SUPREME COURT REPORTS [1957]

THE COMMISSIONER OF EXCESS PROFITS TAX,

WEST BENGAL

ti.

THE RUBY

GENERAL INSURANCE CO., LTD.

(BHAGWATI,

VENKATARAMA AYYAR and

J. L. KAPUR JJ.)

Excess Profits Tax-Insurance company-Premium receipts-

Rscrve for unexpired risks on pending policies-Whether "accruing liability''-iVhether could be deducted as a debt-Excess Profits Tax

Act, 1940 (XV of 1940), SS. 4, 6, rr. I, 2 of Sch. Il-Indian Income-tax Act, 1922 (XI of 1922), s. 10(7), r. 6 of the Sch.

The respondent was a company carrying on life, fire, marine anJ general insurance business, and the question for detennination related to the assessment of excess profits tax on its income other th:'!n life insurance.

The n1ethod adopted by the company with respect to fire insurance policies was that while the premiums received were all of them included in the assets of the year, a portion thereof, 40 per cent., was treated as reserye for unexpired risks on the outstanding policies, and sho\\-n as a liability. The appellant; the Co1nmissioner for Excess Profits 'fax, claimed that the sum set apart as reserve for unexpired risks was liable to be deducted under r. 2 of Sch. II of the Excess Profits Tax Act, 1940, fron1 out of the capital en1ployed in business for that year.

The respondent, \Vhile maintaining that all the premiu1ns received must be treated as capital under r. 1 of Sch. II to the Act contended that the provision for unexpired risks was only a contingent liability and that a liability under a contract of insurance whereunder risk had not .materialised could not be hcl<l to be a debt and was therefore not an accruing liability within r. 2 of Sch. II to the Act.

Held, that. the reserve liability for unexpired risk, unlike borrowed money and debts, cannot be treated as part of the real trading assets of the business so as to have an effect on the running of the business or the earning of profits, and consequently, as it cannot be included as capital under r. 1, it cannot be deducted as an .J.ccruing liability v, rithin r. 2 of Sch. II of the Excess Profits Tax .-\ct, 1940.

Sun lnsun; nce Office Ra::i;!1c:y of Peru Ltd. '" gu1sii.e<l.

v. Clad(, (1912) A.C. 443 and Southern

O.vm, (1956) 2 All

E.R. 728, distin-

!/urthrrn /l/;;:;:h1iu11i Co., Ltd. v. In!and Revenue Cor; imissionc:s, (19~6) /\ll E.R. 54\i agd Inland Reve1iue Commissioners v.

N o, them Aluminium Co., Ltd. (1947) I All E.

R. 608, relied on.

CrvrL

APPELLATE

J URISDIGTION : Civil Appeal No. 12 of 1955.

Appeal from the judgment and decree <lated September 10, 1953, of the Calcutta High Court (Original Side) in I. T. Refrrcnce No. 8 of 1947.

C. K. Daplitary, Solici:'Or-General for India, G. N.

Joshi and R. H. Dliebar, for the appellant.

K. P. Khaitan, Ramesluvar Nath. S. N. Andley and /. B. Dadaclianji, for the respondents.

1957. April 24. The Judgment of the Court was deli\"ered by

VENKATAR.u.1A

AIYAR J.-This appeal raises a question of importance as to whether amounts shown by an insurance company as reserves for unexpired risks on pending policies are liable to be deducted under r. 2 of Sch. II to the Excess Profits Tax Act (XV of 1940) hereinafter referred to as the Act.

The respondent is a company carrying on life, fire, marine and general insurance business, and the present dispute relates to the assessment of excess profits tax on its income from business other than lifr insurance for the chargeable accounting periods ending December 31, 1940, and December 31,

1941. To appreciate the contentions raised. it is necessari; to state that the policies of insurance with which these proceedings are concerned, are, unlike life insurance policies, issued in general for short periods or rid hoc in relation to a specified voyage or event. To take the most important of them, fire insurance policies, they are issued normally for one year, and the whole of the premium due thereon is received when the policies :ire actually issued. In any given year, while the premiums due on the policies would ha\e been n:cei\"ed in full, the risks CO\"ered by them would han run only in part and :i p:irt will be outstanding for the next year. The companies have to prep1re annual statements of profit and loss for the purpose of ascertaining their profits and distributing their di\"idents.

They have also to prepare revenue statements to be sent to the authorities under the provisions of the Insurance Act,

1938. The method

The Com11zissioner

of Excess Prujits Tax, West Bengal

The Ruby General /murance Co., Ltd.

Venkatarama

A(Yar ].

Tha Commissioner

of &ctsJ Profits Tax, Wese Bengal

The Ruby General

lnsuranc~ Co. Lld.

V enkatarama

Atyar. J.

adopted by the respondent in preparing the above statements has been that while the premiums received are all of them included in the assets of the year, a certain proportion thereof, usually 40 per cent., is treated as the reserve for unexpired risks, and that is shown as a liability. To take a concrete example, if in the year 1939 the respondent issued annual fire insurance policies and received a sum of Rs. 1.00,000 as premiums thereof, the whole of it would be shown as income in the statement for the year 1939, and a sum of Rs. 40,000 will be shown as a reserve for unexpired risks.

In the profit and loss statement. the former will be shown as part of the assets and the latter as liability, and it is only the balance that will be included in the net profits. In 1940, the policios issued in 1939 would all of them have expired, and the sum of Rs. 40,000 shown as reserve in 1939 would be treated as part of the assets in 1940. There will. of course, be fresh policies issued in 1940, and in the statement of that year, the premiums received on those policies would be shown as part of the income, a1'd 40 per cent. thereof would be set apart as reserve for unexpired risks.

This method of account-keeping ts what is usually adopted by insurance companies, and is in accordance with well-recognised and approved practice of accountancy.

Now, the question is whether in the illustration given above, the ium of Rs. 40,000 which is set apart in 1939 as reserve for unexpired risks is liable to be deducted under r. 2 of Sch. II to the Act from out of the capital employed in business for that year, which would, of course, include the whole of Rs. 1,00.000 received as premiums. The contention of the appellant is that if all the premiums received are to be treated as capital under r. 1, Sch. II, then the sums which represent the outstanding liability in respect of the unexpired period of the policies-in the illustration given above, Rs. 40,000-should be deducted as a liability under r. 2 of Sch. II. The respondent, while claiming that all the premiums received rnust be treated as capital, maintains that the provision for unexpired risks is a contingent liability, and that that

is not within r. 2 of Sch. II. The Tribunal decided the question against the respondent, but on reference under s. 66(1) of the Indian Income-tax Act read with s. 21 of the Act, the High Court of Calcutta answered the question adversely to the appellant, but granted a certificate under s. 66-A, and that is how the appeal comes before us.

The relevant statutory provisions may now be noticed. Under s. 4 of the Act, the charge is on the "amount by which the profits during any chargeable accounting period exceed the standard profits". 'Standard profits' are defined in s. 6, sub-s. (1), and the respondent having exercised his option under the second proviso thereto, they have to be calculated "by applying the statutory percentage to the average amount of capital employed in the business during such chargeable accounting period.

Schedule H enacts rules for the determination of the average capital employed.

Under r. l(c), the capital employed will include the \'alue of ail assets "when they became assets of the business".

Rule 2(1) enacts that any borrowed money and debts shall be deducted from out of the value of the assets.

There is a further provision in r. 2(1), which is what is material for the purposes of the present appeal, and it runs as follows :

"The debts to be deducted under this sub-rule shall include any such sums in respect of accruing liabilities as are allowable as a deduction in computing profits for the purposes of excess profits tax ........ ; and the said smm shall be deducted notwithstanding that th.::y h:l\"e not become pavable."

For this clause to appll', two conditions must be satisfied.

The sums to be dcJuctcd should be allowable as a deduction in computing the profits for the purposes of the Act, :md further thc1 should be in respect of accruing lialiil; ties. Rule 1 of Sch. I enacts that,

"The profits of a business .............. during any chargeable acco!.lnting period ............ shall, subject to the provisions of thi~ Scheduk. be computed on the principles on which the profits of a business are computed for the purposes of income-tax under s. 10 of the Indian Income-tax Act, 1922."

The Commissioner

of Excess Profits Tax, West Bengal v.

The Ruby General

lmurance Co. Ltd.

Venkatarama

Aryar J.

Tht CommiJJiontr

of Er·!rs~Profits

Tax, WeJl Bengal

The Ruby General

l1uura1c~ C9. Ltd.

Venkatarama

-ivar ].

Section 10(7) of the Indian Income-tax Act provides that,

"Notwithstanding anythinl' to the contrary contained in sections 8, 9, 10, 12 or 18, the profits and gains of any business of insurance and the tax oavable thereon shall be computed in accordance with the l' :CS contained in the Schedule to this Act." Rule 6 of the Schedule provides :

"The profits and gains of any business of insunnce other than life inmrance shall be token to be he balance of the prof1t'i Lli$closcc1 t1y thr.: annual acccllnt.;;, copies of which are required uncler the Insurance Act,

1938, to be furnislml to the Contrcl!er of lmm:rnce. after adjusting such balance co as to exclude from it any expenditure other than expenditure which may under the provisions of section 10 of this Act he allowed for in computing the profits :md gains of a business." It is common ground that :he statements furnished to the Controller of Insurance by the respondent for the relevant peri0ds did disclose 40 per cent. of the premiums received as reserve for unexpired risks on the outstanding policies and that the same has been treated as a liability in its profits and loss statements and allowed in the assessment of income-tax. Ti 'us, one of the conditions required by r. 2 has been satisfied.

The whole controversy between the parties relates to the other condition whether the reserve of 40 per cent. can be regarded as a sum in respect of accruing liability.

The contention of the learned Solicitor- General is that it must be so regarded, and his ar!(Ument in support of it may thus he state:l : A contract of insurance is con1nletc as scon as the policy i~; issued. From th3t time the ri'k bc, ins to attach to it, and there is a liability incurred. Rule 2 does not require that the liabilitv. should have actuallv accrnrd; it is sufficient that it is accrniil•!.

Liahilitv under a policy must be held to be accruing so long as the policy is in force. because it can ripen into actual liability at any time during the life of the policy on the happening of the specified event. \Vhen the assessee shows a certain amount as the , alue of that

liability, it is a sum in respect of an accrumg liability 1957 anJ must be deducted under r. 2.

!11 support of this contention, the decision in Sun Insurance Office v. Clqrk ( ') was relied on. The facts of that c:ise were :is follows : A fire insur:ince company which bd been following the practice of entering in its annual statements 40 per cent. of the total premium receipts :is reserve for unexpired risks claimed a <leductim; therefor in the assessment of its annual profits. The validity of the claim having been disputed, the question as to its jdmissibility was referred to the decision of the court. Bray J., who heard the reference, held th:it the amounts reserved for unexpired risks should be de<lucti:d lirstiy on the ground th:it the premium which haci been paid in respect of a risk for a whole year could not be said to have been wholly earned, when a portion of the period covered by the poiicy was still to run, and that the reserve therefore was not income earned, and secondly and in the alternative, on rhe ground that as the premium had been received burdened with a liability which had been only partially discharged in the year of account, the portion of the liability still outstanding should be valued on the analogy of unpaid price due in respect of property purchased and included in the trading assets.

This decision was taken in appeal, and was reversed bv the Court of Appeal, the learned Judges holding that though the reasoning of Bray J. was sound, the question was concluded against the assessee bv the decision of the House of Lords in The General Accident Fire and Life Asmrance Corporation v.

McGotl'an (

2 ). The case came on further appeal before the House of Lords which agreed with Bray J. that the deduction was admissible, and distinguished the decision in T lie Geneal Accident Fire m:d Life on the facts of that case and as not laying down that, A.<mra11ce Corporation v. McG0tt1an (2) as one turning;. as a m::!tter of law. the deduction could not be made.

Lord Haldane st:ted the round of his de.:iion thus : " .... the case is analogous to one in which if goods ; ire bought their value cannot be treatcLl as

(t} (1910] A. C. 41-3; 6 T.C. 59. (•) (1903) 5 T. C. 3o8.

T 114 Commissioner of Exm s Profits Tax, We<t Bengal

The Ruby General

Insurance Co. Ltrl.

Ver.katarama

A!Jar J.

Tht Commissioner

of ExctsJ Profits Tax, West Bengal

The Ruby General Insurance Co. Ltd.

V enkatarama

Aryar J.

profit without deducting the value of the liability to pay for them which the buyer has incurred."

Lord Alverstone expressed the reasoning on which he based his conclusion as follows ·:

"Premiums are not profits or gains, they are receipts which must be brought into account and out of which, after proper deduction for losses, profits will accrue."

Lord Atkinson also rested his decision on the same ground, and observed :

"That case (Gresham Life Assurance Society v.

Styles) ( 1 ) clearly decided that the receipts of a business are not in themselves profit and gains within the meaning of the Income Tax Acts, but that it is what remains of those receipts after there has been deducted from them the cost of earning them which constitute the taxable profits and gains. Now wh:it is the service which a Fire insurance Company renders to each insurer in consideration for the premiu1n it receives ?

It is only by rendering this service in each case it earns these receipts.

The service consists in indemnifying the insurer against loss by lire <luring the continuance of his policy .... Yet until that time has expired the service for which the Company has been paid has not been completely performed. If the accounts of the Company are to be rendered before the 'date of expiry, theri some division of the premium must be made, and the proportion to be appropriated to te service which is to be performed thereafter. I think the description 'unearned premium' which has been used to describe this latter portion is a very appropriate and accurate description."

It is also material to note that one of the authorities relied on for the Crown was the decision in Scottish Union and National Insurance Company v. Smiles( 2 ) wherein, discussing how the reserve for unexpired risk in lire policies is to he dealt with in computing the pro Ii ts, the Lord President observe< l : "Seeing that lire insurance policies are contracts for one year only, the premiums received for the year

(1) [1892] A. C. 309.

(2) (1889) 2 T. C. 551.

of assessment, or on an average of three years, deducting losses by fire during the same period and ordinary expenses, may be fairly taken as profits and gains of the Company without taking into account or making any allowance for the balance of annual risks unexpired at the end of the financial year of the Company."

Referring to this and to another decision, Lord Haldane observed that they "are not, when carefully examined in the light of what appears to be the true principle, reliable as authorities for !he proposition which would run counter to the practice and good sense of the commercial community."

On the strength of the observations quoted above, the argument has been advanced by the learned Solicitor-General that the obligation which an• insurance company contracts when it issues a policy is to' be treated, in computing its profits for the purposes of taxation, as a liability in praesenti. Mr. K. P. Khaitan, learned counsel for the n; spondent, disputes the correctness of this contention. He argues that what~, ever the position under the English law, a contract of insurance is under the Indian Contract Act merely, 3 contingent contract, that until the event specified in the policy happens, there is no enforceable liability, and that accordingly unexpired risks in pending policies cannot be treated as present liabilities. He also urges a further contention based on the history of the enactment of r. 2 of Sch. II to the Act. That rule as originally passed mentioned only borrowed money and debts, and it was by s. 10 of the Excess Profits Tax (Amendment) Act (XLII of 1940) that accruing liabilities were brought within that rule. And when they were brought in, they did not come as something independent of and distinct from borrowed money and debts. They came in under a provision, which enacted that the debts to be deducted under the rule included sums in respect of accruing liabilities. Relying on this circumstance, counsel for the respondent contends that however liberally the expression "accruing liabilities" might be construed, it cannot be interpreted so as to take in liabilities which do not bear the character of debts, and that a liability under a contract of

The Commissioner

of Eicms Pfqfil& T1J11, West Bengal

The Ruby General

Insurance Ct>. Lid.

Venkatarama

AiJar].

The Commilsianer

of Excess Prqfits Tax/.WtJt Bengal v.

The Ruby General

In.st.ranee Co. Ltd.

Venkatarama

Aljar J.

insurance whereunder risk had not materialised, cannot be held to be a debt, and is therefore not an .. accruing liability v1ithin the rule. In. support of this position, he relies on the decisions in Webb v. Stenton ( 1 ) and Israelson v. Dawson (Port of Manchester Insurance Co., Ltd., Garnishees) ( ').

In Webb v. Stenton (1 ), the question was whether a sum which was payable to the judgment-debtor under a trust deed but which had not become due could be attached in the ha.nds of the trmtees as a debt owin" or accruing within 0. 45, R. 2 of the English Rules f Practice. In holding that it codd not be, Lindley L.J. observed :

"] should say, apart from any authority, that a debt legal or equitable can be attached whether it he a debt owing or accruing ; but it must be debt, and a debt is a sum of money which is now payable or will become payable in the future by reason of a present oblig'.ltion, debitr<m in pracsenti, solvendum ;,, jmuro.

An accruing debt, therefore, is a debt not yet actually payable, but a debt which is represented by an existing obligation.'' Israelson v. Dawson (Port of Manchester Insurance Co., Ltd., Garnishees) (2 ) was again a decision on 0. 45, R. 2, the Court holding that the amount which became payable under a policy as the result of the accident specified therein having occurred was, n.evertheless, not a debt which could be attached under this rule, before the compensation had been determined bv the arbitrator in accordance with the conditions o( t11e policy.

The argument of the respondent based on the above decisions is that until the risk specified in the policy n1aterialises and, consequent thereon, th'e compensation payable thereunder is asctrtained, there is only a contingent libility and not a debt, and that such liability is not within r. 2 of Sch. II to the Act.

In answer, th" learned Solicitor-General contends t11at the decisions quoted J;;8ve a.re not in point, they having been given on a diff:rent statute, that the decision m

(<') [1~33] I K.B. 301.

Sun Insurance Offir; e 'l. Clark (1) which dealt with the question of assessment for purposes of taxation was directly applicable, and that according to that decision, the amounts reserved for unexpired risks would be sums in respect of accruing liabilities.

That a contract of insurance is a contingent contract does not admit of argument. That i~ so under f.. 31 of the Indian Contract Act. and that is also the law in England where it is termed "conditional contract". (Vide Pollock on Contracts, 13th Edn.,- p. 222). This, however, is not material for the purpose of the present discussion which is how such contracts are to be dealt with in asse3sing the taxable profits of an insurance company. That is a matter which must be determined on the provisions o_f the taxing statutes and their application to the facts found with reference to the particular assessment. And it is in this view that the decision in Sun Insurance Office v. Clark (1) becomes important. Now, what is the ratio of this decision ?

The law is well settled that a liability which is purely contingent cannot be allowed as a deduction in computing the profits of a business. And in holding that unexpired risks in respect of pending policies could be estimated and deducted out of the gross premium receipts, the House of Lords must be held to have decided that the obligation of an insurer under such risks was a liability in praesenti.

Reference might be made in this connection to the recent decision of the House of Lords in Southern Railway of Peru Ltd. v. Owen ( 2), There, the appellant Company operated a railway in Peru under a statutory scheme under which its employees were entitled to receive from it a lump sum payment on retirement, death or other termination of service. The Company claimed that it was entitled to value this liability in accordance with "accountancy practice" and to deduct

t~12 same from out of its annual profits. And support for this contention was sought in the decision in Sun fo:, nwce Office v. Clarf (1). In rejecting this claim it vias observed by the House of Lords that the accountancy valuation was not necessarily the correct

(1) [1912] A. C. 443, 6 T.C. 59.

(2) [1956] 2 All E. R. 728.

T lie Commissioner

of Excess Profits Tax, West Bengal

The Ruby General Insurance Co. Ltd.

Venkataranuz

A!Yar J.

The Commi.uioner

ef Excess Profits Tax, We.st Bengal v.

The Ruby General Insurance Co. Ltd.

Venkatarama

Aiyar ].

valuation for purposes of income-tax, and that the real point for decision was whether the claim was to be regarded as an essential charge against the trade receipts during the year.

In distinguishing the decision in Sun Insurance Office v. Clark ('), Lord Oaksey made the following observations, which are pertinent to the present discussion :

"Reliance was placed, during the argument, on Sun Insurance Office v. Clerk (1), in which this House held that a percentage of the premium income of an insurance company might be deferred as a receipt to a future year because it was paid as consideration for future liability, but the principle of that decision is not, in my opinion, applicable to the present case. The premium income was only deferred and would suffer tax in a future year, whereas, in the present case., if the appellant is permitted to deduct compensation, which it has not paid and which it may never have to pay, that compensation will escape tax altogether.

There is, in my opinion, a fundamental distinction between a contingent liability and a payment dependent on a contingency. When a debt is not paid at the time it i; incurred its payment is, of course, contingent on the solvency of the debtor but the liability is not contingent.

Similarly, the liability in Sun Insurance Office v. Clark l1) was not, in my opinion, contingent but remained in force throughout the period of the insurance, though payment in pursuance of that liability might, or ight not, have to be made."

The decision in Sun Insurance Office v. Clark (1) and the observations in Southern Railway of Peru, Ltd. v.

Owen C) quoted above do support the contention of the appellant that in computing the profits of an insurance company 'for purposes of income-tax, the unexpired risks are to be treated as a present liability.

But even so, on the footing that r. 6 in the Schedule to the Indian Income-tax Act has adopted the law as laid down in Sun Insurance Office v. Clark ( 2), the question still remains whether unexpired risk in an outstanding policy is an accruing liability within r. 2 of Sch.

II to the Act.

It is contended for the

(>) [•912] A.C. -143; 6 T. C. 59.

(z) [•9\6] 2 All E. R. 728.

purposes of assessing the taxable profits for purposes appellant that if that liability is a present liability for of income-tax, it must logically be the same for purposes of excess profits tax, and must therefore be deducted under r. 2 of Sch. II to the Act. That woi1ld be so, if the scheme and framework of the Excess Profits Tax Act were the same as those of the Incometax Act.

But the fact is that the Excess Profits Tax Act differs in material respects from the Income-tax Act, and the principles applicable in the assessment of profits under s., 10 of the latter enactment cannot necessarily be held to be applicable in the ascertainment of the capital employed under rr. 1 and 2 of Sch. II to the former Act.

The object of the Excess Profits Tax Act is to tax profits of a business when thev overflow a certain level.

That level is determined thu's : A certain period called the standard period is taken; the capital invested and the profits made in the business during that year are ascertained, and the standard profits are. worked out in relation to those two factors.

Then, the capital actually employed in business during the chargeable accounting period is ascertained. If the capital is the same as that employed in the standard period, then there is no further problem; but if it is more, then the standard profits are increased, and if it is less, they are reduced pro tanto.

Thus, the whole scheme of the Act is to tax profits above a certain level, and that level will move upwards or downwards as the capital employed may be more or less.

It is the this that constitutes the distinguishing feature of the Excess Profits Tax Act, and it is the determination of the capital actually employed in business that forms one of the most important and arduous tasks in the ascertainment of taxable profits under the Act.

Rule I of Sch. II to the Act enumerates three categories of properties, which are to be included in the computation of capital. It is to be noted that this rule does not adopt any legalitic or conventio11a! notion of what is technically termed 'capital'; but it proceeds on a factual basis to include whatever is utilised in business, whether it be tangible rroperty or intangible

The Commissioner

of Excess Pro.fits Tax, West Bengal v.

The Ruby General Insurance Cn. Ltd.

V enkatarama

Aryar ].

The Commissioner

of ExcesJ Profit!

Tax, Wot Bengal

The Ruby Gerural In:.uranu Ca. Ltd.

Venkalarama

AijiarJ.

property.

The object of the provision is clearly to confer a benefit on the assessee by enabling him to retain at least in part the profits realised by him by investment of additional capital.

Then there is r. 2, which provides for certain '.:leductions being made out of capital. Omitting for the present "accruing liabilities'', which form the subject of the present controversy, the other two items mentioned therein are borrowed money and debts, and the reasons for their exclusion from capital falling within r. 1 would appear to be this : Money borrowed and cjebts incurred for the purpose of the business must have been utilised in it, and would be included in the capital employed as defined in r. 1.

The policy of the law being to give some relief to an assessee who invests additional capital in his business, the reason of it requires that that should be limited to capital contributed by the assessee himself. Otherwise, the benefit intended to be given te him might be abused, and the object of the legislation defeated by large scale employment of borrowed capital. Burrowed money and debt are therefore to be deducted out of what is capital within r. 1. \Ve now come to the expression "accruing liabilities".

What does it precisely import?

To decide that. we must have regard to the scope and purpose of rr. 1 and 2 of Sch. II to the Act and to the context and setting of the expression.

It has been already pointed out that the object of the Act is to tax profits which overflow a certain line indicated by what is termed "standard profits", that the location of that line varies with the capital employed, that the scheme of r. 1 is on a factual basis to treat as capital all assets tangible and intangible which are thrown into a business and contribute to the earning of profits and to exclude therefrom under r. 2 that part of it which came in as a result of borrowing.

Now, obviously, a deduction under r. 2 can only relate to what is capital under r. 1, and that must be a really profit-earning asset, whether tangible or not.

Borrowed money to be deducted under r. 2 is money borrowed for the purpose of the business, and which has gone to swell the capital under r. 1.

That is also the position as regards debts.

And

accrumg liabilities which are liable to be deducted under r. 2 must also be of the same character as borrowed money and debts with which they are associated on the principle of noscitur a sociis.

They must be such as can be said to have been utilised in the business and formed part of the really effective

tracfo1g assets during the chargeable accounting period.

If that is the correct approach, as we conceive it is, the question to be considered is neither, on the one hand, whether the liability amounts in law to a debtfor if it is capable of being utilised in business and is so utilised, it will fall under r. 2, even though it is not strictly speaking a debt; nor, on the other hand, whether it is a liability which has been treated as one for the purpose . of assessing income-tax.

In assessing income from business under s. 10 of the Income-tax Act, what is allowed as a deduction is any liability incurred solely and exclusively for the purpose of the business, and when that has not matured, its value is to be determined according to rules of accountancy and deducted.

But when a deduction is claimed under r. 2, what has to be seen is whether the obligation is such that it could be regarded as an asset used in the business, such as could conceivably contribute to its profits. If that is riot established, then it cannot be included as capital under r. 1, and cannot be deducted therefrom under r. 2 as an accruing liability. It should not be overlooked that a deduction under s. 10 of the Income-tax Act and that under r. 2 of Sch. II to the Act proceed on totally different lines and have different objects in view. Under s. 10, the deduction is claimed by the assessee, and that has the effect, when allowed, of reducing the taxable profits.

Under r. 2, it is claimed by the department, and if allowed, it will enhance the liability of the assessee by reducing the capital under r. 1. Incidentally, how inappropriate the principle liad down in Sun Insurance

Office v. Clari,: ( 1 ) would be if it is applied for determinin; r the question of capital employed in business for

th~ purpose of Excess Profits Tax Act will be seen from

(1) [1952) A. C. 443, 6 T.C. 59. !i-61 S. C. India/59

T1" Commissio., r

4 Excess Profits Tax, West Bengal

v Th• Ruby General Insuranu Co. Ltd.

V 1 nkalarama Aiyar ].

The Consinislioner

of Excess Profit; Tax, West Bengal

" The Ruby General lnsuranet Co. Lid.

Venkatarama

Ai.var].

the fact that one of the grounds on which the decision therein was based was that 40 per cent. of the premiums received and set apart as reserve for unexpired risks was unearned income, and could not therefore be regarded as profits for the purpose of the Act. If that were the true position under the Excess Profits Tax Act, then the reserve could not be included in the capital of the business, and, indeed. that was one of the contentions urged by the learned Solicitor-General.

But that was not the stand taken by the department before the Tribunal and that is directly opposed to the plain language of r. 1 of Sch. II, under which all the premiums thrown into the business would be capital employed in the business. That clearly shows how unsafe it will be to adopt the principles laid down for the purpose of assessing business profits under the income tax Act to a determination of the question of the capital employed under the Excess Profits Tax Act.

In this view, is the reserve for unexpired risks an "accruing liability" within r. 2?

The decision in Sun Insurance Office v.

Clark ( 1 ) that it should be allowed as a deduction was based on two grounds. One was that it should be regarded as "unearned income", and for the reasons already stated, it cannot avail when the question is one of determining capital under the Act. And the other was that the reserve represents a liability in the nature of unpaid price of property included in the trading acsets.

But apart from the fact that we have to strain the analogy in applying it to the present situation, can that liability be held to be of the character contemplated by r. 2? Can it be said that the reserve for unexpired risk was, like borrowed money and debt, part of the real trading assets of the business? The answer must clearly be in the negative.

The reserve liability could not factually be said to have contributed to the running of the business or the earning of profits. It was something in the air, and. could have had no effect in the working of the concern, during the chargeable accounting period. It cannot therefore be held to be an

"accruing liability" within r. 2 of Sch. II to the Act.

(1) [1912] A. C. 443, 6 T.C. 56.

A case very much in point is the decision in Northern Aluminium Co. Ltd. v. Inland Revenue Commissioners( 1 ).

There, the question arose whether a conditional liability under a contract was an "accruing liability" within the corresponding provision in the English Excess Profits Tax Act. The .facts were tlut on December 16, 1939, an agreement was entered into between the Ministry of Aircraft Production and a company engaged in manufacturing aluminium products 'and supplying them to manufacturers of aircraft for the Government, wherein it was provided that the prices which the latter was then charging to its customers should be reduced for the period July 1, 1939, to June 30, 1940, and that the amount by which the prices paid to the company were in excess of the reduced prices should be paid by the company to the Ministry. The agreement further provided that negotiations should be started not later than June 30, 1940, for determining the rates to be charged for the periods following June -30, 1940._ The agreement was, in fact, concluded only on October 12, 1942, whereby the prices to be charged by the company were fixed for the years 1941, 1942 and 1943. In accordance with the agreement entered into on October 12, 1942, a sum of £2,743,469 was repaid by the company to the Ministry in 1943 being the difference between the price paid by the customers and that fixed in the agreement. This amount was actually allowed as a deduction in the assessment of the business income for purposes of income-tax, and the dispute related to the question whether it could be deducted in assessing the excess profits tax as an "accruing liability" of the company for the chargeable accounting period which was January 1 to December 31, 1941. It was held by the Court of Appeal that there was, in fact, no agreement between the parties during the chargeable accounting period, and that therefore no liability was incurred. In the alternative, it was held that even if the agreement dated December 16, 1939, could be construed as amounting to a conditional agreement for the period subsequent to June 30, 1940, the obligation created thereby could not be

(1) [1946) 1 All. E. R. 546, 554

• Th• Commissioner of ExceJS Profits Tax, WeJI Bengal v.

The Ruby General imurance Co. Ud.

Venkataram!I

Aryar J.

Thi Ctnmniss iontr

of Excess Pro.fits Tax, Wljt Bengal v TM Ruby General lmurance Co. LJd.

Vtnkatarama

Ai)>ar J.

regarded as an accruing liability within the rule in question. Lord Greene M.R. stated the reason thus :

"A purely conditional liability, which may or may not mature, is not one which falls within that language,. for this reason : Quite apart from the actual words,. it would be contrary to the whole conception underlying these capital provisions because a purely conditional liability, which may or may not eventuate, is not a thing which affects a company's capital position, any more than a conditional receipt can affect its capital position. A receipt which may or may not be received, according as some event does or does not happen, is not a thing with which you can earn profits. It is the possibility of earning profits on your real capital that these capital provisions are concerned with. Therefore, in my opinion, even if one could spell such a hypothetical and conditional contract out of these words, the result would not give rise to an accruing liability within the meaning of the section." This decision was taken in appeal to the House of Lords and was affirmed. Vide Inland Revenue Commissioners v. Northern Aluminium Co. Ltd.( 1 ).

This decision establishes that a conditional liability under a concluded contract-it is on that footing that the second point arose for decision-was not an accruing liability for the purposes of the Excess Profits Tax Act, as the same had no effect on the actual capital position of the company, and the fact that it was allowed for purposes of income-tax did not affect the position under the Excess Profits Tax Act.

The learned Solicitor-General sought to distinguish this decision on the , ground that it did not relate to an insurance business, whereas it was contended that Sun Insurance Office v. Clark(') directly dealt with the question now 1mder consideration whether reserves for unexpired risks in pending policies were liabilities which could be deducted. We do not see how it makes any difference in the construction of r. 2 of Sch. II to the Act that 1"' # the liability sought to be deducted arises under an ' insurance policy and not under some other contract.

(1) [1947] 1 All E.R. 608.

(•) [1912] A.C. 443, 6 T.C. 59.

We are of opinion that the principles bid down in Northern Aluminium Co., Ltd. v.

Inland Revenue Commissioners(

1 ) and fo!cmd Revenue Commissioners v. ·N orthem Aluminium Co., Ltd.( 2 ) are applicable to the decision of the present case, and that a contingent liability in respect of unexpired risk is not an "accruing liability" within r. 2 of Sch. II to the Act.

The decision appealed from is correct, and this appeal must accordingly be dismissed with costs.

Appeal dismissed.

THE MEMBER FOR THE BOARD OF

AGRICULTURAL INCOME-TAX, ASSAM

SMT. SINDHURANI CHAUDHURANI

(with connected appeals)

(BHAGWATI, VENKATARAMA AYYAR and

J. L. KAPUR

J. L. KAPUR J J.)

Salami-lndicia--lf capital income-tax-Assam Agricultural 1939), s. 2(a) (i).

rrceipt-Liability to agricultural Income-tax Act (Assam IX of

The true indicia of salami are ( 1) its single. nonrecurring character and (2) payment prior to the cre.'.ltion of the tenancy.

It is the consideration paid by the tenant for being let into po'session and can be neither rent nor re\'enue but is a capital receipt in the hands of the landlord.

Kamakshya Narain Singh v. The Commissioner of Income Tax (l<J43) L.R. 70 I.A. 180, relied on.

Case-law reviewed.

Rire11dra Kisliore ManikYa v.

Secretary of State for India,

(1920) l.L.R. 48 Cal. 766, Meher Bono Khanum v.

Secretary of State for India, (1925) 1.L.R. 53 CaL 34, Raja Rajendra Narayan Bhanja Deo v. Commissioner af Income Tax, (1929) l.L.R. 9 Pat. 1 and Commissioner of Income Tax v. K. C. Manavikraman Rajah, I.LR. 1945 Mad. 837, distinished.

Consequently, where payments described as salamis and recci\'ed by cert3in zamindar assessecs as consideration for granting agricultural leases, by no means of a precarious nature, were

(1) (1946] I All E.R. 546.

(2) [19471 1 All E.R. 608.

The Cammissioner

qf Excess Profits Tax, West Bengal

v T lit Ruby General J,., uronce Co. Ltd.

V enkalarama

Aryar ].

April 24

THE RUBY

GENERAL INSURANCE CO., LTD

BHAGWATI

L. KAPUR JJ.

Act, 1940

SS. 4, 6

Il-Indian Income-tax Act, 1922

s. 10(7)

II of the Excess Profits Tax Act, 1940

Sun lnsun

C. K. Daplitary

G. N.

Joshi

R. H. Dliebar

K. P. Khaitan

Ramesluvar Nath

S. N. Andley

B. Dadaclianji

AIYAR

II to the Excess Profits Tax Act

December 31, 1940

December 31,

1941

Insurance Act

Ruby General /murance Co., Ltd.

Venkatarama

s. 66(1)

Income-tax Act

s. 21

High Court of Calcutta

s. 66

s. 4

s. 6

s. 10

Indian Income-tax Act, 1922

Ruby General

lmurance Co. Ltd.

Section 10(7)

Income-tax Act

sections 8, 9, 10, 12

Insurance Act

section 10

Bray

Haldane

Ruby General Insurance Co. Ltd.

Aryar

Alverstone

Atkinson

K. P. Khaitan

Indian Contract Act

s. 10

Venkatarama

Aljar

Lindley

Indian Contract Act

England

Peru

Ruby General Insurance Co. Ltd.

Oaksey

Income-tax Act

Ruby General Insurance Cn. Ltd.

enkatarama

Aryar ]

s. 10

Income-tax Act

s. 10

Income-tax Act

s. 10

Excess Profits Tax Act

Ruby General Insuranu Co. Ltd.

nkalarama Aiyar

December 16, 1939

Ministry of Aircraft Production

July 1, 1939

June 30, 1940

June -30, 1940

October 12, 1942

January 1 to December 31, 1941

Greene M.R.

BHAGWATI

s. 2(a)

L.R. 70 I.A. 180


S.C.R.

SUPREME COURT REPORTS 1019

We are of opinion that the principles bid down in Northern Aluminium Co., Ltd. v.

Inland Revenue Commissioners(

1 ) and fo!cmd Revenue Commissioners v. ·N orthem Aluminium Co., Ltd.( 2 ) are applicable to the decision of the present case, and that a contingent liability in respect of unexpired risk is not an "accruing liability" within r. 2 of Sch. II to the Act.

The decision appealed from is correct, and this appeal must accordingly be dismissed with costs.

Appeal dismissed.

THE MEMBER FOR THE BOARD OF

AGRICULTURAL INCOME-TAX, ASSAM

SMT. SINDHURANI CHAUDHURANI

(with connected appeals)

(BHAGWATI, VENKATARAMA AYYAR and

J. L. KAPUR

J. L. KAPUR J J.)

Salami-lndicia--lf capital income-tax-Assam Agricultural 1939), s. 2(a) (i).

rrceipt-Liability to agricultural Income-tax Act (Assam IX of

The true indicia of salami are ( 1) its single. nonrecurring character and (2) payment prior to the cre.'.ltion of the tenancy.

It is the consideration paid by the tenant for being let into po'session and can be neither rent nor re\'enue but is a capital receipt in the hands of the landlord.

Kamakshya Narain Singh v. The Commissioner of Income Tax (l<J43) L.R. 70 I.A. 180, relied on.

Case-law reviewed.

Rire11dra Kisliore ManikYa v.

Secretary of State for India,

(1920) l.L.R. 48 Cal. 766, Meher Bono Khanum v.

Secretary of State for India, (1925) 1.L.R. 53 CaL 34, Raja Rajendra Narayan Bhanja Deo v. Commissioner af Income Tax, (1929) l.L.R. 9 Pat. 1 and Commissioner of Income Tax v. K. C. Manavikraman Rajah, I.LR. 1945 Mad. 837, distinished.

Consequently, where payments described as salamis and recci\'ed by cert3in zamindar assessecs as consideration for granting agricultural leases, by no means of a precarious nature, were

(1) (1946] I All E.R. 546.

(2) [19471 1 All E.R. 608.

The Cammissioner

qf Excess Profits Tax, West Bengal

v T lit Ruby General J,., uronce Co. Ltd.

V enkalarama

Aryar ].

April 24

Thi Memh1r for th.I

Board of

griculturol In.come TIU, .Assam

Smt. Sindhurani

Chaudhurani

all made prior to such grants and were of a non-recurring character, but calculated at rates varying with the nature of the lands and chargeable on every subsequent eviction and re-letting, they were properly so described and were neither rent nor revenue within the definition of 'agricultural income' contained in s. 2(a) (I) of the Assam Agricultural Income-Tax Act and could not be assessed to tax under the Act.

CIVIL

APPELLATE JuRISDICTION : Civil Appeals Nos. 162 of 1955, 38, 39, 40, 41, 42, 43 and 44 of 1956.

Appeal from the judgment and order dated January 5, 1953, of the Calcutta High Court (Original Side) in Income Tax Reference Appeal No. 12 of 1942 and appeals from the judgment and order dated July 2, 1952, of the Assam High Court at Gauhati in Agricultural Income Tax References Nos. 1, 2, 3, 7, 9, 6 and 8 of 1949 respec_tively.

Veda Vyasa and Nau nit Lal, for the appellants in C. A. No. 162 of 1955 and respondents in C. As. Nos. 38 to 44 of 1956.

R. Bak; i, S. N. Mukerjee and R. R. Biswas, for the respondents in C. A. No. lq2 of 1955 and appellants in C. As. Nos. 38 to 41, 43 and 44 cf 1956.

Appellant in C. A. No. 42 of 1956 not represented.

1957. April 24. The Judgment of the Court was delivered by

KAPVR J.-In all these appeals the question for decision is the character and purport of the payment termed 'Salami' and whether it falls within the meaning of "agricultural income" as defined in the Assam Agricultural Income Tax Act (Ass. IX of 1939) hereinafter called the "Act".

C. A. No. 162 of 1955 is directed against the judgment of the Calcutta High Court dated January 15, 1953.

C. A. Nos. 38 to 44 of 1956 have been brought against the judgment of Assam High Court dated April 2, 1952. These matters were all heard together in the Assam High Court and were disposed of by one judgment.

C. A. No. 162 of 1955 relates to the assessment year 1941-42. The assessee in that case was a -/8/9 annas

co-sharer in a zamindari estate known as "Parbatjoar estate" in Assam. The original assessee was Jyotindra Narayan Chowdhury who died on January 25, 1953, and on his death his widow, Shrimati Sindhurani Chowdhurani and others were substituted. The gross agricultural income of the assessee was Rs. 89,633 and income from salami was Rs. 9.331-9-4 which was received from settlement of 414 different holdings out of which 278 were holdings of virgin lands and 136 were those of what are described as auction-purchase lands. Out of the gross income from salami 15 per

cent. has been allowed as collection charges and the amount in dispute in this appeal therefore is Rs. 7,934.

The Agricultural Income Tax Officer held this sum to be "agicultural income" by his order dated November 10, 1941, which was affirmed on appeal to the A:sist:mt Commissioner of Agricultural Income Tax.

The revision taken to the Commissioner under s. 27 of the Act was dismissed but at the instance of the assessec the following two questions were referred for the opinion of the High Court. ( 1) Whether the single non-recurring premia or salamis paid to the landlord assessee once only as consideration for the settlement of agricultural land at the time of granting a lease can be held to be income within the meaning of the Act)

(2) Whether single non-recurring premia or salamis paiLl to the landlord assessee as consideration for the settlement of agricultural land once only at the time of granting lease when such premia or salamis are not dependent on the rate of rent charged, can be held to be income within the meaning of the Act?

The Calcutta High Court by its judgment dated April 12, 1945, held these receipts to be "agricultural income." Against this judgment an appeal was taken to the Privy Council but on the abolition of the jurisdiction of the Privy Council the appeal was transferred to the Federal Court and was heard by that court as C. A. No. 30 of 1949. That court set aside the judgment of the High Court and remitted the case to the High Court "to be dealt with again after ascertaining and considering the following additional factors likely

TltliMembtr fo(tltl

BMrd of Agriadtu ral lr1&ome Tax, AJSam

Smt. Sindhura.i

C/; audhurani

Kapur}.

The ll!imber for tM

Board /)f Agricultural Income Tax, AsJam

v Smt. Sindhurani

Chaudhurani

Kapu' ].

to show the true nature of the receipts described as salami in the present case.

"l. The number of settlement of waste lands and abandoned holdings during the . accounting year and the maximum and the minimum extel)ts settled and salami received.

2. Does the salami vary with the quality of the land, the facilities for irrigation and such other fa vourabie factors?

3. How many tenants ejected under section 69 during the accounting year ; ind how long they had been in occupation before such eviction?

4. Is salami received when lands are relet after eviction?

5. Is salami that is paid in the zamindary of the assessee in the nature of a 'present' given by the tenant to the landlord for the permission to occupy the land or whether it is in substance a premium payable by lessee at the inception of the tenancv ?"

After the remand the case was again stated by the Member of Assam Board of Agricultural Income Tax, Dr. Goswami, and answers to these questions were:

1. Total number of settlements were 414, maximum extent being 59 bighas 2 Cottahs and 10 Dhurs, and salami Rs. 161-8-0! and minimum extent was 15 Cottahs and salami received therefrom Rs. 2-11-9.

2. Rate of salami varies with the quality of the lands, two fixed rates being Rs. 7 per bigha for jungle lands and Rs. 10 per bigha for non-jungle lands.

3. There was no eviction of tenants under section 69 of the Goalpara Tenancy Act. but action was taken in a large number of cases under section 68 of that Act.

4. Salami is realized when lands are relet after eviction.

5. Salami is not in the nature of a present. It is a compulsory payment by the tenant to the landlord at the inception of the tenancy.

In the Statement of the Case the Board said that the zamindar's business or vocation was letting out holdings

against payment. The area of land held by him was a large one "which he lets out piecemeal to various tenants on conditions among others that the would-be teµant will first pay a fee which he prefers to call 'salami' and that he will pay an annual rent." It held that this payment was not "a windfall", that t!ie "'salami' arose from the landlord's business of letting out his lands, and .......... is an income'', that because of the "regularity or periodicity" attached to the receipt of salami, "it satisfies the test of 'income' " and therefore the amounts received as salami were "agricultural income" within s. 2 (a) ( 1) of the Act.

On a consideration of the facts found by the Board in this case and after reference to the reported judgments of the various courts, the Calcutta High Court held that the amounts received by the .assessee as salami were not "agricultural income" and the Board has brought this appeal (C. A. No. 162 of 1955) against that judgment.

In the Assam Appeals also the areas of land held by the assessees were large and total income in the case of "Parbatjoar estate" was Rs. 1,15,510 and in the case of Mechpara estate it was Rs. 2,82,106 which was divisible amongst the various co-sharers.

Salami rates in Parbatjoar estate varied from Rs. 7 per bigha for forest land to Rs. 10 per bigha for other lands depending upon the quality of the land. In Mechpara estate the rates in hilly tracts were Re. 1 to Rs. 2 for good sali land and Re. 1 to Rs. 6 for other class of land and in the plains they varied from Rs. 2 to Rs. 3 for good sali land, and Re. 1 to Rs. 6 for other lands and As. 8 to Re. 1 for newly formed Char lands. In Bijni Raj estate the minimum salami was Rs. 1 per bigha irrespective of the area of the land. In Gauripur estate the holdings were settled by auction and the amount of salami was determined by the demand, depending upon the quality of land and facilities for irrigation.

Similarly in the Chapter Trust estate holdings were settled by auction. The finding of the High Court was:

"It is . abundantly clear from the above statement of facts that the rates of salami vary with the quality

Tht mtmber for the Boart! of Agricullural Incomt Tax, Assam

v Smt. Sindhurani

Chaut!hurani

Kapur].

Till Mtmb,, for 1111

B°"'"of Agrialll....Z Inconw Tu, As.ram

Sm/. Sindlitrani

Chowlhurani

KaJJl'T j.

of la!ld in each estate. They have no relation to rent which is admittedly fixed and invariable.

Lands are settled generally in small plots; The highest figure received as salami in a single transaction in the years with which we are concerned was in Parbatjoar. A sum of Rs. 621 was received on a settlement of an area measuring 88 B., 14 K.,

15 D. .In Mechpara an area measuring 165 B., 16 K., 12 D., was settled for Rs. 318. The minimum extent of area settled in one transaction was also in Mechpara. Lands measuring only 2 K. was settled. Salami received was Rs. 3-5-0.

Between these two extremes the extent of areas settled varies."

There were no evictions under s. 69 of the Assam Tenancy Act of non-occupancy tenants but ejectments did take place and action was taken under s. 68 of the Act. After the re-statement of the case on the lines suggested by the Federal Court, the Assam High Court held that "salami" is not rent but revenue derived from land and is therefore income ........ "

The questio)l for decision is whether the amounts received as salami are rent or revenue within the definition of "agricultural income" and therefore liable to agricultural income-tax.

The basis of the first Calcutta Judgment dated May 12, 1945, in C.A. No. 162 of 1955 was that salamis were a normal and regular feature of these estates and there was periodicity. When the matter came up in appeal to the Federal Court the learned Chief Justice was of the opinion that the receipt termed salami if nothing more is stated in respect of it cannot be treated as a capital receipt and therefore exempt from taxation nor could it merely as such be treated as income and therefore assessable to income-tax. Mahajan J. (as he then was) said : "It may be a recurring or a periodical payment if it is a fee or a fine levied annually on the holder of rent-free tenures as a quit rent; on the other hand, it may not be a periodical payment or a recurring payment if it is in the form of gratuity or offering on receiving a lease or settling for the revenue or on receiving any favour real or implied." He was of the opinion that in the former case it would be agricultural

income but in the latter case it would be a capital receipt being the price for that small "modicum of ownership which the landlord transfers to the tenant."

In the Assam cases Ram Labhaya J. said that by settling the lands and accepting salami the landlord parts with the right of immediate occupation.

The characteristics and incidence of salami disclosed from the "statements of the cases" are that it is a lump sum non-recurring receipt of money by a landlord from a tenant before making a settlement of the holding, which in C'.A. No. 162 of 1955 varied from Rs. 7 to Rs. 10 per bigha and was less in other cases. He is also entitled to charge a fixed periodical amount of 11 annas per bigha per annum. Salami is charged whenever a fresh settlement is made whether it is of a piece of virgin land or of an auction-purchase holding. Thus salami is a payment by a tenant to the landlord antecedent to the constitution of the reiationship of landlord and tenant. It is really a payment by the tenant to the landlord for being allowed to take possession of the land for cultivation under the lease. In all those cases under appeal the leases were oral and the duration and conditions thereof were regulated by Statute-The Assam Tenancy Act.

Salami is not a recurring or periodical payment or a fee or fine levied at fixed intervals from the tenant for the same holding.

In these cases it has not been contended or even suggested nor was it contended before tl1e Federal Court that salami is capitalised rent. As a matter of fact the Federal Court found that it was not rent. In consideration of the payment of salami an estate in land is transferred by the landlord to the tenant although the estate taken by the tenant in the first instance is a non-occupancy tenancy which grows into an occupancy tenancy by the efflux of time. But in no case in any of the appeals was action taken under s. 69 of the Assam Tenancy Act which regulates the rights and liabilities of non-occupancy tenants and no tenant was ejected from his non-occupancy tenancy.

On the other hand whenever action had to be taken for non-payment of rent and ejectment it was taken

T lie Memh1r for 1/16

Board of Agricu /lural Income Tax, Auam

Sml. SitulhuraniJ

Chau<fh,, rani

Kapur].

Tbt MmiMr for t/u

Botml of Agricultural Income T wt, A.sstlln

SmJ. Sindhunmi

Chaudhurani

EafJVr J.

under s. 68 of the Goalpara Tenancy Act. This section is as follows :

A permanent tenure-holder, a raiyat at fixed rates, or an occupancy tenant, shall not be liable to ejectment for arrears of rent, but his tenure or holding shall be liable to sale in execution of a decree for the rent thereof, . and the rent shall be a first charge thereon.

In execution of decrees for arrears of rent the estates of the occupancy tenants were sold, the purchaser in all cases being the landlord himself and thus for recovering the arrears of rent the landlord had to bring to sale the right, title and interest of his tenant and after purchase of this right he relet the land, on receiving the salami from the new tenant. This process again shows that the landlord did part with some interest in land, which cannot be said to be precarious, when he made the settlement of land on receipt of .<alami, which was a single non-recurring payment by the lessee for the acquisition of his rights under the lease. "Agricultural income" which, it is claimer! by the Board comprises salami, has been defined in s. 2(a)(i) of the Act. The relevant portion of this $ection is :

S. 2(a)(i). Any rent or revenue derived from land which is used for agricultural purposes, and is either assessed to land revenue in Assam or subject to a local rate assessed and collected by officers of the Government as such.

Salami is not rent and, therefore, unless it is revenue it will not fall within this definition.

"Income" was described by Sir George Lowndes in Commissioner of Income Tax v. Shaw Wallace &

Co. ( 1) as "a periodical monetary return coming in with some sort of regularity, or expected regularity, from definite sources." In Captain M aharai Kumar Go pal Saran Narain Singh v. The Commissioner of Income Tax, Bihar & Orissa( 2 ), Lord Russell of Killowen after referring to the definition given by Sir George Lowndes held that life annuity paid out of an estate is income.

(1) (1932) L.R. 59 I. A. 2o6, 212.

(2) (1935) L.R. 62 I.A. 207.

Salami was described by Lord Wright in Kamakshya Narain Singh v. The Commissioner of Income Tax(1 ), a

cae of a grant of a mining lease for a period of 999 years, in the following words :

"The salami has been, rightly, in their Lordships' opinion, treated as a capital receipt. It is a single payment made for the acquisition of the right of lessees to enjoy the benefits granted to them by the

lease. That general right may properly be regarded as a capital asset, and the money paid to purchase it may properly be held to be a payment on capital account."

The importance lies in the use of the words "the money. paid to purchase it'', i.e., the right of the lessee to enjoy the benefits granted under the lease.

In Raja Shiv Prasad Singh v. The Crown(2) where also the lease was a mining lease 'for a period of 999 years, salami was described as a sum which is payable at the inceptioq of the lease and as a non-recurring payment in the nature of a premium for granting a lease: In Commissioner. of Income Tax v. Maharajadhiraj Kumar Visheshwar Singh( 8 ) an area measuring 4i bighas of land was settled for an indefinite (bemead) period on a yearly rent and in the event of default of two consecutive instalments the lessee could be dispossessed and was also liable to other penalties. This land was settled with the lessee to enable him to build a "gola house" and a platform for the rice mill. The lease was taken to be in the nature of a permanent lease and it was held that salami represented the price for parting with the land was not merely an . advan:::e rent and as it was not a recurring payment, it did not fall within the definition of the word 'income' as given in Commissioner of Income Tax v. Shaw

Wa.1/ace & Co.( 4 ).

Manoharlal J. who gave a concurrent judgment, at page 824 described salami as the amount of money which a landlord "insists on receiving as a condition precedent for parting with the land

in favour of the lessee." He also held that salami

(1) (19!3) L.R. 70 I.A. 180, 190.

(3) (1939) l.L.R. 11! Patna 805.

(2) (192.1) I.L.R. 4 P; ltna 73-

(4) (1932) L.R. 59 I.A. 206, 212.

The Memb<r ]or lhe

Board of Agriwltural

lnc011M Tax, AsJam v.

Smt. Si11dhurani

l'liaudht1ra1li

Kapur].

The Afember. for the Board of Agricultural l11come Tax, AsJam v.

Smt. Si11dhurani

Chmufh11rani

Kapur,].

could not be treated as a revenue receipt and that it was received by the landlord "not because of the use of the land but before the land was put into use by the assessee." The same court in Province of Bihar v.

M aharaja Pratap U dai Nath Sahi Deo ( 1 ) followed the definition of the word 'salami' as given in Kumar Vishesluvar Sing/i's case.

Harries C.J. there held that where salami cannot be regarded as payment of rent in advance, it will not be income and would, therefore, not be taxable. He said "prima facie, salami is not income, and it is impossible upon the facts as stated to say that salamis received ............ constitute part of h.is. income." ,

Rankin C.J. in Re Gooptu Estate Limited( 2 ) held payment of one lakh of rupees as salami not to be income. In that case it was demanded and paid in respect of resettlement of a lease which had still to run for 48 years but had been forfeited for the non-payment of rent.

In certain cases, however, payment by way of salami has been held to be 'agricultural income'. In Birendra Kishore Manikya v. Secretary of State for India( 3 ) it was held that the consiclcration for the grant of a lease is the capitalised value of the sum periodicallv payable along with the premium so that "the larger the one element the smaller. the other." On this basis the premium paid for the settlement of waste lands or abandoned holdings was regarded 'as rent or revenue' derived from land and therefore within the definition of agricultural income in section 2 ( 1) (a) of the Indian Income Tax Act. This was a case which was decided under the Indian Income Tax Act and the question whether it was a capital receipt or revenue receipt and therefore exempt or not from taxation did not arise because the Bengal Agricultural Income Tax Act was passed in 1944 and the Assam Act in 1939. It was not necessary for the purpose of that case to decide whether it was a capital receipt or revenue because what was to be decided was whether salami was

(1) (1947) I.L.R. 20 Patna 699, 722.

(2) (1929) 50 C.L.J. 375

(3) (1920) I.L.R. 48 Cal. , SG.

exempt from incomeotax under. s. 2(a) (i) of the Indian Income Tax Act. As a matter of fact the assessee argued in that case that these sums constituted "agricultural income".

Moreover the dictum the smaller the salami the higher the rent and vice-versa did not receive acceptance by the Federal Court when the present matter was heard in that court before remand (C.A. No. 30 of 1949).

In Meher Bano Khanum v. Secretary of State for India( 1 ) 'salami' was defined to be an amount received by the landlord for the recognition of the transfer of a non-transferable holding which was paid to the landlord because of his ownership of the land. It was held to be "agricultural income" as it was "rent or revenue"

within the meaning of that expression. The Standing Counsel who appeared for the Secretary of State in that case conceded that it was not revenue but his argument was that it was not revenue derived from land but that it was an incident of the transfer and not of tenancy and therefore did not flow from the land. In neither of these cases was it argued whether salami was a revenue receipt or capital receipt.

In a Full Bench of the Patna High Court in Raja Rajendra Narayan Bhanja Deo v.

Commissioner of Income Tax(~ ) mutation fees were held to be agri;:ultural income but that was a case of payment after the relationsh:p of landlord and tenant had come into existence.

Similarly in the Commissioner of Income Tax v. K. C. Manavikrarnan Raja!i(3) monies paid for the renewal of leases were held to be agricultural income within the meaning of s. 2 ( 1) (a) of the Indian Income Tax Act.

Here again the monies were paid not for the constitution of the relationship of landlord and tenant but after that relationship had come into existence and for its continuance.

In H. H. Maharaja Sir Bir Bikram Kishore Manikya Bahadur v. The Province of Auam(' ), a case under the Act, Harries

C.J. referred to Kamakshya Narain Singh's case( 5 ) and held that it had to be decided on

(1) (1925) I.L.R. 53 Cal. 34

(2) (1929) I.L.R. 9 Patna 1.

(3) I.L.R. 194 5Mad. 837.

(4) (1948) 53 C.W.N. 164.

(5) (1943) L.R. 70 I.A. 180, 190.

1957 '

Th • Member for tire

Board ef Agricu/t1Jra/ Income Tax, Assam

Smt. Sindhurani

Chaudhurani

Kapur].

T ht Member for t/u

Board of Agricultural Income Tax, A.1.ram

Smt. Sindhurani

C/ulUdhurtmi

Kapur].

the facts of each case whether salami was agricultural income or not because it was not known in respect of what transaction the am.ount was received.

The Orissa High Court in S. M. Bose v. Secretary, Board of Revenue( 1) has held that salami is not a payment of rent in advance nor is it income but is a payment by way of capital receipt. It was contended before us that the Privy Council in Kamakshya Narayzn Sing h's case( 2 ) based its decision on the wasting nature of the assets under the lease. But the definition given by Lord Wright is in general terms and just describes what the characteristics of a payment by way of salami are without any reference as to the nature of assets under a lease. ·

In all these appeals before us the assessees derived considerably large amounts of income from agricultural holdings. It is not shown as to what the number of the holdings were but they must have been considerably large. On the othr hand the number of settlements was comparatively small-a few hundreds and consisted of settlements of virgin lands as well as of auction; purchase lands and were not derived from the same holdings at regular intervals. This and the findings of fact given above negative the finding as to "regularity and periodicity" of pa, yment of salami and also that it "arose out of business of letting out his land," The payments by 'way of salami were made by the prospective lessees anterior to the constitution of the relationship of landlord and tenant as the price for the lessor agreeing to the parting of his rights in an agricultural holding in favour of the proposed lessee.

In Principles of Mohamadan Law by Macnaughton salami is-defined as;

"a free gift by way of compliment or in return of a favour." In Wilson's Glossary the meaning given to it is :

"a complimentary present, a douceur. ........... ; a present to a superior upon being introduced to him; a gratuity or offering on receiving a lease ...... "

(1) A.LR. 1955 Orfosa 288.

(2) (1943) L.R. 70 I.A. 180, 190.

In the Arabic-English Dictionary by Johnson it t957 means:

" ........ a present on being introduced to a superior; earnest money ; a free gift from a farmer to Government on taking lands .......... " In Vol. I of Baden Powell's "Land Systems of British Inclia" it is stated at page 543;

" ...... the Zamindar, to raise money, had sold so many taluqs or under farms for 'salami' or fees paid down .... "

Thus all these definitions show that salami is a payment by the tenant as a present or as price for parting by the . landlord with his rights under the lease of a holding. It is a lump sum payment as consideration for what the landlord transfers to the tenant.

The manner in which the leases were dealt with and the fact that in no case was a non-occupancy tenant evicted and his tenure was allowed to mature into an occupancy holding shows that the leases were •in practice not so precarious as was suggested by the Board, but had an element of stability and permanency attached to them. Therefore, when a tenant paid salami he did so in order to get in return an estate in the land owned by the zamindar. Salami is thus not rent and both parties have proceeded on that basis and it could not be called revenue within the meaning of the word used in the definition of agricultural income under s. 2(l)(a) of the Act because it was a payment to the landlord by the tenant as a consideration for the transfer of a right in zamindari lands owned by the landlord. It has therefore all the charactenstics of a capital payment and is not revenue.

In the result appeal No. 162 of 1955 brought by the State of Assam is dismissed with costs throughout and the appeals brought by the assessees in C.A. Nos. 38 to 44 of 1956 are allowed, the judgment of the High Court set aside and the referred questions answered in the negative. The assessees will have their costs in this court in one set and the courts below except in appeal No. 42 of 1956 where the appellant was not present.

~IS. C. India/59

Tiii Member for lh1

Board sf ..4gri&u/lurtil Incom1 Ta:c, Ars•m

Smt. Sindhurani

CAautlhurai

Kapur J

Flu Member for l/u

Board of Agrici.:ltural Income Tax, A.Ham

Smt. Sindhurani

Chaudhurani

Kapur J.

Apil, 25

but it appears that she could not be served and given notice of the hearing of the appeal and, therefore, although her appeal is allowed, as it is based on a point com, non to other appeals, the parties will bear their own co'ts in that appeal.

Appeal No. J(,2 of 1955 dismissed.

Appeals Nos. 38 to 44 of 7956 allowed.

BASH!RUDDIN ASHRAF v.

THE STATE OF BIHAR

( S. R. DAS C.J., JAF!'AR IMAM, s. K. DAS, GOV!NDA

MENON and A. K. SARKAR JJ.)

i\!t!tatvalli-A.fajlis, powers of-Budgct-Mutatva//i's fai/u, e to prcpart• and send copy to Afaj/is-Coniictio'1-Validity-Sentence of fine, in default imprisonment-Legali:y-l?ihar TVaqfs Act, 1947 (Bi*ar Act 8 of 1948), ss. 58, 65-Con.ctitution of India, Art.,. 19 (!) (g).

The appellant failed to prepare a bud_gct of the Waqf Estate of \Yhich he \Vas the mutawalli, for the year 1952-53 and send a copy of it to the Majlis before J:-inuary 15, 1952, :is he was hound to Jo unJt•r s.

58( I) of the llihar Waqfs Act, 1947, ond \•:as convicted hy the Magistrate under s.

6--5( I) of the J\ct :inJ stntcncc<l to pay a fine of Rs. iOO, in default to nn(crgo fifteen cbyc; -iriplc imprisonment.

It was contended for him that the con\iction and sentence \Vere nor \al id ber:iuse (I) s. ; g l)[ thi.: Act contravened Art. I9(1)(g) of the Constilution of India, :?.'i it g:ivc unrestricted po\ver to the Majlis to alter or modify the budget prepared by the muta\valli without a right of appc:II against the action of the ?i.1ajlis and so in1poscd an unreasonable restriction on the muta\valli in c1rrying on hi.o; occup:ition as such, :Ind (2) s. 65 of the Act did not provide for any imprion ment in default of payment of fine.

lleld, that hav1ng regard to the fact th:-it a muta\\':tlii occupies the position of a man:igcr or custodian and the supervisin:i over him by the :tvfaj!i<; with the respect to due administration of the \vaqf property is neccss:iry and that the 11owers of the !'vfajlis to olter or modify the budget prepared by the mutawalli are controlled by sub-s. ( 6) of s. 58 of the Act. the restrictions imros-:d by s. 58 of the Act on the exercise of his powers

SINDHURANI CHAUDHURANI

BHAGWATI

L. KAPUR

J.

s. 2(a)

L.R. 70 I.A. 180

enkalarama

Aryar

Sindhurani

Chaudhurani

s. 2(a)

Income-Tax Act

Calcutta High Court

Veda Vyasa

Nau nit Lal

R. Bak

S. N. Mukerjee

R. R. Biswas

KAPVR

Assam High Court

Assam

Jyotindra Narayan Chowdhury

January 25, 1953

Shrimati Sindhurani Chowdhurani

November 10, 1941

s. 27

April 12, 1945

section 69

section 69

section 68

Salami

s. 2

Mechpara

Bijni Raj

Gauripur

Parbatjoar

s. 69

s. 68

Calcutta

May 12, 1945

Mahajan

Assam

Ram Labhaya

s. 69

Board of Agricu /lural Income Tax, Auam

s. 68

s. 2(a)(i)

S. 2(a)(i)

George Lowndes

(1932) L.R. 59 I. A. 2

(1935) L.R. 62 I.A. 207

Salami

Wright

Manoharlal

L.R. 70 I.A. 180

(1932) L.R. 59 I.A. 206

Kumar Vishesluvar Sing

Harries

Rankin

section 2

s. 2(a)

Patna High Court

s. 2

Kamakshya Narain Singh

(1943) L.R. 70 I.A. 180

Orissa High Court

Kamakshya Narayzn Sing

(1943) L.R. 70 I.A. 180

Johnson

s. 2(l)(a)

State of Assam

BASH!RUDDIN ASHRAF

STATE OF BIHAR

S. R. DAS

JAF!'AR IMAM

s. K. DAS

GOV!NDA

MENON

A. K. SARKAR

TVaqfs Act, 1947

ss. 58, 65

s.

58( I)

Waqfs Act, 1947

s.

6

s. 65

s. 58

s. 58


Flu Member for l/u

Board of Agrici.:ltural Income Tax, A.Ham

Smt. Sindhurani

Chaudhurani

Kapur J.

Apil, 25

SUPREME COURT REPORTS fl957]

but it appears that she could not be served and given notice of the hearing of the appeal and, therefore, although her appeal is allowed, as it is based on a point com, non to other appeals, the parties will bear their own co'ts in that appeal.

Appeal No. J(,2 of 1955 dismissed.

Appeals Nos. 38 to 44 of 7956 allowed.

BASH!RUDDIN ASHRAF v.

THE STATE OF BIHAR

( S. R. DAS C.J., JAF!'AR IMAM, s. K. DAS, GOV!NDA

MENON and A. K. SARKAR JJ.)

i\!t!tatvalli-A.fajlis, powers of-Budgct-Mutatva//i's fai/u, e to prcpart• and send copy to Afaj/is-Coniictio'1-Validity-Sentence of fine, in default imprisonment-Legali:y-l?ihar TVaqfs Act, 1947 (Bi*ar Act 8 of 1948), ss. 58, 65-Con.ctitution of India, Art.,. 19 (!) (g).

The appellant failed to prepare a bud_gct of the Waqf Estate of \Yhich he \Vas the mutawalli, for the year 1952-53 and send a copy of it to the Majlis before J:-inuary 15, 1952, :is he was hound to Jo unJt•r s.

58( I) of the llihar Waqfs Act, 1947, ond \•:as convicted hy the Magistrate under s.

6--5( I) of the J\ct :inJ stntcncc<l to pay a fine of Rs. iOO, in default to nn(crgo fifteen cbyc; -iriplc imprisonment.

It was contended for him that the con\iction and sentence \Vere nor \al id ber:iuse (I) s. ; g l)[ thi.: Act contravened Art. I9(1)(g) of the Constilution of India, :?.'i it g:ivc unrestricted po\ver to the Majlis to alter or modify the budget prepared by the muta\valli without a right of appc:II against the action of the ?i.1ajlis and so in1poscd an unreasonable restriction on the muta\valli in c1rrying on hi.o; occup:ition as such, :Ind (2) s. 65 of the Act did not provide for any imprion ment in default of payment of fine.

lleld, that hav1ng regard to the fact th:-it a muta\\':tlii occupies the position of a man:igcr or custodian and the supervisin:i over him by the :tvfaj!i<; with the respect to due administration of the \vaqf property is neccss:iry and that the 11owers of the !'vfajlis to olter or modify the budget prepared by the mutawalli are controlled by sub-s. ( 6) of s. 58 of the Act. the restrictions imros-:d by s. 58 of the Act on the exercise of his powers

by a mutawalli are reasonable.

Accordingly, the provisions 1957 of s. 58 of the Act do not offend Art. 19 (I) (g) of the Constitution.

Commissioner, Hindu Religious Endowments, Madras v. Sri Bashiruddin Ashraf Lakshmi1dr.i Thirt!ia Swamiar of Sri Shirnr Jlutt, (195-t) S.C.R. v. 1005, rdic<l on.

Thi State of Bihar

The order of the Magistrate providing for imprisonment in default of payment of fine is not invalid in , icw of s. 33 of the Code of Criminal Procedure read with ss. 40 and 67 of the Indian Pena! Code.

CRIMWAL

APPELLATE JuRISDICTION : Criminal Appeal No. 39 of 1955.

Appeal by special leave from the judgment and order dated January 28, 1954, of the Patna High Court in Criminal Revision No. 69 of 1954 arising out of the judgment and order dated November 23, 1953, of the Sessions Judge, Patna, in Criminal Appeal No. 288 of 1953 against the judgment and order dated August 27, 1953, of the Munsif Magistrate of Patna Sadar.

Murtaza Fazl Ali, and R. C. Prasad, for the appellant.

S. P. Varma, for respondent No. 1. 1957.

April 25.

The Judgment of the Court was deli; m:d by

h!A!-.1 J .-The appellant was removed from his position as mutawalli of Gholam Yahia Waqf Estate on September l, 1951, by an order passed by the Majlis constituted under the Bihar Waqfs Act, 1947 (Bihar Act 8 of 1948) (hereinafter referred to as the Act). He appealed to the District Judge of Monghyr, as he was entitled to do under the provisions of the Act, and the operation of the order of removal passed by the Majlis was stayed by the District Judge pending the hearing of his appeal. A complaint against him was filed in th.:: Court of the S; td:ir Sub-Divisional Magistrate, Patn:i, on Julv I. 1952, by Mahommad Samu:il, Nazir of the Maili~. on the order of its Sadar. It was alleged in the co;1plaint that it was the duty of, the appellant to prepare a budget of the waqf estate of which he was a mutawalli, under s. 53(1) of the Act, for the year

Imam].

Bashituddin Ashref

Thi State of Bihar

Imam].

1952-53 and to send a copy of it to the Majlis before January 15, 1952.

The appellant had deliberately failed to comply with the aforesaid provisions and therefore had committed an offence punishable under s. 65(1) of the Act. The office of the Majlis where the budget had to be filed was situated at Patna within the local jurisdiction of the Magistrate in whose Court the complaint was filed. The appellant was subsequently tried at Patna by a Munsif Magistrate with First Class powers and convicted under s. 65 (!) of the Act and sentenced to pay a fine of Rs. 100, in default to undergo fifteen days simple imprisonment. He appealed to the Sessions Judge of Patna who dismissed his appeal. An application filed by the appellant in the Patna High Court in its criminal revisional jurisdiction was rejected. The appellant obtained special leave to appeal against the order of the High Court.

It has been found as a fact that the appellant failed to prepare a budget of the estimated income and expenditure of the waqf estate and to send a copy of it to the Majlis before January 15, 1952. The only question for consideration is whether the appellant's failure to comply with the provisions of s. 58(1) of the Act makes him liable to be punished under s. 65(1). At this stage, it is necessary to set out the provisions of s. 58 of the Act which are as follows :

"58(1) The mutawalli of every waqf shall, before the fifteenth day 'of January in each year, prepare a budget of the estimated income and expenditure of such waqf for the next succeeding financial year and shall forthwith send a copy thereof to Majlis.

(2) The Majlis may, within six weeks from the date on which it receives such copy, alter or modify the budget in such manner and to such extent as it thinks fit.

(3) If the Majlis alters or modifies any budget under sub-section (2), it shall forthwith send a copy of the budget as so altered or modified to the mutawalli of the waqf concerned, and the budget as so altered or modified shall be deemed to be the budget of the waqf. ( 4) If within the period mentioned in subsection (2) and for two weks thereafter the Majlis docs

not &end to the mutawalli of the waqf concerned a copy of the budget altered or modified as aforesaid, the Majlis shall be deemed to have approved the budget without any alteration or modification.

(5) If the mutawalli fails to prepare and semi a copy of the budget as required by sub-section ( 1), the Majlis shall prepare a budget for the waqf concerned and such budget shall be deemed to be the budget of that waqf for the year in question.

(6) Nothing contained in this section shall be deemed to authorise the Majlis to alter or modify any budget in a manner or to an extent inconsistent with the wishes of the waqif, so far as such wishes can be ascertained, or the provisions of this Act." Section 65 provides that a mutawalli may be punished if he fails to comply with certain matters mentioned therein including his failure to comply with sub-s. (1) of s. 58. Sub-section (' ) of s. 65 reads as follows :

"65( 1) If a mutawalli fails without reasonable cause, the burden of proving which shall be upon him, to comply with any order or direction made or issued under clauses (i), ( o) or ( q) of sub-section (2) of section 27 or under section 56, to comply with the provisions of sub-section ( 1) of section 57, sub-section ( 1) of section 58, section 59 or section 60, or, to furnish any statement, annual account, cst_imate, explanation or other document or information relating to the waqf of which he is mutawalli, which he is required or called upon to furnish under any of the other provisions of this Act, he shall be punishable with fine which may extend, in the case of the first offence, to two hundred rupees and, in the case of second or any subsequent offence, to five hundred rupees." It is clear from the provisions of s. 58(1) that before January 15, each year, the mutawalli of each waqf shall prepare a budget for the next succeeding financial year and shall forthwith send a copy thereof to the Majlis. Under s. 65( 1 ), if he fails to comply with the alxwe, he is liable to be punished with fine.

It was contended by the learned Alh-ocate for the appellant that s. 58 of the Act was an invalid provision because it gave unrestricted power to the Majlis to alter

R4<hinidrlin Ashraf

....

The State of Bihar

Imam].

Bashinlddin Ash<af

Tiu Stale ef Bihar

r.,.,.J.

or modify the budget prepared by the mutawalli without a right of appeal against the action of the Majlis altering or modifying the budget. The provisions of s. 58 imposed an unreasonable restriction on the mutawalli in carrying on his occupation as such.

Accordingly, the provisions of s. 58 offended Art. 19(1)

(g) of the Constitution.

The Act was enacted for the purpose of providing for the better administration of waqfs in the State of

Ilihar as its preamble states. Section 5 provides for the establishment of two l:>odies corporate known as Majlis to discharge respectively the functions assigned to them by the Act with reference to Sunni waqfs and Shia waqfs.

Section 27 provides that the general superintendence of all waqfs in the State shall be vested in the Majlis, whicli will <lo all things reasonable and necessary to ensure that waqfs are properly supervised and administered and that the income thereof. is duly appropriated and applied to the objects of such waqfs ancl in accordance with the purposes for which such waqfs were founded or for which they exist so far as such objects and purposes can be ascertained.

Sub-section (2) of this section enumerates, inter alia, the various powers and duties of the Majlis including the removal of a mutawalli from his office under certain conditions. The various powers set out in this sub-section clearly indicate that the mutawalli is subordinate to and .vnder the control of the Majlis. The Majlis under s. 47 may also make an application to the District Judge for an order, amongst other things, for the removal of the mutawalli. Chapter X deals with mutawallis and their duties and under s. 56 it is specifically enjoined that every mutawalli shall carry out all directions which may from time to time be issued to him by the Majlis under any of the provisions of the Act. Previous to the passing of the Act, the Mussalman Wakf Act (Central Act XLII of 1923) was enacted to make provisions for the better management of waqf property and for ensuring the keeping and publication of proper accounts in respect of such properties. It applied to all waqfs, except those to which s. 3 of the Mussalman Wakf Validating Act,

1913, applied. Reference to some of the provisions of the Mussalman Wakf Act may now be made. Section 3 provides for the furnishing of particulars relating to a waqf to the Court, that is to say, a District Judge or within the limits of ordinary original civil jurisdiction, to such Court subordinate to the High Court as the State Government may by notification in the Official G::izette designate.

Section 5 provides that within three months after the thirty-first day of March next fo11owing the date on which .the statement referred to in s. 3 had been furnished, and thereafter within three months of the thirty-first day of March in every year, the mutawalli shall prepare al).d furnish to the Court a full and true statement of accounts of all moneys received or expended by him on behalf of the waqf of , v:1ich he was the mutawalli during the period of twelve months ending on such thirty-first day of March.

Section 10 provides for punishment for failure to comply with the provisions of s. 3 or s. 4 by a mutawalli, who becomes liable to be fined a sum which may extend to five hundred rupees, or, in the case of a second or subsequent offence which may extend to two thousand rupees.

It is clear that the purpose of the Act and that of the Mussalman Wakf Act was to ensure that the waqfs were properly administered and that the income of the waqf was duly appropriated for the purposes for which the waqf had been founded. Having regard to the fact that the mutawalli occupied the position of a manager or a custodian and that some kind of control or supervision over him by the Majlis with respect to due administration of the waqf property and due appropriation of fonds was certainly necessary, we are of the opinion that the provisions of s. 58 of the Act are reasonable restrictions on the exercise of his duties as a mutawalli arid it cannot be said that the provisions of s. 58 offend any of the provisions of the Constitution. As was said in the case of The Commissioner, Hindu Religious Endotvments, Madras

v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt(') a budget is indispensable in all public institutions and that it is not per se

(I) [1954) S. C.R. 1005, 1037.

Bashirflddin Ashraf

Tll4 State of Bihar

Imam].

Bashfruddin Ashraf

The StaJ, qf Bihlw

Imam].

S{WREME COURT REPORTS [1957]

unreasonable to provide for the budget of a religious institution being prepared under the supervision of the Commissioner or the Area Committee. Under o. 58 of the Act, the mutawalli has to prepare a budget and send a copy of it to the Majiis within a specified time and the Majlis, which has the powers of supervision over him, is authorized to alter or modify the budget.

This power of alteration or modification is inherent in the power of supervision and such a provision in s. 58 cannot be said to be unreasonable. Reliance, however, was. placed on a passage in the judgment of this Court in the case cited above to the effect that if an Area Committee under cl. 3 of s. 70 of the Madras Hindu Religious and Charitable Endowments Act, 1951, ma!, es any addition or alteration in the budget, an appeal against it lay to the Deputy Commissioner. The passage upon which reliance is placed is no authority for the proposition that the provisions of s. 58 of the Act become unreasonable because there is no provision •for an appeal against the orders of the Majlis. The powers of the Majlis to alter or modify the budget prepared by the mutawalli are not unrestricted. Sub-section ( 6) of s. 58 expressly provides that nothing contained in the section shall be deemed to authorize the Majlis to alter or modify any budget in a manner or to an extent inconsistent with the wishes of the waqif, so far as such wishes can be ascertained, or the provisions of the Act.

In our opinion, nothing contained in sub-ss. (2), (3) and ( 4) of s. 58 amount to unreasonable restrictions on the exercise of the duties of the mutawalli as a person administering a waqf. Even if it were to be assumed that the said provisions amounted to an unreasonable restriction, sub-ss. (2), (3) and (4) are clearly severable from sub-ss. (1), (5) and (6) of s. 58. Even if sub-ss. (2)

(3) and 4 were struck down, the mutawalli would still be under a legal obligation under sub-s. (I) to prepare a budget and submit a copy thereof to the Majlis within a specified time and his failure to do so would make him liable to punishment under s. 65(1).

It was urged that the Sessions Judge erred in placing the onus on the appellant under s. 65(1) to prove that he had submitted the copy of the budget within time.

This objection, however, does not require a detailed consideration because the Sessions Judge clearly stated in his judgment that apart from the onus, he ws satisfied that the prosecution had fully established on the evidence that the appellant had failed to send a copy of the budget as required by law.

It was also pointed out that s. 65 does not provide for any imprisonment in default . of payment of fine, but the appellant was sentenced to 15 days simple imprisonment in default of payment of fine. Section 33 of the Code of Criminal Procedure read with ss. 40 and 67 of the Indian Penal Code appears to us to be a clear answer to this contention.

It was also pointed out that under s. 65 of the Act a sentence of fine extending upto five hundred rupees could be imposed for a second or for a subsequent offence. We need not, however, consider that matter in the present appeal as it was conceded on behalf of the appellant that the sentence of fine imposed upon him in the present case was for a first offence. ·

The appeal is accordingly dismissed.

Appeal dismissed.

UNION OF INDIA v.

CHAMAN L:(\.L LOONA (S. R. DAS C.J., JAFER IMAM, s. K. DAS, GoVINDA MENON and A. K. SARKAR J J.)

Partition of India-Distribution of rights and liabilities- Contract by Governor-General in Council, if and when for the purposes of Pakistan-Test-Such purpose, if can be modified by powers of control vested in /oint Defence Council-Adjudication of. rights and liabilities under such contract-Indian Independence (Rights, Property and Liabilities) Order, 1947, Arts. 8(1), 3(2)-/oint Defence Council Order, 1947, Art. B(c).

The correct test to determine whether a contract made before the partition of India on behalf of the Governor-General in Council comes within the purview of cl. (a) 'of Art. 8(1) of the Indian Independence (RightS; Property and Liabilities) Order,

B1JJhiruddi11 khmf

v..

Thi Stat• ef Bilw

Imam].

April 30.

BASH!RUDDIN ASHRAF

THE STATE OF BIHAR

S. R. DAS C.J.

JAF!'AR IMAM

MENON

A. K. SARKAR JJ.

TVaqfs Act, 1947

ss. 58, 65

s.

58( I)

Waqfs Act, 1947

s.

6

s. 65

s. 58

s. 58

s. 58

Art. 19

s. 33

Code of Criminal Procedure

ss. 40 and 67

Murtaza Fazl Ali

R. C. Prasad

S. P. Varma

September l, 1951

District Judge of Monghyr

Sub-Divisional Magistrate, Patn

Mahommad Samu:il

s. 53(1)

Bashituddin Ashref

s. 65(1)

Patna

s. 65

Sessions Judge of Patna

Patna High Court

January 15, 1952

s. 58(1)

s. 65(1)

s. 58

Majlis

Majlis

Section 65

s. 58

s. 65

section 27

section 56

section 57

section 58

section 59

section 60

s. 58(1)

s. 65( 1 )

s. 58

hinidrlin Ashraf

State of Bihar

Bashinlddin Ash<af

Tiu Stale

s. 58

s. 58

Art. 19(1)

Section 5

Section 27

s. 47

s. 56

Central Act XLII of 1923

s. 3

Mussalman Wakf Validating Act

Section 3

Section 5

s. 3

Section 10

s. 3

s. 4

s. 58

s. 58

Bashirflddin Ashraf

Bashfruddin Ashraf

s. 58

cl. 3

s. 70

s. 58

s. 58

s. 58

s. 58

s. 65(1)

s. 65(1)

s. 65

Section 33

Code of Criminal Procedure

ss. 40 and 67

Indian Penal Code

s. 65

JAFER IMAM

GoVINDA MENON

Partition of India

Arts. 8(1), 3(2)

Art. 8(1)

April 30.