3 S.C.R. SUPREME COURT REPORTS 359

DHARAMVIR DHIR. v.

THE COMMISSIONER OF INCOME-TAX,

BIHAR & ORISSA

(J. L. KAPUR, M. HIDAYATULLAH and J.C. SHAH, JJ.)

Income-tax-Deductions-Expenditure iticurred for purpose of trade-Assessee paying share of profits in return of advance made- Whether allowable deduction-Indian Income-tax Act, I922 (II of z922), ss. IO (2)(iii) and zo(2)(xv).

The assessee entered into a contract for working certain collieries. As he did not have the requisite funds, he entered into an agreement with M whereunder M was to advance a sum upto Rs. rt lacs, but could withdraw the money at any time and stop further advances and was not liable for any losses; the assessee was to pay interest on the advances at 6% per annum in addition to a sum equivalent to II/16th of the net profits of the business. In pursuance of the agreement M made advances to the assessee and the assessee paid interest and n/16th of his net profits to M. The assessee claimed these amounts paid to M as allowable de<luctions under s. I0[2)(iii) or under s. 10(2)(xv) of the Income-tax Act. The amount paid as interest was allowed but the other sums paid were not allowed on the ground that these sums were not wholly and exclusively laid out for the purpose of the business.

Held, that the assessee was entitled to the deductions claimed. The case had to be decided according to the tenor of th.e agreement and the circumstances of the case. In order to justify the deduction of the sum given up had to be.for .reasons.· of commercial expediency; it may be voluntary but so !orig as it was incurred for the assessee's benefit, e.g., the carrying on of his business, the deduction was claimable. In the present case there was nothing to show that the assessee could have made any better arrangements or would not have lost the contract had he not entered into the agreement with M. Therefore in a commercial sense the payments were an expenditure wholly and exclusively laid out for the purpose of the business.

Commissioner of Income-tax v. Chandulal Keshavlal, [1960] 38 I.T.R. 6or, followed.

Commissioner of Income-tax, Bombay v. M/s. Jaggannath Kissonlal, [1961] 2 S.C.R. 644, M/s. Haji Aziz & Abdul Shakoor Bros. v. The Commissioner of Income-tax, [r961] 2 S.C.R. 651, and Strong v. Woodijield, (1906) 5 T.C. 215, relied on.

Pondicherry Railway Company v. Commissioner of 1ncometax, Madras, (193I) L.R. 58 I.A. 239, distinguished.

Union Cold Storage Co. Ltd. v. Adamson, (1931) 16 T.C. 293,

f anuary 5.

I960 Tata Hydro-Electric Agencies Ltd., Bombay v. The Commissioner of

Income-tax, Bombay Presidency, (1937) L.R. 64 I.A. 215, Robert Dharam,.•fr Dhir Ad1tie & Sons' Collieries, Ltd, v. Commissioners of Inland Revenue, v.

(1924) S.C. 231, Commissioner of Income-tax, Bombay !'residency v.

The Commissioner Tata Sons Ltd. [1939] 7 I.T.R. 195 The Indian Radio and Cable

of Incon"tax, Communications Company Ltd. v. The Commissioner of focome-tax, Lihnr & Orissa Bombay, [1937] 5 I.T.R. 270, British Sugar Man11Jaeturers Ltd. v.

Harris, [1937] 21 T.C. 528, referred to.

CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 448 and 449 of 1959.

Appeals by special leave from the judgment and order . dated February 12, 1958, of the Patna High Court in Misc. Judicial Cases Nos. 679 and 680 of 1955.

A. V. Viswanatha Sastri and Naunit Lal, for the appellant (In both the appeals).

A. N. Kripal and D. Gupta, for the Respondent (ln both the appeals).

1961. January 5. The Judgment of the Court was delivered by

Kapur J.

KAPUR, J.-'These appeals by the a.ssessee are brought against two judgments and orders of the High Court of Judicature at Patna in Income-tax references under s. 66(2) of the Income Tax Act answering the questions in the negative and against the assessees.

The questfons were: (I) "Whether on the facts and circumstances of this case Rs. 72,963- 12-0 was a revenue expenditure deductible under section l0(2)(iii) or under section 10(2)(xv) of the Indian Income Tax Act?''

(2) "Whether on the facts and circumstances of this case Rs. 76,526-1-3 was a revenue expenditure deductible under section 10(2)(iii) or under section 10(2)(xv) of the Indian Income-tax Act?"

The facts of the appeals are these: The appellant was an employee of M/s. Karam Chand Thapar & Bros. and for each of the accounting years relating to the assessment years 1947-48 and 1948-49 his salary was Rs. 10,572. He also had an income of Rs. 500 from shares in certain joint stock companies. On December 20, 1945, he entered into a. contra.ct with

Bengal Nagpur Coal Company Ltd., for raising coal x96x from Bhaggatdih Colliery, Jharia and actually start. D

. D . ed his business from January 1, 1946. Evidently he haram;" hir did not have the requisite funds for his business and The Commissioner therefore in order to finance it, he entered into an of Income-ta•. agreement with the Mohini Thapar Charitable Trust Bihar & Orissa on February 25, 1946. The trust is a public charitable trust, which was created by Lala Karam Chand Kapur f.

Thapar, who constituted himself as the Managing Trustee. The relevant terms of this agreement bet. ween the appellant and the trust were that the trust was to advance a sum upto Rs. I! lacs, the contract was to be "carried in accordance of the policy" settled between the appellant and the' trust; the trust could withdraw its money at any time and to stop further. advances; the trust was not to be liable for any losses; the appellant was to send monthly returns' to the trust and the seventh clause was "that in consideration of the trust having agreed to finance my said . contract business up to Rs. l! lacs I ha'l.'e agreed to pay to the trust interest on the amount from time to time owing to the trust in respect of the monies to be advanced as above at the rate of 6 p.c. per annum in addition to a. sum equivalent to ll/16th of the net profits of this business of mine."

In pursuance of this agreement the appellant, besides interest, pa.id to the trust the sum of Rs. 72,963 for the first accounting year and Rs. 76,526-1-3 for the second accounting year corresponding to years of assessment 1947-48, 1948-49 and claimed these amounts as allowable deductions under s. 10(2)(iii) or under s. 10(2)(xv) of the Income-tax Act. The amount of interest has been allowed but the claim in regard to the other sums paid was disallowed by the Income-tax Officer on the ground that the agreement was not genuine and bona fide and that it was not prompted by ordinary business considerations.

The matter was taken in appeal to the Appellate Assistant Commissioner who upheld the order of the Income-tax Officer. An appeal to the Income-tax Appellate Tribunal was also dismissed and so was an application

x961 for reference under s. 66( 1 ), but the High Court . . directed the Tribunal to state the case on the ques- Dharamvir Dh" tions set out above. For the two assessment years

The co;;,.issioner the_ question was the same e:ccepting for the amounts of Income-tax, claimed as allowable deduct10ns.

Bihar & Orissa In its order dated April 4, 1955, the Appellate Tribunal had foand that t.he payments were not for the Kapur f, purpose of the business and that taking into account the nature of the accounts, the nature of the payments and the relationship i)etween the parties, it could not be said that the amounts were wholly and exclusively laid out for the purpose of the business and therefore rejected the claim. In the statement of the case the Tribunal has said that the average amount which had been advanced by the trust to the appellant in the first year was Rs. 18,100 and the payments made to the trust in the two years were therefore a share of profits and not expenditure laid out wholly and exclusively for the purposes of the business.

The High Court approached the question from the same angle. It was of the opinion that the question should be determined on principles of ordinary commercial trading and because the Managing Trustee was in a dominating position and only a small sum of money i.e., Rs.18,100 on an average had been advanced, the payment of Rs. 72,963 in addition to interest was an absurdly large sum which with the interest paid worked out at about 400% interest. The High Court also took into consideration the fact that the appellant was an employee of Lala Karam Chand or his company.

Put in their own words the High Court observed "having regard to the relationship between the parties and having examined the clauses of the agreement of the 25th February, 1946, between the assessee and the board of trustees I am of the opinion that the real legal position in this case is that there is a joint adventure between the parties, a quasi partnership which falls something short of partnership and that the arrangement between the parties was that the amount of profits should be ascertained and then they shall divide it up in certain specified proportions".

The payments, therefore, did not fall within s. 10(2) r96r (xv). The question was therefore answered in the Dh --:- Dh' . . aramvir ir negative and agamst the assessee. The appellant has v. come in appeal to this Court by special leave.

The Commissioner As far as the record goes at the relevant time the of Income-ta<, appellant was a person of comparatively small means. Biha' "' Odssa No doubt he was getting a salary of Rs. 10,572 a year - b b I<apu' ]. and had a out Rs. 500 from his share holdings ut beyond that he does not seem to have had any other means. There is nothing to show on the record that he had any security to offer or did offer for the money that he was borrowing. Thus the trust was lending monies to the extent of Rs. li lakhs without security and upon a venture which might or might not have been successful. The '.l'ribunal and the High Court seem to have fallen into an error by taking o. mean of the advances made by the Trust to the appellant during the first accounting year. The record shows that the advances were very considerable in the first year ranging fr6m Rs. 12,000 in January 1946 to Rs. 1,86,000 in July of that year and in the following months of that year they ranged from Rs. 59,000 to Rs. 7,000. In the following years beginning from the end of 1946 to 1953 considerable sums of money had been advanced which ranged on au average from Rs. 1,97,000 in 1947 to Rs. 3,17,000 in 1953. In regard to 1947, the Tribunal has found that the average amount of ioan was Rs. 1,20,317 but according to the figures supplied by the appellant in his petition for special leave to appeal to this Court, the average comes to Rs. 1,97,919. In any case very considerable sums of money had been advanced by the Trust and as we have said above to a person who was not a businessman, who neither gave nor is shown to have been able to give any security. The agreement between the appellant and the trust has to be considered in the context of those circumstances and if taking all the surrounding circumstances into consideration the trust found it necessary to have control over the working and over the finances and had offered stringent conditions it is not a matter which can be considered to be abnormal.

i961 Another matter which was taken into consideration --:- . by the Tribunal was that the amounts claimed as Dh., amv" Dh" deductible items were shown as a share of profits of

The co; issioner the trust which had. he.en debited in the appellant's of Income-tax. profit and loss appropr1at10n account or in other words Bihar & Orissa the appellant as per his accounts admitted that it was an appropriation of the profits to the trust. The Tri- Kapur J bunal thus was of the opinion that the interest to be received by the Trust was 11/16 part of the profits of the appellant's business and that the method of accounting clearly sh'owed that the appellant was only parting with the share otiirofits. This, in our opinion, is an erroneous approaCh to the question. The case has to be decided according to the tenor of the docu- . ment as it stands and the circumstances of the case.

The genuineness of the document has not been challenged though an effort was made by the Revenue to so construe the document and so read the facts as to make both the amounts liable to tax in the hands of the appellant. As to what is a deductible expense has to be viewed in the circumstances of each case. In Commissioner of Income.tax v. Chandulal Keshavlal (') this Court observed that in deciding whether a payment of money is a deductible expenditure, one has to take into consideration the question of commercial expediency and the principles of ordinary commercial trading. If the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may enure for the benefit of a third party. Another test laid down in that case was whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying out of its business and it is immaterial that a third party also benefits thereby. Thus in cases like the present one, in order to justify the deduction th~ sum given up must be for reasons of commercial expediency. It may be voluntary but so long as it is incurred for the assessee's benefit e.g. the carrying on of his business, the deduction would be claimable. In Commissioner of Income-tax,

(1) [1960] 38 I.T.R. 601.

Bombay v. Jaggannath Kissonlal (1) the assessee execut- '96' ed a promissory note jointly with another person in Dharamvfr flhir order to raise the money for himself and for the other. v.

The other person became.insolvent and the assessee The. Commissioner had to pay the whole amount and claimed that of Income-tax, amount as an allowable deduction under s. 10(2)(xv) Bihar <l> Odssa and it was found that it was a practice in the Bombay k b. h .

Kapur j. mar et to orrow money on sue promissory notes and there was an element of mutualitv in the transaction. The loss sustained by the assessee was allowed as a deductible item on the basis that a commercial practice of financing the business by borrowing money on joint and several liability was established. In another case decided by this Court M/s. Haji Aziz & Abdul Shakoor Bros. v. The Commissioner of Incometax (2) it was held that the expenses which are permitted as deductible are such as are made for the purpose of carrying on the business i.e. to enable a person to carry on business and earn profits in that business and the disbursements must be such which are for the purpose of earning the profits of the business. See also Strong and Company of Romsey Ltd. v. Woodifield (').

These cases therefore show that if any amount is expended which is commercially expedient and is expended for the purpose of eae1ing profits it is a deductible expenditure.

In support of their opinion the High Court relied upon the cases hereinafter mentioned but in our opinion they do not apply to the facts and circumstances of this case. The first case referred to is Pondicherry Railway Company v. Commissioner of Income-Tax, Madras('). In that case the assessee company, incorporated in the United Kingdom, obtained a. concession of constructing a railway in the territories of Pondicherry. The assessee company was to pay to the French . Government l of its net profits.

The French Government on its part gave land Ol] which the railway was to be built free of charge and also agreed to pay a subsidy. The question for decision in that case was wh0ther the monies paid by the

(1) [1g61] 2 S.C.R. 644,

(3) (19o6) 5 T.C. 215.

(2) [1g61] 2 S.C.R. 651.

(41 [1931] L.R. 58 I.A. 239.

'96' assessee company to the French Government i.e., ! of

Dharamvir Dhfr its net profits were allowable as a deduction under the

v. provisions corresponding to s. 10(2)(xv). Lord Mac- The Commissioner millan observed at p. 251:- of Income-tax, "A payment out of profits and conditions on pro- Bihar & Orissa fits being earned cannot accurately be described as

Kapur }. a payment made to earn profits. It assumes that profits have first come into existence. But profits on their coming into existence attract tax at that point, and the revenue is not concerned with the subsequent application of the profits." But these observations have been later on explained in other cases to which reference will be made presently. In Union Cold Storage Co. Ltd. v. Adamson (1) the assessee leased landR and premises abroad reserving a rent of£ 9,60,000. It was also provided in the deed that if at the end of the financial year it was found that after providing for this rent the result of the company's operations ~as insufficient to pay interest on charges and debentures etc., the rent for the year was to be abated to the extent of the deficiency.

In computing its profits the assessee company claimed the sums of rent paid in two respective years. They were held not payable out of the profits or gains and were allowable deductions.

At page 318 Rowlatt J. said that the sum which was to be paid by the company was a recompense in respect of possession and use of the premises abroad and the company had entered into some liabilities by way of payment for their premises and that payment was an outgoing of the business which was to be provided for and allowed before profits of the business could be ascertained. In the House of Lords Lord Macmillan distinguished the Pondicherry case(') by saying that in that case the ascertainment of profits preceded the coming into operation of the obligation to pay and when profits had been ascertained the obligation was to make over ! thereof to the :French Government. Dealing with the passage above referred to Lord Macmillan said at p. 331:- . "I was dealing with a case in which the obligation was, first of all, to ascertain the profits in a

(1) [1931] 16 T.C. 293.

(2) (1931) L.R. 58 I.A. 239.

prescribed manner, after providing for all outlays

I96I incurred in earning them, and then to divide them.

H h . . h h d d . .c Dha•amvir Dhir ere t e quest10n 1s w et er or not a e uct10n ior rent has to be made in ascertaining the profits, and 1 he c0 ;;,, issioner the question is not one of the distribution of profits of Income-ta" at all." Bihar &.. Orissa In Tata Hydro-Electric Agencies Limited, Bombay Th C . . l<apur J. v. e ommissioner of Income-tax, Bombay Presidency (1) the Tata Power Co. entered into an agency agreement with Tatasons Ltd. agreeing to pay to Tatasons Ltd. a commission of 10% on the annual net profits of Tata Power Co., subject to a minimum whether any profits were made or not. Later on two persons D and S advanced funds to Tata Power Company on the condition that in addition to the interest payable to them by Tata Power Company they should each receive from Tatasons Ltd., 12t% of the commission earned by Tatasons Ltd.

Tatasons Ltd. assigned their entire right to the assessee company and the Tata Power Company entered into a new agency agreement with the assessee company and the assessee company received a commission and out of that paid ! to D and S. Relying on Pondicherry Railway case (') the Bombay High Court held that that was not an allowable deduction as expenditure incurred solely for earning profits. On appeal the Privy Council held that Pondicherry case did not govern the case.

The nature of the transaction was held to be this that the obligation to make the payments was undertaken by the assessee company in consideration .of its acquisiticn of the right to p, roperty to earn profits i.e. of the right to conduct the business and not for the purpose of producing profits in the conduct of the business. Dealing with Pondicherry Railway case (') Lord Macmillan said:-

"In the Pondicherry case the assessees were under obligation to make over a share of their profits to the :French Government. Profits had first to be earned and ascertained before any sharing took place. Here the obligation of the appellants to pay

(1) [1937] L.R. 64 I.A. 215.

(2) (1931) L, R. 58 I.A. 239.

a quarter of the commission which they receive from the Tata Power Co. Ltd. to F. K Dinshaw Dharamvir Dhir Ltd., and Richard Tilden Smith's administrators is v.

The Commissioner quite independent of whether the appellants make of Income-ta., any profits or not." Bihar & Orissa and at page 225 Lord Macmillan said:-

Kapur ]. "In short, the obligation to make these payments was undertaken by the appellants in consideration of their acquisition of the right and opportunity to earn profits, that is, of the right to conduct the business, and not for the purpose of producing profits in the conduct of the business." At page 226 the Privy Council accepted the following test laid down by Lord President in Robert Addie &: Sons' Collieries, Ltd. v. Commissioners of Inland Revenue(') where it is observed:-

"What is 'money wholly and exclusively laid out for the purposes of the trade' is a question which must be determined upon the principles of ordinary commercial trading. It is necessary, accordingly, to attend to the true nature of the expenditure, and to ask oneself the question, Is it a part of the Company's working expenses; is it expenditure laid out as part of the process of profit earning".

In Commissioner of Income-tax, Bombay Presidency v.

Tata Sons Ltd. (') the company received a commission on the basis of profits. The managed company was in urgent need of money and the assessee company found a financier a Mr. Dinshaw and an agreement was entered into with the managed company and Mr.

Dinshaw by which the latter agreed to lend a crore of rupees on the condition that the assessee company assigned to him a share in the commission which the assessee company might receive from the managed company. That was held to be an agreement on the part of the assessee company to share their commission with Mr. Dinshaw and it was a part of the arrangement on which the assessee company obtained finance and therefore the payment to Mr. Dinshaw was an expenditure solely for the purpose of earning profits or gains and it was not of a capital nature. At

(1) (i9"4) S.C. 231,

(•) (1939) 1 I.T.R. 19;.

page 203 Beaumont 'c, J. said that the question wher96r ther the 'payment of a part of the commission to a Dh . nh th. d b d d d"t . d aramvir " 1r person can e regar e as expen 1 ure mcurre v. solely for the purpose of earning that commission. is a Th• Commission"

question which must be answered on the facts of each of Income-tax, case on a commercial basis.

Bihar & Orissa In The Indian Radio and Gable Communications Company Ltd. v. The Commissioner of Income-tax, Bombay (1) it was observed that it was not universally true to say that a payment the making of which is conditional on profits being earned cannot properly be described as an expenditure incurred for the purpose of earning such profits. Lord Maugham in explaining the judgment in the Pondicherry Railway case (') said at page 278 :-

"To avoid misconception it is proper to say that in coming to this conclusion they have not taken the view that the case is governed by the decision in Pondicherry Railway Co. Ltd. v. Commissioner of Income-tax, Madras, though that case no doubt shows light on the nature of the problem which has to be solved in the present case. It should perhaps be added that a sentence in the judgment in that case has been explained, if explanation was necessary, by Lord Macmillan in the subsequent case of W. H. E. Adamson v. Union Gold Storage Company."

As to when a deduction is claimable and when it is not, it was said at page 277 that if a company had made an apparent net profit and then had to pay to a director as a contractual recompense, the net profit would be the difference between the two but if there was a contract to pay a commission the net profits of the year it must necessarily be'held to mean as net profits before the deduction of the commission.

In British Sugar Manufacturers Ltd. v. Harris(') the assessee company agreed to pay two other companies a certain percentage of its annual profits after deduction of expenses and debenture interest in consideration of their giving to the assessee company the full benefit of their technical and financial knowledge

(1) (1937] 5 I.T.R. 270. .

(2) (1931] L.R. 58 I.A. 239. \3) ig37] 21 T.C. ~28.

J(apur f.

1961 and experience.

Certain payments were made in Dharam•i• Dhir pursuance of that agreement and it was held that v. payments under the agreement were permissible The Commissicmer deductions in computing the assessee company's proof Imome-tx, fits.

Dealing with the Pondicherry Railway case (1) at Bihar & Oms• page 548, the learned Master of the Rolls said :-

Kapur]. "It is to be observed that Lord Macmillan in that paragraph was quite clearly using the word ' profit ' in one sense and one sense only ; he was using it in the sense of the 'real net profit' to which Lord Maugham referred. That he was doing that is, I think, abundantly clear when the nature of the contract there in question is considered, which was merely a contract under which a percent, age of profits was payable by the railway company to the French Government. There was no question of services or anything of that kind in the case; it was merely a sum payable out of profits. I do not find myself constrained by that expression of opinion, because it must be read; as Lord Macmillan has said in a subsequent case Union Cold Storage Co.

Ltd. v. Adamson(') at pp. 331-2, in relation to the particular subject matter with which he was dealing." As has been said above the question to be considered in this case is governed by the observati'.lns of this Court in Commissioner of Income-tax v. Chandnlal Keshavlal

& Co. (')and the circumstances under which the trust agreed to lend the appellant such a large sum of money shows the true nature of the transaction.

On the facts proved in the present case the Trust agreed to finance the business of the appellant on the terms set out in the agreement and there is nothing to show that he could have made any better arrangements or would not have lost the contract if he had failed to enter into the agreement i.e. the agreement to pay the amounts in dispute. Therefore in a commercial sense the payments were an expenditure wholly and exclusively laid out for the purpose of the business.

In our opinion, therefore, the High Court was in error and the question referred should have been

(1) [1931] T •. R. 58 I.A. 239.

(2) (1931) 16 T.C. i93. 331·3•.

(5) [1¢<>] 38 I. T.R. 6o1.

answered in the affirmative in favour of the appellant. 1961 The appeals are, therefore, allowed and the judgments Dharamvir DAir and . orders of the High Court are set aside. The Th c v. . .

I 'JI h h' . h' C t d . th ' omm1ssioner appe !ant w1 ave IS costs m t IS our an m e of Income-•••, High Court. One hearing fee.

BihaY & Orissa Appeals allowed.

THE FIRST NATIONAL CITY BANK v.

THE COMMISSIONER OF INCOME-TAX,

BOMBAY CITY. (J. L. KAPUR, M. HrnAYATULLAH and J.C. SHAH, JJ.)

Business Profits Tax-" Undivided profits ", if fell within the word" reserves "-Business Profits Tax Act, I947 (XX! of r947), Sch.[[, Rule 2(I).

The appellant, a non-resident Banker incorporated under the National Bank Act of the United States of America with its Head Office in America, was assessed under Business Profits Tax Act, 1947 Under the Treasury Rnles of the United States of America and Instructions for preparation of reports of conditions by the National Banking Association certain sums had to be specifically allocated under s. 52n of the Revised Statute of the United States, and the appellant bank was required to keep a certain sum of money under the head " undivided profits" and that was an integral part of the capital structu.c.e.

The reason for the existence of this fund was that when losses occurred according to the practice they could be charged against "undivided profits", i.e., profits set apart after provision for expenses and taxes etc. for continuous use in the business of the Bank. The appellant contended that in computing the amount for the purpose of "abatement" it was entitled to include the "undivided profits" which fell within the word " reserves".

The question was whether the large sum of money shown as "undivided profits" was a part of the reserves.

Held, that the amount designated as "nndivided profits" was a part of the reserves and had to be taken into account when computing the capital and reserves within Rule 2(1) of Sch. II of the Business Profits Tax Act, 1947.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 315/1958.

Appeal by special leave from the judgment and order dated February 5, 1957, of the Bombay High Court in I.T.R. No. 34/1956.

Kapur].

I96I

January 6.

359

DHARAMVIR DHIR

L. KAPUR

M. HIDAYATULLAH

C. SHAH, JJ.

Income-tax Act

s. 10(2)(xv)

Income-tax Act

[1961] 2 S.C.R. 644

L.R. 58 I.A. 239

(1937) L.R. 64 I.A. 215

Patna High Court

A. V. Viswanatha Sastri

Naunit Lal

A. N. Kripal

D. Gupta

Kapur

High Court of Judicature at Patna

s. 66(2)

section 10(2)(xv)

section 10(2)(iii)

section 10(2)(xv)

Income-tax Act

Karam Chand Thapar & Bros.

December 20, 1945

Bengal Nagpur Coal Company Ltd.

Jharia

January 1, 1946

February 25, 1946

Lala Karam Chand Kapur

s. 10(2)(iii)

s. 10(2)(xv)

Income-tax Act

s. 66( 1 )

Bihar

April 4, 1955

Lala Karam Chand

25th February, 1946

s. 10(2)

s. 10(2)(xv)

Bombay

United Kingdom

Pondicherry

French . Government

L.R. 58 I.A. 239

s. 10(2)(xv)

Rowlatt

Macmillan

French Government

(1931) L.R. 58 I.A. 239

Dha•amvir Dhir

Tata Power Co.

Tatasons Ltd.

Tata Power Company

Pondicherry Railway

Bombay High Court

L.R. 64 I.A. 215

Tata Power Co. Ltd.

F. K Dinshaw Dharamvir Dhir Ltd.

Richard Tilden Smith

Dinshaw

Beaumont

Maugham

L.R. 58 I.A. 239

Dharamvir DAir

FIRST NATIONAL CITY BANK

COMMISSIONER OF INCOME-TAX

M. HrnAYATULLAH

Business Profits Tax Act

Business Profits Tax Act, 1947

s. 52

February 5, 1957


3 S.C.R.

SUPREME COURT REPORTS 371

answered in the affirmative in favour of the appellant. 1961 The appeals are, therefore, allowed and the judgments Dharamvir DAir and . orders of the High Court are set aside. The Th c v. . .

I 'JI h h' . h' C t d . th ' omm1ssioner appe !ant w1 ave IS costs m t IS our an m e of Income-•••, High Court. One hearing fee.

BihaY & Orissa Appeals allowed.

THE FIRST NATIONAL CITY BANK v.

THE COMMISSIONER OF INCOME-TAX,

BOMBAY CITY. (J. L. KAPUR, M. HrnAYATULLAH and J.C. SHAH, JJ.)

Business Profits Tax-" Undivided profits ", if fell within the word" reserves "-Business Profits Tax Act, I947 (XX! of r947), Sch.[[, Rule 2(I).

The appellant, a non-resident Banker incorporated under the National Bank Act of the United States of America with its Head Office in America, was assessed under Business Profits Tax Act, 1947 Under the Treasury Rnles of the United States of America and Instructions for preparation of reports of conditions by the National Banking Association certain sums had to be specifically allocated under s. 52n of the Revised Statute of the United States, and the appellant bank was required to keep a certain sum of money under the head " undivided profits" and that was an integral part of the capital structu.c.e.

The reason for the existence of this fund was that when losses occurred according to the practice they could be charged against "undivided profits", i.e., profits set apart after provision for expenses and taxes etc. for continuous use in the business of the Bank. The appellant contended that in computing the amount for the purpose of "abatement" it was entitled to include the "undivided profits" which fell within the word " reserves".

The question was whether the large sum of money shown as "undivided profits" was a part of the reserves.

Held, that the amount designated as "nndivided profits" was a part of the reserves and had to be taken into account when computing the capital and reserves within Rule 2(1) of Sch. II of the Business Profits Tax Act, 1947.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 315/1958.

Appeal by special leave from the judgment and order dated February 5, 1957, of the Bombay High Court in I.T.R. No. 34/1956.

Kapur].

I96I

January 6.

372 SUPREME COUR'I' REPOR!rs [i961]

'96' R. J. Kolah and I. N. Shmff, for the appellant.

The First National A. N. Kripal and D. G; upta, for the respondent,

City Bank

1961. January 6. The Judgment of the Court was v. delivered by The Commissioner

of Income-tax, KAPUR, J.-This is av appeal against the judgment Bombay City and order of the High Court of Judicature at Bombay

Kapur]. in Income-tax Reference No. 34 of 1956. The appellant is a non-resident Bank incorporated under the National Bank Act of the United States of America with its head office in that country and with branches all over the world including some branches in India.

It was assessed under the Business Profits Tax Act (Act XXI of 1947), hereinafter termed the "Act", in respect of the chargeable accounting periods:- 1-4-1946 to 24-12-1946, 25-12-1946 to 24-12-1947, 25-12-1947 to 23-12-1948, and 24-12-1948 to 31-3-1949 and the sole question for decision in this appeal is the meaning of the word "reserves" in R. 2(1) of Schedule 2 of the Act and how the capital of the appellant during the above-mentioned chargeable accounting periods has to be corn pu ted for the purpose of allowing the " abatement" under the Act.

The appellant contended that in computing the amount for the purpose of abatement, it was entitled to include what is termed in the United States "Undivided Profits ", the contention being that this item falls within the word " reserves" in R. 2( l) of Schedule II of the Act which provides:

"Where the company is one to which rule 3 of Schedule I applies, its capital shall be the sum of the amounts of its paid-Up share capital .and of its reserves in so far as. they have not been allowed in computing the profits of the company for the purpose of the Indian Income-tax Act, 1922 (XI of 1922), diminiB'hed by the cost to it. of its investments or other property the income from which is not includible in the profits, so far as that cost exceeds any debt for money borrowed by it."

h d I f II h r961 . It is not necessary to give t e etai s o a t e _ years; but it will be sufficient as an illustration if wen. F;,,1 Nation•I were to confine ourselves to the "Undivided Profits" City Bank c in the Balance Sheet as on December 31, 1946, wherev. in the relevant entries were as follows : TMC.,...mission.r

of ImomeW.

Ca pita] . $ 77 ,500,000·00 Bombay City Surplus.. . .. $ 152,500,000·00 Undivided Profit ... $ 29,534,614·21 Kapur J.

The Report of the Directors dated January 14, 1947, was as follows: . "At the year-end, Capital of the Bank remains at$ 77,500,000 surplus has increased to $152,500,000 by the transfer of$ 10,000,000 from Undivided Profits. After this transfer, Undivided Profits are $ 29,534,614 an increase of $ 240,376 from a year ago. The Trust Company has Capital of $10,000,000 surplus of $ 10,000,000 and Undivided Profits of $ 8,097,020. The two institutions thus show tota.l capital funds, that is Capital, Surplus and Undivi<l ed Profits of $ 287,631,634 or $ 46·39 per sharo compared with S 44·60 per share at the end of

1945. ,, According to the Balance Sheet of 1948, capital funds since 1939 had increased from$ 169,768 thousands to $ 320, 795 thousands in the year 1948 and there had bee11. a progressive increase both in what is called "Surplus" as well as "Undivided Profits'', the former increased from $ 62,500 thousands to $ 182,500 thousands and the latter from $ 19, 768 thousands to $ 50, 795 thousands. The question in this case is whether this large sum of money shown as "Undivided Profits " is a part of the Reserves or is equivalent to the inallocated amount carried forward at the end of a year of account in the balance of Profit & Loss Account as we know it. It was the sum of $ 20,534,614•21 and similar sums for tlie other chargeable Accounting Periods which are the subject matter of controversy in this appeal. Both the Inco!ne-tax Officer and the Appellate Assistant. Commissioner excluded these amounts in determining the capital of the Bank under R. 2(1) of Schedule II on the ground that they were not a part of the reserves of the Bank.

~~ The appellant took an appeal to the Income-tax

Th• First National Appellate Tribunal which was dismissed on the

City Bank ground that " Undivided Profits " meant nothing v. more than the " Balance of the profits and Joss The Commissioner account" and that no distinction could be draw1:

of Ineome-tox J b th J t d h B b ci ' mere y ecause m e nomenc a ure use m t e om ay •Y United States, the amount was shown as" Undivided

Kapur J.

Profits " and not balance of the profit and Joss account. At the instance of the appellant the following question of Jaw was referred to the High Court:

" Whether on the facts and in the circumstances of the case 'Undivided Profits' of $ 29,534,614·21 shown in the condensed statements of conditions as of December 31, 1946, can be treated as reserves and added to the capital, as required by rule 2(1) of Schedule II to the Business Profits Tax Act for the chargeable accounting period 25-12-19!6 to 24-12-1947?" In its order the Tribunal said that the Treasury Rules in United States divided capital account into four different heads, Capital, Reserve, Surplus and the Undivided Profits. The reserves are really reserves for liabilities including the reserves for dividends. " The general reserves as shown by the balance sheet in India is equivalent to the Surplus. The undivided profits is equivalent to the balance of profit and loss account." In the statement of the Case submitted to the High Court, the Appellate Tribunal stated that the question whether the Undivided Profits meant the same thing as balance of the profit and loss account was a question of fact and it did not matter what name was given to it. But this was the very question which was referred to the High Court.

The High Court after referring to the Directors' Report to the shareholders held , that the Undivided Profit of $ 29,534,614·21 did not constitute "reserves" because no direction had been given in regard to it, it had never been transferred to any reerve and had never been earmarked for any particular purpose and that the only act of volition on the part of the Directors of the Bank was the transfer of 10 million

dollars to the Surplus. In its judgment the High

I96I Court said : The First Nalio11& "It is true that these large amounts (of Un- City Bank divided Profits) remain with the Bank, that the v.

Bank uses them, that business is carried on with The Commissio-- the help of those funds and that they are as much o~Inome~:" capital of the Bank as capital in the strict sense of om ay 'Y the term. " Kapur].

The High Court however held that they did not satisfy the test laid down by the Supreme Court in Century Spinning & Manufacturing Go. Ltd. v. C.J.T., Bombay(') as the amount was not transferred to any reserve and there being no act of volition on the part of the Directors this could not be regarded as Reserve. The correctness of this view is challenged before us.

The Directors' report dated January 14, 1947, shows that the surplus increased as a result of the allocation made by the Directors, by IO million Dollars, which was taken from Undivided Profits and the Undivided Profits themselves increased to $29,534,614"21 which was an increase of $240,376 in the year 1946 and therefore the Capital Funds of the company which included Capital, Surplus and Undivided Profits along with similar items from the Trust Company had increased considerably which was reflected in per share increase, i.e., 44·60 per share at the end of 1945 to 46'39 per share at the end of 1946 thus showing that it was the result of an act of the Directors that Surplus

was increased and a particular sum was left in the Undivided Profits.

It was contended that no sum could be treated as ' Reserves' unless the Directors recommended it to be so allocated and it was so adopted by the shareholders. But this argument ignores the evidence placed by the appellant. Under the Treasury Rules of the United States of America containing "Instructions for Preparation of Reports of Condition by National Banking Associations", certain sums had to be specifically allocated under s. 5211 of the revised Statute of the United States (Title 12, U. S. C. 161).

Items 25 to 28, according to these instructions, deal

(1) (1954] S.C.R. 203.

' 96' with Ca.pita.I Account. Item 26 deals with 'Surplus'

The First -; ationala.nd item 27 with 'Undivided Profits' and item 28 with

Citv Bank 'Reserves' (and retirement account for preferred v. stock). The following Reserves come under item 28 :- The Commission.,, (a) "Reserve for dividends payable in oommon of Imome-ta:r, stock. '' Bonibay City f d 1 d' 'd

(b) "Reserves or other un ec a.red 1v1 ends." Kapur J.

(c) t'P Retirement account for preferred stock. " ( d) " Reserves for contingencies, etc. " Item 29 was as follows:-

" Total capital accounts". This item iR the sum of items 25 to 28, inclusive.

Along with this the appellant has placed a copy of the letter from the Deputy Controller of Currency, Washingtont the relevant portion of which is as follows :....:. ·· " [n connection with this matter we wish to assure you that your position as stated is in complete accord with that of the Office of the Comptroller of the Currency. In the United States, the 'Undivided Profits' as reflected in the accounting of a bank actually represents a part of its crapital funds.

All of the other bank supervisory agencies in the United States consider the 'Undivided Profits' of a bank as a part of its capital funds.

In any calculation for the pllrpose of determining the adequacy of capital in a commercial bank in the United States, the supervisory authorities include 'Undivided Profits' as an integral part of the capital structure as it would not be possible otherwise to make an accurate computation. When losses occur in banks, it is the usual practice in many banks to charge them against the ' Undivided Profits ' account which by any reasoning would be inappropriate if the account were regarded as 'Undistributed Profits'. In commercial banks in the United States, it is not customary to maintain any account that could be regarded specifically as 'Undistributed Profits' in the same sense as applied to similar acoovnts in the ot, her corporations in India. The term ' Undivided Profits' simply follows a bank account-

- ing nomenclature used in the United Sta, tes to

3 f.fC.R. . " SUPWEME COU~T :j:tEPQR; rS 377

designate profits set .aside, after proviio.ns ,.for 1961 expenses and t11-xes, dividends .and reserves., . for

. --N . 1 " t' f t · h b .,1 f th b k, T/ie Firsl al<ona con muous u Ure use m t e JiSlll!JSS '? e an Cit:; Bank and it bears a clos'e, if not idenli.c11-l, rel.ationship to • v. the , Earner.! Surplhs .A'ccount \}f, ali Jn:dustrial corpo- Tho Commissionor ration. " . , of Income-tax, Balance sheets of three other banlrn of the Unite'd iombay Ciiy ' States relied on by the appeUant 'show that Capital [{a~:.J.

Fund comprises three kinds 'Of ftlnds, i.e., Capital, .Surplus and Uiicl.ivided Profits. 'Th, e .documents placed on the record show tha~ 'these .thr~\l different kinds of funds put toget.her ma)rn up what is called. "Capital Fund". The creatidn and mlJ, intenance of the item ' known as' Un.divided Profits -is a requiremeift .of the Treasury 'Rules which are made under the Statute

and therefore it cannot oe said that the amount of Uµ, pivided' Profits .iri the-)3alai10e Sheet was not allocated as a result of .either aresolutton of the \' .

- .

Directors, acceptd by t)l.!l' sareholders or on '.l.Ccount . of the 'requirei]l.ets .of, the law.

The "Undivided Profits" hav.e to be empli;>ye<; l in the manner indicated by the' ltter' q( the Deputy Con-

- - - troller of QurrenQy. They _a, r/' set NP for exftenses, taxes, dividends ana reserves f(>r continuous use; fn the . business of the Bank an, d are a par~ of 'the capital

f1mds 'and an integral part b~ the capi.al structure and without it, it would no£ be' possib!J to' make an accurate computation. The reason for 'the. existence of this fund, as shown by th!l.t letter is ti).at 'vhen therfii.are losses, they pan be charged' aga.inst "U ndividea Profits" which expression means profits set apart a, fter provi&ion for expenses nd .taxes etc. for con- nuous use .in th~ business of the Bank.

There, is a differegc~ betweq the systm of il.cc<; iqnting of Banking 9prpanis ', in Jndia ans! the United States; .tlie failure to appteci!lote this difference'has Jed the Appellate Tribunal as well as the High Court to arrive at an erroneous conclusion. In India at the end of an yar of accoun, b the unallocated profit or loss is <Carried fqrward to the account of the., n.ext year and such unallocated aruo'unt gets:'nierged :in , the acbount of th:Lt year. ; J:n the system uf aoooun\ing in the 48 'I -

378 SUPREME COUR'l' REPORTS (1961]

1961 U.S. A. each year's account is self-contained and - nothing is carried forward. If after B, llocating the The ~;; stBNai;, onal profits to diverse heads mentioned above any balance

'Y v."n , remains, it is credited to the " Undivided Profits "

The commissioner whieh become part of the capital fund. If in any year

o' Income-tax, as a result of the allocation there is a loss the accumula1:- Bombay c; tf ed undivided profits of the previous years are drawn

Kapur]. upon and if that fµnd is exhausted the Banking Company draws upon the surplus. In its very nature the Undivided Profits are accumulation of amounts of residue on hand at the end of year of successive periods of accounting and these amounts are by the prevailing accounting practice and the .Treasury directions regarded as a part of the capital fund of the Banking Company.

The nature of" Undivided Profits" was considered by the Supreme Court of America in Fedelity 'l'itle and Trust Co. v. United States (1 ). In that case a suit was brought by the Fedelity Co. to recover the tax assessed on its whole capital and undivided profits under s. 2 of the Spa.nish War Revenue Act. In the Supreme Court it was contended by the company that th11 terms "Capital''," Surplus" and "Undivided Profits" have a precise and definite meaning in the business of banking and that Undivided Profits are not surplus and cannot therefore be taxed as " Surplus ". The Government on the other hand contended that the undivided profits were taxable as being a part of Capital or Surplus. The Court held that "Undivided Profits" were taxable as being a part of the Capital employed. Mr. Justice Brandeis delivering the opinion of the Court said at p. 955:

" The Act declares that 'in estimating capital surplus shall bq included,' and that the ' annual tax shall in all cases be computed on the basis of the capital and surplus for the preceding fiscal year" ················--·······-·········-························ As it is the use or employment of capital in banking, not mere possession thereof by the banker, which determines the amount of tax, the fact that a portion of the capital so used or employed is

(1) 66 L. E<!. 9,53 : (1921) 259 U.S. 304.

• ~

. "

designated 'undivided profits ' is of no legal signix96x fi ,, canoe. .

The First National As to what the word "Reserves" as used m the City Bank Business Profits Tax Act connotes, was considered by v. this Court in the Commissioner of Income-tax v. Gen- The Commissioner tury Spinning & Jlf anufacturing Co. Ltd. (1 ). It was 0! Income-tax, held that the true nature and character of a sum dis- Bombay City puted as reserve was to be determined ""'.ith reference Kapur J. to the substance of the matter. The amount in dispute in that case was the profits after the deduction of depreciation and tax which amount was carried to the Balance Sheet and was later recommended by the Directors to be appropriated mainly to dividends and balance to be carried forward to the next year's account. Thus on the crucial date, i.P.., April I, 1946, from which the Chargeable Accounting Period began the sum in dispute had not been declared as reserve; on the other hand the Directors had earmarked it for distribution as dividend and it remained as a mass of undistributed profits available for distribution. At page 209 Ghulam Hassan J. said:-

"The reserve may be a general reserve or a specific reserve, but there must be a clear indication to show whether it was a reserve either of the one or the other kind.

The fact that it constituted a mass of undistr.ibuted profits on the 1st January, 1946, cannot automatically make it a reserve .............. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A reserve in the sense in which it is used in rule 2 can only mean profit earned by a company and not distributed as dividend to the shareholders but kept back by the directors for any purpose to which it may be put in future .................. " Applying this test to the disputed sum, it cannot be said that the amount is not "Reserve" within the meaning of the Rules.

As is shown by the instructions under s. 5211 of the Revised Statute of the United States and the letter of the Deputy Controller referred to above, the appellant bank was required to keep a certain sum of money under the head " Undivided Profits " and that is an integral part of the capital

(I) [1954] S.C.R. 203.

380 SUPREME COURT REPOl{TS [1961]

x96x structure. Under these circumstances it would be

Th F . -,-N ,. 1 erroneous not to treat the amount of "Undivided ' "' a iona u fi " f h J f d City Bank i: ro ts as a part o t e capita un .

In our opinion therefore the amount designated as 1"he Commissioner "Undivided Profits " is a part of the reserves and has

0£ Inome~~., to be taken into account when computing the capital om ay "Y and reserves within R. 2(1) of Schedule II of the Act.

Kapur J.

The question which was referred by the Tribunal should have been decided in the affirmative and in favour of the appellant and the amount should have been added to the ca pita! as allowed by R. 2( 1) for the

Chargeable Accounting Periods. In the result the appeal is t1Ilowed.

The appeIIant will have its costs in this Court and in the High Court.

I96I

January zo.

Appeal allowed.

K. A. RAMACHAR AND ANOTHER v.

COMMISSIONER OF INCOME TAX, MADRAS. (J. L. KAPUit, M. HrnAYATULLAH and J.C. SHAH, JJ.)

Income-tax-Assessee assigning portion of his profits of partnership firm to his wife a11d daughters-Such profits, if can be included in the asscssec's total income for purposes of assessmcnt-Incometax Act, I922 (II of I922), s. I6(I)(c).

One Rangachari, a partner of a partnership firm, assigned by means of a deed of settlement a fourth share of the profits of the fir1n each to his 'Nife, a married adult daughter and a minor daughter for 8 years with the right to receive the said share of profits absolutely and exclusively from the firm.

The question which arose before the High Court on a reference under s. 66(r) of the Income-tax Act was "Whether the inclusion in the assessce's total incnme of the profits settled by him on his wife and two daughters is justifie<l in law?" The assessee Hangachari relying on the rule laid down by the Privy Council in Bijoy Singh Vudhuria's case cL1irned that the amounts payable to his v.•ife and tYl'O daughters never became his inco1ne, being diverted by an overriding title and that those amounts could not be included in his total income for the purposes of assessment being excluded by reason of the third proviw to s. 16(1)(c) of the Income-tax Act.

The High Court held that the third proviso was not attracted and that the income had accrued to the assessee in the first instance, and had then Leen applied for payments under the deeds. On appeal with a certificate of the High Court:

Held, that the answer given by the High Court was co:rect.

! ' \ ' '

' '

THE FIRST NATIONAL CITY BANK

L. KAPUR

C. SHAH, JJ.

Business Profits Tax Act

Business Profits Tax Act, 1947

s. 52

R. J. Kolah

I. N. Shmff

A. N. Kripal

D. G

India

Schedule 2

United States

Schedule II of the Act

Schedule I

Indian Income-tax Act, 1922

December 31, 1946

Kapur

January 14, 1947

S 44

Schedule II

Supreme Court

United States of America

s. 5211

United Sta

The term ' Undivided Profits' simply follows a bank account-
ing nomenclature used in the United Sta, tes to

3 f.fC.R. . "

Bombay

Supreme Court of America

s. 2

War Revenue Act

Brandeis

S. 304

April I, 1946

Ghulam Hassan

1st January, 1946

s. 5211

Schedule II of the Act

K. A. RAMACHAR

COMMISSIONER OF INCOME TAX, MADRAS

J. L. KAPUit

Rangachari

s. 66(r)

Income-tax Act

Hangachari

Bijoy Singh Vudhuria

s. 16(1)(c)

Income-tax Act


380 SUPREME COURT REPOl{TS [1961]

I96I structure. Under these circumstances it would be

Th F . -t-N 1. 1 erroneous not to treat the amount of ''Undivided e trs a sona 0 fi , f . f d City Bank ro ts as a part o the cap1tal un .

In our opinion therefore the amount designated as 1"he Commissioner "Undivided Profits " is a part of the reserves and has

0~ Inome~~~, to be taken into account when computing the capital om ay uy and reserves within R. 2(1) of Schedule II of the Act.

Kapur J.

The question which was referred by the Tribunal should have been decided in the affirmative and in favour of the appellant and the amount should have been added to the capital as allowed by R. 2( 1) for the

Chargeable Accounting Periods. In the result the appeal is allowed. The appellant will have its costs in this Court and in the High Court.

january IO.

Appeal allowed.

K. A. RA~IACHAR AND ANOTHER v.

COMllSSIONER OF INCOME TAX, 1\:!ADRAS. (J. L. 1\.APUH., M. HTDAYATULLAH and J. C. SHAH, JJ.)

I ncome-tax~Assessee assigning portion of his profits of partnership firm to his wife m•d daughters--Such profits, if can be included in the assessee's total income for purposes of assessment~ Incometax ActJ 1922 (II of I922), S. I6(I)(c).

One Rangachari, a partner of a partnership firm, assigned by means of a deed of settlement a fourth share of the profits of the firm each to his wife, a married adult daughter and a minor daughter for 8 years with the right to receive the said share of profits absolutely and exclusively from the firm.

The question which arose before the High Court on a reference under s. 66(1) of the Income-tax Act was " \Vhether the inclusion in the assessee's total income of the profits settled by him on his wife and two daughters is justifiec.l in law?'' The assessee H.angachari

relying on the rule laid down by the Privy Council in Bijoy Singh Dudhuria's case claimed that the amounts payable to his wife and two daughters never became his income, being diverted by an overriding title and that those amounts could not be included in his total income for the purposes of assessment being excluded by reason of the third provio to s. r6(1)(c) of the

Incornetax Act. The High Court held that the third proviso was not attracted and that the income had accrued to the assessee in the first instance, and had then been applied for payments under the deeds. On appeal with a certificate of the High Court :

Held, that the answer given by the High Court was co:rect.

. '

\ \ • j

• I

3 S.C.H.

SUPRE~IE COUR'l' ltEPOHTS an

An examination of the deeds of settlement showed that the

196I disponer had stated that from the profits " payable to him " certain amounts in specified shares were to be paid to his wife 1\. A. Ramacha" and two daughters. o doubt, the assessee in those deeds created v. a right in favour of the disponees to get the amounts direct from Commissioner of the firm, of which he was a partner. The tenor of the document Tncom~tax, Mad, as showed that the profits 'Yere first to accrue to him and were then applied for payments to the dispon<.:es.

Under the law of partnership, it i.s the partner and the partner alone 'vho is entitled to the profits.

A stranger, even if he were an assignee, has not anrl cannot have a direct claim to the profits. By the deeds in question, the assessee merely allowed a payment to his wife and daughters to constitute a valid discharge in favour of the firm, but 'vhat was paid was, in law, a portion of his prof1ts or, in other words, his income.

The rule in Bijoy Singh's case was not applicable to this case, and in view of the decision of this court in Sitaldas Tirathdas's case it cannot be said that the profits were diverted by an overriding title before they accrued to the assessee.

Provat Kumar Mitter v. Commissioner of Income-tax, ll'est Bengal lrg6r] 3 S.C.R. 37

Tulsidas Kilachand v. The Commissioner of Income-tax [rg6r]

3 S.C. R. 351.

The Commissioner of Income-tax, Bombay v. Sitaldas Tirathdas [1961] 2 S.C. R. 634, applied.

Bijoy Singh Dudhuria v. Commissioner of Income-tax, Benp, al [1933J r I.T.R. 135, held inapplicable.

CIYJL APPELLATE JURISDICTIO~: Civil Appeals Nos. 142 and 143 of 1960.

Appeals from the judgment and order dated July 21, 1955, of the Madras High Court in C.R. No. 32 of 1952.

G. S. Pathak and Naunit Lal, for the appellants.

K. N. Rajagopal Sastri and D. Gupta for the respondent.

1961. Januan 10. The Judgment of the Court. was delivered byv

HIDAYATULLAH, J.-These are two appeals by the Hiday&aJullah J. legal representatives of one A. R. Rangachari, who died during the pendency, in the High Court at Madras, of proceedings in a reference under s. 66( I) of the Incometax Act made by the Income-tax Appellate Tribunal, Madras Bench. The following question was referred to the High Court for its decision :

::; UPREME COURT REPORTS [1961]

1961 "Whether the inclusion in the assessees total K.A. Ramachar income of the profits settled by him on his wife v. and two daughters is justified in law ? "

Commissioner of The High Court answered the quest ion i 11 the :-tffir~ Income-ta);, Madras mative. The appeals have been tiled with a. CPrtificate

Hidayatt41lah ) . granted by the High Court.

Rangachari was one of five partners of 11 firm, Messrs. Chari and Ram, and held 11 :-; ix-anna :-; hare in the profits and loss of the partnership. On September 22, 1947, he executed three cJeedH of settlemeut., which are marked ExtH. A, Al and A-2, in favour of his wife, a married adult. daughter and a minor daughter. To each of them, he assigned a fourth share of the profits of the firm payable to him (but not the losses), for a period. of M years, vesting the right in them to receive the said share of profits absolutely and exclusively and declaring the settlements to be irrevocable during the above period. It is not necessary to refer to the three documents, because the terms are the same. A few clauses of the deed, Ex. A, may be quoted. After recitals which included the following:

"Whereas the Settlor has settled upon his minor daughter, Srimathi l\Ieera Bai, one-fourth of his share of profits payable to him from the firm for a period of eight years; And whereas out of natural love and affection, the Settlor is desirous of conferring upon the Beneficiary a similar portion of his share of profits from the firm", the deed goes on to say :

" Now this Indenture witnesseth as follows : I. The Settlor hereby assigns unto the Beneficiary all the rights of the Settlor in respect of onefourth of his share of profits in the firm (but not the losses) payable to him during a period of eight years commencing from the date hereof to be taken and enjoyed by the Beneficiary in absolute and exclusive right.

2. The Settlor shall not b a yc any manner of right or interest in the said one-fourth share herehy settled and the right to receive from the firm one-fourth of

3 S.C.R.

SUPREME COURT REPORTS 383

the Settlor, s share during the said period of eight 1 961

years shall exclusively vest in the Beneficiary.

K. A. Ramachar

3. The Beneficiary shall be entitled directly to v. receive and collect from the firm the share of profits Commissioner of hereby transfened for the Raid period of eight years. Income-tax, Madras

If • 111o

1 I. I + I

11 + I •• 41 111o 1o ... •

4. ' 111o ' ' 111o + f • + .f' • • ' I + t • 111o I If • If If I I I t I

I + I ' ' • 111o I • I • • •

+ ' + I t <t I + t lllo I

8. This settlement shall be irrevocable." For the assessment year 1947-48 corresponding to a previous year ending on April 13, 1947, the profits due to Rangachari amounted to Rs. 86,491-13-0. This amount was credited to the account of Rangachari, and Rs. 21,622-15-3, bring one-fourth thPref)f, were transfezTed to the accounts of each of the three disponees.

In the same lvay, the profits oft he prey ions yf:'ar ending April 13, 1948, were dispoed of.

The asessee claimed that these amounts could not be ine1uded in his total incon1e for purposes of assessment, being excluded by rtason ofthe third proviso to s. l6(l)(c) of the Ineozne-tax Act. He also contended that the amount payable to his wife and two daughters never became his income, being diverted by an overriding

title, and that the case was governed by the rule laid down by the Privy Council in Bijoy Singh Dudhuria v.

Com'missioner of lncome-ta~, Bengal (1).

The assessee's contentions were not accepted by the Inco1ne-t a.x Officer, .and his appeals to the Appellate Assistant Commissioner and the Tribunal also failed.

In so far as the assessment year 1947-48 was concerned, the Income-tax Officer held that the incorne had already accrued to the assessee, because the deeds were executed five months after the cJose of the account year. He also held that the transfer to the minor daughter fell within s. 16(3), as there was no adequate consideration for the transfer. With regard to the \vife and marrit>d daughter, he held that s. 16(l)(c) was not applicable, because what had been transferred was income first accruing to the assessee 9 whiles. 16(l)(c) contemplated income which accrued to a. person, to whom the transfer was made. The same reasons (excPpt th~ first) were given for rejecting the

(I) (1933) I I.T.R. 135

Hidayatullah f.

. IL '- .. ..___,..

.. ··/ - "'~-"' .~ ~- .

;· ; I ' . . - SUPTIE:\IE C:OlTRT REPORTS [19611 "- '_{ 384 .. ____ ...........___._ ..... ' \ . ":- '\ .

J96I . ~.· assessee's'. COntentionS • in respect -Of the .Other aSSeSS•

· .. - men t vear. : · _- ·\. _ · . ·. . . K. A. Ramachar J • • It is not necessary to refer in detail tothe decisions

. co-mi;; ionr of of the A ppe1Iate Assistnt Commissioner; th_e 'ribunal Income-tax, Madras and the High Court~ ~The High Coh'rt in an Claborate - ... judgmen~ pin.ted ou~· that s. 16{l)(c) lid 'nota:pply to llidayatullah]. these proceedings; and that t~1e tlurd'provtso was,

therefore, not attracted .. ·· It also held that the iucome had o.ccrued to the. ass-essee 'in the first instance~ .and ·-···· had then: ben-iipplied for payments under the deeds.

This Court has recently decided tliree cases which have a direct, bearing in.· this connection-. :_:In Provat Kumar-.iJiittei v.·. Commissioner .or lncometax~L JVest Bengal (1), • the assessee had executed a deed of trust under which dividends:· from .. certain shares,, -\vhich

~- -

-continued. tor be :his. assets, .• wr.re trari.sferre:d _:to; his

wife~ . It was held~ that :the, case: diu . not: fall t within s; 16{l)(c), and that the: rulo in~Bijoy Singh Dudhuria's case (!j). also' did not apply.~! In 1lulsidas -J(ilachand v. XheCommissioner of Income-li:u:, Bombay(3), th~ _husband had created a tru-st -of the shares,. constituting hims.elf . as itne . trustee to pay :to the wife dividends from those . shares for a-period'.· of seven; ears. -_. It ; was . ' held that the case was riot governed:by_s. 16(l)(c): but - ·--by _s: 16(3)(b). In -The. Commissio, ner. of ~1ncom~-_t(u;,

-~~ -~ .Bombay v. Silaldas Tirathda8 (~), the rule laidi down _by

.the ·.Privy .Councn in 'Bijoy. Singh _Dudhuria's case (2) . · .. was considered along with:, the . cse of the_ Privy Council in P. c~ jJullick. v; Commissioner of-}ncf?meta; c,

. . . Bengl (5), and. it was pointed: out,· Jhat. the tule in . . Bijoy Bingh Dudhuria's case (2)_applied.orily to ; those - .. ·.cases where-- it could. be. said that._by:an overriding :- . 'title the income was diverted :in such .a way. as· nev:er •: .- :· ·-Jo . become .. the. income of the assessee... These three . . cases; in our opinion,- afford a complete answer .. to the

• •• !. ·.contentions of the appellants.· . , . - , -' .. :' ·. : . An examination of. the deeds of settlement shows. ·:,, · .. that the disponer had stated that frol!:r the profits

_.· .· _ . "payable to him" certain amounts in specified shares

were to -b~ paid_to his wi.fe and two daughters. _-; No

(I) [t961] 3 s.c.R. 37.. .-_ {3). (1961) 3 s.c.n:. 351.

(2) [1933] [ l.T. R. 135

(4} ( TQ6I] 2 S.C.R.- 6H .

- -. . . . , . . . _ . _ (_S_)_ (z_93s] 6I.!.R. 206:

,. ;

I .; ,~ --

. -·. -~

3 S.C.R.

SUPREl\IE COURT REPORTS 385

doubt, the assessee in those deeds created a right in

I961 favour of the disponees to get the amounts direct I\. A. Ramachar from the firm, of which he was a partner. The tenor v. of the documents shows that the profits were first to Commissioner of accrue to him and were then applied for payments t.o Jncomt-tax, Madra! the disponees. Learned counsel for the appellants contended that what had been assigned was an actionllidayatullah f. able claim, to wit, the right to profits, and therefore the profits were diverted, before they accrued to the disponer. This, in our opinion, is neither in accordance with the law of partnership nor with the facts as we have found on the record.

Under the law of pa.rtnership, it is the partner and the partner A>lone who is entitled to the profits. A stranger, even if he were an assignee, has not and cannot have a direct claim to the profits. By the deeds in question, the

assesee merely allowed a payment to his wife and daughters to constitute a valid discharge in favour of the firm; but what was paid was, in law, a portion of his profits, or, in other words, his income.

A glance at the account books of the firm, l\lessrs. Chari and Ran1, clearly shows that the amounts were first credited in the Khata of Rangachari and then under his directions were transferred from his Khata to those of his wife and daughters. The dispositions, therefore, were, in law and in fact, portions of the income of Rangachari, after the income had accrued to him, and tax was payable by him at the point of accrual.

In view of the decision of this Court in Sitaldas Tirathdas's case (1), it cannot be said that the profits were diverted by an overriding title before they accrued to Rangachari; and the rule in Bijoy Singh Dudhuria.' s case {2} cannot be called in aid.

For the above reasons, we are in entire agreement with the High Court in the answer given and dismiss these appeals with costs.

(I) [1961] 2 S, CR. 634.

Appeal8 dismissrd.

(2) [rqnl r I.T.R. t3.'i

Schedule II of the Act

Kapur J.

K. A. RA~IACHAR AND ANOTHER

COMllSSIONER OF INCOME TAX, 1\:!ADRAS

C. SHAH, JJ.

s. 66(1)

Income-tax Act

H.angachari

Bijoy Singh Dudhuria

A. Ramacha

Bijoy Singh

Sitaldas Tirathdas

[1961] 2 S.C. R. 634

G. S. Pathak

Naunit Lal

K. N. Rajagopal Sastri

D. Gupta

HIDAYATULLAH

Hiday&aJullah

A. R. Rangachari

High Court at Madras

s. 66( I)

Madras

Rangachari

September 22, 1947

Srimathi l\Ieera Bai

K. A. Ramachar

April 13, 1947

s. 16(3)

s. 16(l)(c)

Hidayatullah

K. A. Ramachar

s. 16

Bijoy Bingh Dudhuria

Bijoy Bingh Dudhuria's case (2)applied.orily to ; those - .. ·.cases where-- it could.


3 s.c.R. SUPREME COURT REPORTS 405

the impugned Resolutions were ultra vires and should

I96' be quashed. .

Dr. Akshaibar Lal In the result, the appeals are allowed.

Resolut10ns v.

Nos. 90, 94 to 96 and 99 to 102 dated May 15, 1960, of Vice-Cilancellor, the Executive Council of the Banaras Hindu Univer- Banaras Hindu sity are quashed, and an appropriate writ or writs Univmity shall issue to the respondents to that effect. The Hidayat1tllah J. respondents shall pay the costs of these appeals, as also of the High Court.

Only one set of hearing fee here and in the High Court shall be allowed.

Appeals allowed.

MAHANTH RAMSW AROOP DAS

1).

THE STATE OF BIHAR. (J. L. KAPUR, M. HrnAYATULLAH and J. C. SHAH, JJ.)

Agricultural Income-tax-Estate in management of Court Receiver-Owner if liable to be assessed to tax for such period- -Bihar Agricultural Income-tax Act, XXXII of r948, ss. 2, cl. (m), 3 and IJ.

The appellant was the Mahant of the Asthal Estate in Bihar which was in the management of a Receiver appointed by the Civil Court in a suit relating to the estate. On appeal the question that arose for decision in this Court was whether the appellant- Mahant was liable to be assessed under the Bihar Agricultural Income-tax Act, r948, to pay agricultural income-tax for the year in which the estate was in the management of the Court Receiver.

Held, that the income though collected by the Receiver was the income of the appellant. By virtue of the provisions of ss. 2,

cl. (m) and r3 of the Bihar Agricultural Income-tax Act it was open to the taxing authorities to treat the Receiver as the assessee because he held the property from ·Y{hich income was derived, but on that account the income in tli:e.'nand of the owner was not exempt from liability to assessment of tax. Section 3 of the Act provides for charging agricultural income of every "person " as defined in s. 2, cl. (m) which includes a receiver and s. r3 merely provides a machinery for recovery of tax from "persons" including receivers and is not by itself a charging section.

CIVIL APPELLATE JtrRISDICTION: Civil Appeal No. 449of1958.

Appeal by special leave from the judgment and decree dated August 7, 1956, of the Patna High Court in Misc. Judicial Case No. 604 of 1953.

January II,

"zg~I- \,

'·406.

~ . \

.,_ ' . , '

D. P. Singh, for the appellant. ---c-;·-- --·.

Mahanth \_ S. P. Varma, for the respondent.

Ramswaroop Das

1961. January 11. The Judgii::limt of the Court was • v. delivered by · -- ·-- . : - '.

State of Bihar . .

SHAH, J.-The High Court of Judicature at Patna answered in the . affirmMive the following question which was submitted by the Board of Agricultural Income-tax, Bihar, under s. 28(3) of the Bihar Agricultural Income-tax Act, XXXII of 1948-hereinafter referred to as the Act £

Shah]. .·

' I

"Whether, in the facts and circumstances of the case, the petitioner could be legally assessed for the income of the Estate in 1355 Fasli when the Estate was in the hand of the Receiver?" \Vi th special leave under- Art. 136 of .the Constitution, this appeal is preferred against the order of the High Court. The appellant is the l\fahant -of the Asthal Estate, Salauna, in the District of Bhagalpur in Bihar. In a suit concerning that estate, a Court Receiver was appointed by the First Class Subordinate Judge, .Mcinghyr, to manage the estate. The.Receiver functioned till sometime in December, 1949, and under

the -order of the Subordinate Judge he handed over chargeof the estate to the appellant on Januai:ylb. -1950._ On January}5, 1950, the appellant submitted \.a return of .income of the estate to the Agricultural Income-tax Officer, l\fonghyr, for the Fasli year 1355 corresponding to September 16, 1948, to September 15, 1~49. The Agricultural Income-tar Officer: assessed on August 7, 1950, the agricultural income of the es_tate at Rs. 90,507-2-6 and ordered the appellant to pay Rs. 20,290-13-0 as agricultural: income-tax. Appeals . . against the order of assessment preferred to the Com~ ·

-:missioner 'of Agricultural Income-tax and the Board

of, Agricultural Income-tax; Bihar, were unsuccessful.

The Board however refori:ed the question set . out hereinbefore to the High Court under s. 28(3) of tho 'Act as arising out of its order. . .. .

- ; The, only question which falls to be determined in this appeal is hether the appellant .was lia hie to be assessed to pay agricultural income-tax for; the year . ' ,_ ' \... . . .. " -- .

in which the estate was in the management of the Court Receiver. Section 3 of the Act which is the charging section provides :

"Agricultural income-tax shall be charged for each financial year in accordance with and subject to the provisions of this Act on the total agricultural income of the previous year of every person." By s. 4, it is provided :

"Save as hereinafter provided, this Act shall apply to all agricultural income derived from land situated in the State of Bihar." The income of the estate of the appellant was not exempt from payment of tax and by virtue of s. 3, agricultural income-tax was charged upon the income for the assessment year in question, and the appellant was prima facie liable as owner of the estate to pay tax on tht income. The appellant however relied upon s. 13 of the Act which provides:

"Where any person holds land, from which agricultural income is: derived, as a common manager appointed under any law for the time being in force, or under any agreement or as receiver, administrator or the like on behalf of persons jointly interested in such land or in the agricultural income derived therefrom, the aggregate of the sums payable as agricultural income-tax by each person on the agricultural income derived from such land and received by him shall be assessed on such common manager, receiver, administrator or the like, and he shall be deemed to be the assessee in respect of the agricultural income-tax so payable by each such person and shall be liable to pay the same." The appellant urged that if the land from which agricultural income is derived is held by a Receiver and the income is received by the Receiver,. the Receiver alone can, by virtue of s. 13, be deemed to be the assessee and the Receiver alone is liable to pay the tax in respect of that income. In support of his contention, the appellant relies upon the definition of the word, "person" in s. 2, cl. (m) which states:

Mahanth Ramswaroop Das v.

State of Bihar

Shah].

Mahanth Ram swaroop Da£

State of Bihar

Shah].

"'Person' means any individual or association of individuals, owning or holding property for himself or for any other, or partly for his own benefit and partly for another, either as owner, trustee, receiver, common manager, administrator or executor or in any capacity recognised by Jaw, and includes an undivided Hindu family, firm or company."

In our view, there is no substance in the contention raised by the appellant. The liability to pay tax is charged on the agricultural income of every person.

The income though collected by the Receiver was the income of the appellant.

Bys. 13, in addition to the owner, the Receiver is to be deemed to be an assessee.

But the fact that the Receiver may, because he held the property from which income was derived in the year of account, be deemed to be an assessee and liable to pay tax, does not absolve the appellant on whose behalf the income was received from the obligation to pay agricultural income-tax. Section .13 merely provides a machinery for recovery of tax, and is not a charging section. When property is in the possession of the Receiver, common manager or administrator, the taxing authorities may, but are not bound to, treat such persons as assessees and recover tax.

The taxing authorities may always proceed against the owner of the income and assess the tax against him. The definition in the connotation of "person " undoubtedly included a receiver, trustee, common manager, administrator or executor, and by such inclusion, it is open to the taxing authorities to assess tax against any such persons ; but on that account, the income in the hand of the owner is not exempt from liability to assessment of tax.

Counsel for the appellant urged that the income received by the appellant from the Receiver did not retain its character of agricultural ihcome and therefore also the appellant was not liable to pay agricultural income-tax. But this contention was never raised before the taxing authorities and no such question has been referred to this court. The character of the income was accepted to be agricultural

income in the hands of the appellant and the only question which was sought to be referred and raised before the Board of Agricultural Income-tax was one as to the liability of the appellant to be assessed to agricultural income-tax for the year in question.

In that view of the case, the appeal fails and is dismissed with costs.

Appeal dismissed.

M/S. BHOR INDUSTRIES L'l'D.

. v.

THE COMMISSIONER OF INCOME-TAX,

BOMBAY CITY I. (and connected appeals) (J. L. KAPUR, M. HrnAYATULLAH and J.C. SHAH, JJ.)

Income-tax-Assessment of dividend income-Company incorporated in Indian State subsequently merged-Extension of Indian Income-tax Act to merged State-Taxation concessions tit merged State-Scope-Assessment on shareholders of non-distributed profits -Exemption from taxation-Computation of dividends deemed to be distributed-Deduction of interest-Merged States (Taxation Concessions) Order, r949, para. r2-lndian Income-tax Act, r922 (fr of r922), ss. r4(2)(c), z8A(8), 23A.

The appellant had been incorporated in r944 as a private company limited by shares in the former State of Bhor with its registered office in Bhor. The shareholders of the company were at all material times resident in British India. By virtue of the States Merger (Governors' Provinces) Order, r949, the State was merged with the Province of Bombay with effect from August I,

1949. The provisions of the Indian Income-tax Act, r922, were extended to the merged State with effect from April r, r949.

Under fue power given by s. 6oA of the Act which enabled the Central Government to remove any difficulty in the application of the Act to'merged States by making a general or special order granting exemption or other modification, the Central Government notified the Merged States (Taxation Concessions) Order, r949.

Paragraph r2 of that Order stated that "the provisions of s. 23A of tile Indian Income-tax Act shall not be applied in respect of the profits and gains of any previous year ending before rst day of August, 1949, unless the State law contains a provision corresponding thereto." The total world incon1e of the company for 1946and.1947 was Rs. 6,57,084-and 7,80, r25 respect. ively and for those years the company declared dividends of Rs. 2,580 and Rs. 1,140. For (he assessment years r947-48 and

Mahanth Ramswaroop Dt1s

State of Bihar

Shah].

 J11nuary za .

Akshaibar Lal

MAHANTH RAMSW AROOP DAS

THE STATE OF BIHAR

L. KAPUR

C. SHAH, JJ.

Income-tax Act

ss. 2

Bihar

Income-tax Act

ss. 2

Income-tax Act

Section 3

s. 2

Patna High Court

D. P. Singh

S. P. Varma

Ramswaroop Das

State of Bihar

SHAH

High Court of Judicature at Patna

s. 28(3)

Income-tax Act

Art. 136

Bhagalpur

s. 28(3)

Section 3

s. 4

s. 3

s. 13

s. 13

s. 2

BHOR INDUSTRIES

COMMISSIONER OF INCOME-TAX

J.C. SHAH

Income-tax Act

Income-tax Act

Bhor

India

Bombay

Income-tax Act

s. 6

Central Government

s. 23A

Indian Income-tax Act

rst day of August, 1949

Mahanth Ramswaroop