties of Calcutta.

From D.I.s Inv. No. AIP I Misc.(5)D.I./63-64/5623 dated 13-8-65, forwarded to this office under C.I.T. Bihar and Orissa, Patna's letter No. Inv. (Inv.) 15/

65-66/1953-2017 dated Patna 24-9-65, it appears that these persons are naine lenders and the transactions are bogus.

Hence proper "investigation regarding these loans is necessary.

The name of some of the persons from whom money is alleged to have taken on loan on Hundis are :

1. Seth Bhagwan Singh Sricharan.

2. Lakha Singh Lal Singh.

3. Radhakissen Shyam Sunder.

The amount of e§capement involved amounts to Rs. 100,000/-.

Sd/- S. P. Chaliha, 30'4-66.

Income-tax Officer, A-Ward. Muzaffarpur."

In his repott the Income-tax Officer does not set out any reason for coming to the conclusion th'at this is a £.t case to issue notice under s. 148.

The material that he had before him for issui. g notice under s. 148 is not mentioned in the report.

In his report he vaguely refers to certain communications received by him from the C.I.T .. Bihar and Orissa. He does not mention the facts contained in those communications.

All that he says is that from those communicatiqns "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

I D

CHHUGAMAL V. S. P.'CHALIHA. (Hgde, J.) 447

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 s. 151 (2).

Wl; lat that provision requires is that he must give reasons for issuing a notice under s. 148.

In other words he must have some prima facie grounds before him for taking action under s. 148.

Further his report mentions : "Hence proper investigation regarding these loans is necessary". In other words his cQ11Clusion is that there is a case for investigating as to the truth of the alleged transactions. That is not the same thing as saying that there are reasons to issue notice under s. 148. Before issuing a notice under s. 148, the Income-tax Officer must have either reasons to believe that by C reason of the omission or failure on the part of these assessee to make a return under s. 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 alternatively not-

D withstanding that there has been no omission or failure as mentioned above on the part of the assessee, the Income-tax Officer has in CO!}sequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year. Unless the requirements of clause (a} or (b) of s. 14 7 are satisfied, the Income-tax Officer has 110

jurisdiction to issue a notice under s. 148. From the report sub- E mitted by the Income-tax Officer to the Commissioner, it is clear that he could not have had rea, sons to believe that by reaSOI! of tho assessee's omission to disclose fully and truly all material facts necessary for his assessment for the accounting year in question, income chargeable to tax has escaped assessment for that year; nor could it be said that he as a consequence of infor- F mation in his possession, had reasons to believe that the income chargeable to tax has escaped assessment for that year.

We are not satisfied that the Income-tax Officer had any material before him which could satisfy the requirements of either cl. (a) or Cl. (b) of s. 147.

Therefore he could not have issued a notice under s. 148. Further the report submitted by him under s. 151 (2) does not mention any reason for coming to the con- G clusion that it is a fit case for the issue of a notice under s. 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 s. 148. To Question No. 8 in the report which reads "Whether the Commissioner is satisfied that it is a case for the H issue of i!lOtice under section 148", he just noted the word "yes"

and affixed his signatures thereunder.

We are of the opinion that if only he had read the report carefully, he could never have

<:ome to the conclusion on the material before him that this is A .a fit case to issue notice under s. 148. The important safeguards provided in sections 147 and 151 were Jightly 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 those provisions as of little importance.

They have substituted the form for the substance.

In the result this appeal is allowed, the order of the High Court is set aside and the impugned notice quashed. The Respondent No. 2 shall pay the costs of the appellant both in this Court and in the High Court.

G.C.

Appeal allowed.

CHHUGAMAL RAJPAL

S. P. CHALIHA & ORS

C. SHAH, C.J.

K. S. HEGDE

A. N. GROVER, JJ

Income-tax Act, 1961

s. 147, 148 and 151

s. 148

s. 147(a)

s. 148

s. 151

June 3, 1966

s. 148

Income-tax Act, 1961

Arts. 226 and 227

s. 148

s. 148

s. 151(2)

s. 148

s. 148

s. 147

s. 148

s. 147

s. 148

s. 151

s. 148

ss. 147 and 151

CIVIL APPELLATE JURISDICTION

M. C. Chagla

N. D. Karkhanis

S. P. Chowdhury

Bhumnesh Kumari

S. C. Manchanda

R. N. Sachthey

B. D. Sharma

Hegde

Arts 226 and 227

Constitution of India

s. 148

Indian Income-tax Act

s. 148

Income-tax Act, 1961

section 14

Income Tax Act, 1961

s. 151

Section 151(2)

Section 148

section 148

Section 147

Section 139

Section 14

Section 139(2)

s. 148

s. 151

18th January 1971

s. 148(2)

Section 147

Incometax Act, 1951

ChugamaJ RajpaJ

Calcutta

Seth Bhagwan Singh Sricharan

Lakha Singh Lal Singh

Radhakissen Shyam Sunder

S. P. Chaliha

s. 148

s. 148

Bihar

D

CHHUGAMAL V. S. P.'CHALIHA

s. 151

s. 148

s. 148

s. 148

s. 148

s. 139

s. 14

s. 148

s. 147

s. 148

s. 151

s. 148

s. 148

section 148

s. 148

sections 147 and 151


A. PERIAKARUPPAN CHE'ITIAR

STATE OF TAMIL NADU &. ORS.

January 15, 1971

[J. C. SHAH, C.J., K. S. HEGDE AND A. N. GROVER, JJ.]

Admission to Medical Colleges-Allegation of malafides against Selection Committee-Proof of -Interview marks-Government specifies

heads of distribution of marks but no marks allotted to each head- Presumption that marks should be distributed equally-Violation of presumption by Selection Committee-Effect on selections made.

The petitioner, who was an unsuccessful applicant for a seat in one of the medical colleges in the respondent-State challenged the selections made by a writ petition in this Court. This Court came to the conclusion that the selections made were invalid, but did not strike t'iem clown, 1nd instead, direted the State to constitute a separate expert Committee )Or making selections to the unfilled seats. The Court further directed that the Committee should interview only the candidates shown in the waiting list and t'1ose who moved unsuccessfully the High Court a"d this CN\ft.

This Court observed that the 75 marks allocated for interview "should be divid.d equally among the live different heads with respect to which the marks should be given at the interview.

In pursuance of the direction the State constituted a Selection Committee.

The Committeecalled for interview several other candidates . besides those asked t<(be interviewed by this Court, though the Committee refrained from interviewing such additional candidates. The Selection Committee also distributed the 75 interview marks among the live heads not

equally but according to its own discretion. Candidates were se!ecteo for all the unfilled seats but the petitioner was not selected. He challenged the selection on the grounds that : ( 1) the Seleotion Committee showed open hostility to him at the interview, (2) the violatioi of the directions of this Court showed malafides, and (3) those illegalities vitiated the selection made.

HELD : ( 1) The Selection Committee denied that they had exhibited any hostility towards the petitioner. The charge of ma afides has to be established by the petitioner by satisfactory evidence, and the fact that the petitioner could not get anv outside evidence to establish what happened at the interview cannot shift the burden that is on him, [451 F-H]

(2) The Selectiot Committee explained that they called additional candidates for interview because they did . no~ understand the SCC!pe <?f the judgment of this Court, and that they ~1st"!butd the 75 ma:ks tn teir dicretion because there was no spec; fic direction rn the operative portion of the judment of thi~ Court t? distribute them , equally. Though t!ie explanation was not sattsfactory, it could not be said that the Committee had acted mala fide. [452 B.C; 453 E-F]

( 3) The interview rules were made by Government ad Goverr•ment alone could have distributed the marks amongst the va•1ous heads.

Tn the absence of such a distribution it should be .teemed that each one of the hea&. carried eual marks.

Therefore, the po:ure adoted by the Committee was illegal and contrary to the directions of this Court and was likelv to have affected the result of the interview. [453 F-0]

15-L807Sup.Clf71

Moreover, the CQnu11ittee, even on the bis adopted by it, had proceeded on wholly wrong premises while granting marks to the petitioner under the liead 'National Cadet Corps activities'. [455 F-G]

Therefore, the selections made could not be sustained.

ORIGINAL JuR1so1cnoN : Writ Petition No. 623 of 1970.

Petition under Art. 32 of the Constitution of India for enforcement of fundamental. rights.

K. K. Venugopal and R. Gopalakrishnan, for the pe'.itioner.

S. Govind Swaminathan, Advoca:e-General, Tamil Nadu, S.

Mohan and A. V. Rangam, for respondents Nos. 1 to 5.

The Judgment of the Court was delivered by

Hegde, J.

This is an unfortunate case.

The peti:ioner, a bright . young student is approaching this Court for the second time to seek justice.

He had a brilliant academic career.

He secured high marks in all the examinations in which he appeared.

In the Pre-University Examination, he secured First class with D Grade D plus in Physics and Chemistry and A plus in Biology.

He stood 4th in his college.

Grade D plus represents 85 to 99 per cent marks and A p!us 65 to 75 per cent marks. He applied for admission for a scat in one of the medicaL colleges in the State of Tamil Nadu.

He was called for jnterview but wa5 not selected as he is said to have &ecured low marks in the interview, E He challenged before this Court the selections made on various.- grounds in Writ Petition No. 285 of 1970.

That petition was heard along with another petition and those peiitions were allowed on September' 23. 1970. In that petition the petitioner had alleged that the selections made were illegal for various reasons.

He had also alleged tliat the selections were manipulated by the F Government. This Court came to the conclusion that the allega- 'i tion& of ma/a iide had not been established but ye<t sdections were held to be invalid for the reasons mentioned in our order dated 23rd September, 1970.

Despite coming to the conclusion that the selections made were invalid, we did not strike down the selections in view of the fact that the selected candidates had not been made parties to those petitions.

We directed the State of G Tamil Nadu to immediately constitute a separate. expert committee consisting of eminent medical practitioners (after excluding all those who were the members of the previous committee) for making selections to the 24 unfilled seats. We further ordered:

"The selection shall be made on statewise basis. The committee shall interview only the candidates who are shown in the waitin~ list, the persons who unsuccess-. fully moved the High Court of Madras and the two

petitioners before this Court. They shall allot separate marks under the five heads mentioned in the rule.

The committee shall take into consideration only matters ; aid down in the rule exclude from consideration all irrelevant mattersand thereafter prepare a gradation list to fill up the 24 seats mentioned earlier." In pursuance of the above direction, the State of Tamil Nadu constituted a selection committee and the selection committee has selected 24 students for being admitted into one or the other medical colleges run by the Government of Tamil Nadu but the petitioner has not been selected. Thereafter the petitioner has come up with this writ petition challenging the validity of the selections C made. The main contention taken by him in his writ petition is that in view of the widspread publicity given to our previous judgment by the newspapers and the radio, there had been a widespread discontent and criticism in regard to the prevail\ng system of interviews. That widespread publicity affected very much the

prestige of the State Government of Tamil Nadu and therefore the Government of Tamil Nadu was particular to see that the petitioner was 1; ot selected. He soµght to establish this plea primarily on 1he basis of three circumstances namely ( 1) that during the nterview the members of the selection committee showed open hostility towards him; (2) that despite the order of this Court, the selection committee called for interview several persons in addition to those directed to be interviewed by this Court and it is only after he moved this Court to take action against the comn1ittee for disobeying the orders of this Court, the committee refrained from interviewing the candidates other than those directed to be interviewed by this Court and (3) the selection committee has deliberately contravened the directions of this Court.

• The members of the selection committee -have denied the allegation that they had exhibited any hosµ!ity towards the peti• tioner during the interview.

On the question as to what hap: pened during the interview, we have only the version of the petitioner on the one side nd of the members of the committee on the other.

On the basis of the material before us it cannot be said that the allegations made bv the petitioner are established.

The charge of ma/a fide is a serious charge and the same has to be established by satisfactory evidence.

The fact that 'the petitioner could not get any outside evidence to establish what l:Jappened at the time of the interview cannot shift the burden that is on him to prove his allegations.

It is true that at one stage, the selection committee called for interview several candidates other than those asked to be interviewed by this Court. When t1iose persons were called for interview, the petitioner approached this Court to restrain the selection

committee from interviewing those persons. This Court declined to go into that matter at that stage. Thereafter the State of Tamil Nadu moved this Court for clarification of our order. We rejected that application as in our view the order did not require any clarification. Thereafter the selection commiitee refrained from interviewing the candidates whom it had called for interview in addition to those whom this Court asked the selection committee to interview. The members of the selection committee say that they did not clearly understand the scope of our judgment and it is in those circumsta,, ces they called for interview some candidates whom they ultimately did not interview. Though this explanation is not very satisfactory but from that circumstance alone, we cannot come to the conclusion that the selection committee had any ulterior purpose in calling a large number of candidates for interview.

So far as the i!1egalities said to have been committed during the inferview are concerned, we shall separately deal with them.

But those ijlegalities do not establish either by t.!Jemselves or even when consdered along with circumstances mentioned above the plea of m11la fide.

This takes us to the illegalities alleged to have been committed by the selection committee.

As mentioned in our earlier

judgmrtt, the selection committee was direct<"! to interview the candidates under five differnet heads viz.- I. Sports or National Cadet Corps activities;

2. Extra Curricular special services;

3. General Physical condition and endurance;

4. General ability; and

5. Aptitude.

The Government allocated 7 5 marks for interview but it did not prescribe separate marks for the separate heads. In rhe previous writ petition, it was contended that tbe interview was invahd inasmuch as the Government did not prescribe separate marks for separat": heads. We rejected that contention with these observations :

"It is true that the rule did not prescribe separate marks for seoarate heads. But thw• in "Ur opinion did not permit the selection committee to allot marks as it pleased. Each one of the tests prescribed had its own importance. As observed at foot-nore 20 at p. 485 of American Jurisprudence Vol. 15 that the interviewers need not record precise questions and answers when oral te<t< are used •o aooraise pe-sona'ity traits; it is sufficient if the examiner's findings are recorded on the appraisal

sheet according to the personal qualifications itemised for measure.

A contention similar to those advanced by the petitioners came up for consideration before the Mysore High Court in D. G. Viswana; h v. Chief Secretary of Mysore and Ors. ( 1). There the Court observed thus:

"It is true that Annexure IV does not specifically mention the marks allotted for each head.

But from that circumstance it cannot be held that the Government had conferred an unguided:power on the Committees. In the absence of specific allocation of marks for each hoad, it must be presumed that •the Government considered that each of the heads mentioned in Annexure IV as being equal in importance to any other. In other words we have to infer t'hat the intention of the Government was that each one of those heads should carry 1/Sth of the 'Interview marks'."

If is clear from our judgment that we quoted the decision in Viswanath's case (supra) with approval.

But yet when the impugned selections were made, the selection committee allotted marks to the various heads according to their own discretion. It was admitted before us at the hearing that the selection committee distributed the 7 5 inrview marks among the five heads mentioned above according to its own discretion. For some heads, 10 marks were allotted and for others 25 marks. The procedure adopted by the selection committee clearly contravened our judgment in the earlier writ petition. There is no substance in the plea advanced on behalf of the selection committee that in the operative portion of our order, we did not direct the selection committee that each one of the heads should carry 1/Sth of the "inU!rview" marks. The selection committee was not the rule making authority. The interview rules were made by the Government. The Government alone could have distributed the marks amongst the various heads. Jn the absence of such a distribution, as mentioned by us in our earlier judgment, it should be deemed that each one of those heads carried equal marks. There can be no doubt that the orocedure adopted by the selection committee is likely to have affected the result of the interview.

As seen earlier, one of the heads under which the interviewers were asked to interview is ''Snorts or NationHl Cadet Corns acfvities".

It is mot Sports and National Cadet Co'lJs ac•ivities. The H reauirement is either S!.JOrts or National Cadet Corps activities.

Admittedly the petitioner produced a "A" certificate to show that

e had the National Cadet Corps training. Hut yet he was given

(1) A.LR. 1964 Ms. 132.

A only five marks out of the 10 marks allotted for that head by the selection committee. The petitioner's complaint is that the selection committee had no right to cut .down the marks to which he was entitled to.

We called upon the selection committee to disclose the basis on which the marks were given for National Cadet Corps activities. In response to that direction, the Chairman of the Selection Committee filed an affidavit on December 28, 1970. In B paragraph 4 of his affidavit he deposed thus :

':Likewise in the National Cadet Corps also, there are various grades and the candidate may have joined in N.C.C. in school or college for one. year or 2 years or more; (ii) passed examinations and attained certificates and stripes. The grades are certificate-A-Part I, lowest in rank then Part II, Certificate B, Certificate C being the highest.

Some candidates may in addition have attained promotions as Lance Corporal, Sergeant or Under Officer.

Marks were allotted according to the grades as shown by various certificates."

In the reply affic!avit filed by one Ramanathan, a relation of the petitioner (the petitioner is a minor), it was averred as follows (in paragraphs 5 and 6 of the affidavit) :

"I state the averments in para 4 of the supplemental counter affidavit are misleading and do not attempt to place before this Honourable Court the entire facts.

The N.C.C. is divided into two Divisions, namely, Junior Division and Senior Division. The Junior Division N.C.C. is conducted only in the High Schools, while the Senior Division N.C.C. only in the colleges.

The 'A' Certificate is issued to the Junior Division N.C.C. cadets who pass the 'A' Certificate Examination, while the 'B' and 'C' Certificates are issued to the Senior Division N.C.C. Cadets who pass the 'B' and 'C' Certic ficate ExaminaHons respectively held in the Colleges for the Senior Division.

As such, .a High School student would be eligible to obtain only an 'A' Certificate and not the 'B' an<! 'C' Certificates.

6. The students who appeared for the selection to the Medical course for the year 1970-71 could not have obtained a 'B' or a 'C' Certificate for the reason that N.C.C. was discontinued in the State of Tamil Nadu in all Schools and Colleges in Jan. 1968. In the Anglo Indian Schools, the school year ends in December, while in the rest of the schools the school year is from June- April. The students studying in the High Schools other

thn Anglo-Indian Schools during t11e year 1967-68

PERIAKARUPPAN V. TAMIL 'NADU (Jfogde, J.) 45 5

would, therefore, not have obtained ewn an 'A' Certificate, as the Certificate is issued after undergoing training for a period of one year and then passing .he examination.

The petitioner obtained such a certificate in January, 1968 for the N.C.C. Course of one year in regard to which he wrote his examination in October,

1967. The students studying in the schools other than the Anglo-Indian Schools would, therefore, have not been able to obtain even an 'A' Certificate for the year 1967- 68, since the N.C.C. was discontinued in the middle of their academic year, N.C.C. was resumed in the State of Tamil Nadu only in November 1969; and as such students studying in the schools and colleges in the State of Tamil Nadu would not have been able to get the 'A' 'B' or 'C' Certificate in the Schools and Colleges during the academic year 1968-69 or 1969-70. The petitioner, therefore, sumbits that none among the students who appeared for the selection to the Medi.cal Course for the year 1970-71 could have obtained the 'B' or 'C' Certificates, the 'A' Certificate, therefore, was in effect the highest certificate that a candidate appearing for selection for the Medical Course for the year 1970-71 could possibly obtain. Even this certificate would not be available to the students passing out of the schools other than the Anglo:Indian Schools and who appeared for this selection for the Medical Course 1970-71. It is a matter of easy verification as to who among the 24 selected candidates or the 114 candidates eligible for the selection for these 24 seats in fact possessed the N.C.C. 'A' Certificate or even the 'B' and 'C' certificates."

No reply was made to the allegations quoted above. Nor was the learned Advocate General of Tamil Nadu able to controvert those allegations. under those circumstances we must hold that selection committee had proceeded on a wholly wrong premises while granting marks under the head "National Cadet Corps activities".

For the reasons mentioned above we hold that the selections made are vitiated and as such t!hey cannot. be sustained.

We were informed that the 24 students whose selections are impugned in the present writ petition have already joined one or the other medical college in the State of Tamil Nadu and they have been attending classes for over a nionth. In view of the. h3rdship that H may be caused to those innocent students, by the ordet tht we proposed to make, we asked the Advocate General of Tamil Nadu on January 4, 1971, when the petition came uo for hearing, to see if he could persuade the Government of Tarnil Nadu to admit

the petitioner in any one of the medical colleges in Tamil Nadu A and thus avoid the unpleasant consequence. For that purpose we adjourned the petition to the 7th of this month. When the matter was taken up on that date, the learned Advocate General informed us that the Government was unable to accept our f.uggestion. That day the hearing of the case was completed. Bearing in mind the serious consequences that our order is likely to have on those 24 B students, we again. asked the Advocate-General to explain to. the .Government the hardship that i5 likely to be ca.used to the selected students for no fault of their own and inform 'us the decision of the Government before . the 14th of this month.

The Government's reaction was not favourable. Hence there is no alternative before us but lo allow the writ petition, quash the impugned selections and diret the Staie of Tamil Nadu to appoint a .fresh selection committee1for making selections in accordance with our order dated September 23, 1970.

The Sta-re of Tamil Nad11 shall pay the costs of the petitioner in this writ petition.

V.P.S.

Petition allowed

A. PERIAKARUPPAN CHE'ITIAR

STATE OF TAMIL NADU &. ORS

January 15, 1971

C. SHAH, C.J.

K. S. HEGDE

A. N. GROVER, JJ.

Art. 32

Constitution of India

K. K. Venugopal

R. Gopalakrishnan

S. Govind Swaminathan

S.

Mohan

A. V. Rangam

Hegde

September' 23. 1970

23rd September, 1970

State of G Tamil Nadu

High Court of Madras

State of Tamil Nadu

Government of Tamil Nadu

State Government of Tamil Nadu

Mysore High Court

Viswanath

December 28, 1970

N.C.C.

Ramanathan

Tamil Nadu

PERIAKARUPPAN V. TAMIL 'NADU

January 4, 1971

Government of Tarnil Nadu

September 23, 1970


STATE OF MADRAS v.

S. PADMANABHAN ETC.

January 21, 1971

(J. C. SHAH, C.J., K. S. HEGDE AND A. N. GROVER, JJ.]

Tamil Nadu General Sales Tax Act, 1959-Act coming into force on April 1, 1959-Published in Official Gazette on March IS, 1959-G.O. 976 issued under Act, on March 28, 1959 authorising notification under s. 17 to be published on April 1, 1959- Notification coming into force on April l, 1959-Exemption of fresh fruits under earlier Act taken away under notifioation-Validity of notification whether affected by fact that ii was issued before coming into force of Act.

The respondents were dealers in fruits in Tamil Nadu. Orighally under the Madras Geaeral Sales Tax Act, 1939 the sale of fruits was liable to tax.

By means of a notification dated March 25, 1954 the sale of fruits among other commodities was exempted from payment of tax under s. 6 of the Ac:. The 1939 Act was repealed and re-enacted by the Madras (now Tamil Nadu) General Sales Tax Act. 1959 which was published in the official gazette on March 18, 1959. The State Government passed G.O. No. 97oon March 28, 1959 by which the new Act was to come into force from April 1, 1959. To the G.O. was annexed a not1fica ion under s. 17 of the Act which was directed to be published on April I, 1959 and was to come into force on that date. According to the notiiica'ion fresh fruits ceased to be exempt from tax under the Act.

Subsequen ly fresh fruits were again exempted with effect from April 1, 1960. Thus it was only during the assessment year 1959-60 that the respondents were liable to pay tax on the sale of fresh fruits under the provisions of the Act. By the judgment under apoeal the High Court struck down notification No. 976 dated March 28, 1959 which was to take effect fro\11 April 1, 1959 on the ground that it had been issued before the Act came in'o force. The respondents were held to be entitled by reason of the saving provision di s. 61 of the Act to invoke the exemption that had bee~ granted under the earlier Act of 1939.

By special leave appeals were filed by the State of Madras in this Court. ·

HELD : The mere fact that the imougned notifica'ion bore an earlier date was of no consequence. Section 53 ( 4) of the Act expressly provide•r that all notifications under the Ac: shall, unless they are expressed to come into force on a oarticulac date come 'into force on the day on which they are published. The notification in question was s'ated to come into 'force on April 1, 1959. Besides it was published on that very day. Therefore in terms of cl. (b) of s. 53(4) of the Act the notification had come into force only on April 1, 1959 and not earlier. No one had challenged nor indeed could it be disputed that on April I, 1959 a valid notification could be issued under s. 17 of the Act. For this reason alone the validity of the notification must be upheld. [460 B-E]

The appeals must accordingly be allowed.

Bopa•na Venkateswara/oo & Ors. v. Supt. Central .Tail, Hyderabad, H State, [1953] S.C.R. 905, held inapplicable.

CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 177 to 183 of 1967.

Appeals by special leave from the judgment and order <.lated A December 28, 1964 of the Madras High Court in Writ Appeals Nos. 354 to 360 of 1963.

S. T. Desai and A. V. Rangam, for the appellants (in al! the appeals).

T. A. Ramachandran, for the responde, nts (in all the appeals).

The Judgment of the Court was delivered by

Grover, J.

These appeals by special leave from a judgment of the Madras High Court involve the question of the validity of a notification No. 976 issued under the provisions of the Tamil Nadu General Sales Tax Act, 1959, hereinafter called the Act, C which was to come into force on April 1, 1959.

The respondents are dealers in friuts in the State of Tamil Nadu. Originally under the Madras General S1les Tax Act, 1939 the sale of fruits was liable to tax.

By means of a notification dated March 25, 1954 the sale of fruits among other commodities was exempted from payment of tax under s. 6 of that Act. The D 1939 Act was repealed and re-enacted by fhe Act which was published in the Official Gazette on March 18, 1959 but which was to come into force, as stated before, on April .1, 1959. On March 28, 1959 the Government passed G.O. No. 976 which was as follows:-

"The Madras General Sales Tax Act, 1959, which E will replace the Madras General Sales Tax Act 1939, will come into force from 1st April 1959.

Th~ Governmeru Ji.live examined the question of continuing or withdrawing the exemption from sales tax or the reductions in rates of sales tax so far granted under the Madras General Sales Tax Act, 1939, and such of F them as have been decided to be continued from 1st April 1959 are specified in the notifications annexed to this order:

2. The notifications annexed to this order will be published in the Fort. St. George Gazette. The Controller of Stationery and Printing, Madras, is Pquested to G publish in the notification in the Fort St.

George Gazette, dated the 1st April 1959 without fail.

The notification itself may also be reproduced :

"In exercise of the powers conferred by Section 17 of the Madras General Sales Tax Act, 1959 (Madras Act 1 of 1959) and in supersession of all the notifications issued under s. 6 of the Madras General Sales Tax Act, 193 9 (Madras Act IX of 19 3 9) the Governor of

MADRAS v. PADMANABHAN (Grover, J.) 45&

Madras hereby makes the exemption in respect of the tax payable, under .the said Madras General Sales Tax Act, 1959, o.n the sale or purchase of the goods or class of goods or by the class or persons or institutions in regard to the whole or part of their turnover specified in column ( 2) of the Schedule, below subject to the conditions and restrictions, if any, specified in the corresponding entry in column ( 3) thereof.

This notification shall come into force on the 1st day of April 1959."

In the Schedule which contained the exemptions fresh fruit was not one of the items which was exempted from tax. In other words. by virtue of this notification the respondents became liable to pay tax on the sale of fresh fruit with effect from April 1, 1959. It may be mentioned that the exemption with regard to fresh fruits was once again granted with effect from April 1, 1960. It was only during the assessment year 1959-60 that the respondents were liable to pay tax on the sale of fresh fruits under the provisions of the Act. It is unnecessary to refer to the course which the litigation in the shape of writ petitions filed by the respondent took in the High Court. It would be sufficient to mention that by the judgment under appeal the High Court struck down. the notification No. 976 dated March 28, 1959 which was to take effect from April l, 1959. It was held that this notification had been issued before the Act came into force which amounted to an exercise of power which did not exist on the date on which the notification was promulgated. Ir was further held that the respondents were entitled by reason of the saving provision of s. 61 of the Act to invoke the exemption tliat had been granted under the earlier Act of 1939.

Section 3 provides for the levy of taxes on sale or purchase of goods. Under the first proviso to sub-s. (1) of that section it was expressly laid down that in case of goods specified therein which included fresh fruits ti)e rate of tax would be 1 % on the turnover of a deler whose 1total turnover for a year wa~ not less than Rs. 10,000/-. Under the second proviso the dealers dealing exclusively in one or more of the goods enumera'red in the first proviso except foodgrains, rice products, wheat products and milk whose total turnover for a year was not more than 30,000/- were not to be liable to pay tax under sub-s. (1) Section 17 empowered the Government by notification to make an exemption or reduction in rate in respect of any tax payable under the Act.

Now what the GovernmPnt did w•~ thM it m•n~ "" orn•r on March 28, 1959 in anticipation of the coming into force of the Act "U April 1, 1959. It decided that a notification be published in the Fort. St. George Gazette on April 1, 1959 declaring the exemp-

A tions which would be granted under s. 17 of the Act in supersession of all the previoi.-s notifications issued under s. 6 of the Act of 1939. It is not disputed that the impugned notification was actually published in the Gazette on April 1, 1959. On that date the Act had come into force.

We are wholly unable to comprehend how the validity of the notification could be impugned when it was actually promulgated on the date on which the Act came B into force.

The mere fact that it bore an earlier elate was of no consequence. Section 53(4) of the Act expressly provided:

'(a) All rules made under this Act shall be published in the Fort. St. George Gazette, and unless, they are expressed to come into force on a particular day shall come into force on the day on which they are so published.

(b) All notifications issued under this Act, shall, unless they are expressed to come into force on a particular day, come into force on the day on wh'ch they are published.

The notification in question was stated to com'.: into force on April 1, 1959. Besides, it W<tS published on that very day. Therefore,

, in terms of clause (b) it came into force only on April l, 1959 and not earlier.

No one has challenged nor indeed it can be disputed that on April l, 1959 a valid notification could be issued under s. 17 of the Act. For this reason alone the validity of the E notification must be upheld.

On behalf of the repondents our attention has been invited to Boppanna Venka•eswa•aloo & Others v. Suprintendent, Central Jail, H, vderabad Sta 1e(1). The fac•s i1n that case were a'together different and have been discussed in the jud2ment of the High Court. We consider it wholly unnecessary to refer to them F , as the point which arose there about the validity of certain orders made under the Preventive Detention (Second Amendment) Act 1952 was entirely of a different nature and is not apposite for the purpose of the present case.

In the result the appeals are allowed and the decision of the High Court is hereby reversed. The writ petitions shall stand dis- G, missed.

In view of the entire circumstances the parties are left to bear their own costs .

. G.C.

Appeals allowed.

(I) [ 1953) S.C.R. 9os.

STATE OF MADRAS

S. PADMANABHAN ETC

January 21, 1971

C. SHAH, C.J.

K. S. HEGDE

A. N. GROVER, JJ.

Tamil Nadu General Sales Tax Act, 1959

s. 17

Tamil Nadu

March 25, 1954

s. 6

Madras

General Sales Tax Act

March 18, 1959

s. 17

April 1, 1960

March 28, 1959

April 1, 1959

s. 61

Section 53

s. 53(4)

April I, 1959

s. 17

Madras High Court

S. T. Desai

A. V. Rangam

T. A. Ramachandran

Grover

Tamil Nadu General Sales Tax Act, 1959

Tax Act, 1939

s. 6

April .1, 1959

Madras General Sales Tax Act, 1959

Madras General Sales Tax Act 1939

1st April 1959

Governmeru Ji.live

Madras General Sales Tax Act, 1939

Section 17

Madras General Sales Tax Act, 1959

s. 6

Madras General Sales Tax Act, 1959

1st day of April 1959

April l, 1959

s. 61

Section 3

Section 17

s. 17

s. 6

Section 53(4)

s. 17