April IS

SUPREME COURT REPORTS fl964}

SANT RAM AND ORS.

LABH SINGH AND ORS. [P. B. GAJENDRAGADKAR, c. J., K. N. WANCHOO, M. HIDAYAT-'

ULLAH, K. C. DAS GUPTA AND N. RAJAGOPALA AYYAN

GAR, JJ.] Pre-emption-Based on custom-Whether infringes Constitution of Jndia-"Laws in force"-W:hether includes custom and usage-Constitution of India, Arts. 13, 19.

In a suit filed by the respondent, the Munsif though holding that there was a general custom of pre-emption in the locality and that the respondent had a right to pre-empt, under that custom, dismissed the suit because the sale did not include a strip of land 3 feet 6 inches wide between the respondent's h'.:use and the property sold. The respondent's appeal was allowed by the District Judge. The appellants appealed to the High Court which was unsuccessful because of the answer of the Division Bench to which the question was referred. The Division Bench held that the law relating to pre-emption on the ground of vicinage was saved by Art. 19(5) and was not void 1.1nder Art. 13 of the Constitution. The appellant relied on the decision of this Court in Bhau Ram v. Baijnath and claimed that pre-emption on the ground of vicinage could not be claimed. The respondents in reply contended (a) that Bhau Ram's case was concerned with a legislative measure whereas the present case arose from custom and was thus distinguishable and (b) that Art. 13(1) dealt with "all laws in force'~. and custom was not included in the definition of the phrase "laws

in force" in cl. (3)(b) of Art. 13.

Held: (i) In so far as statute law is concerned Bhau Ram's case decides that a law of pre-emption based on vicinage is void. The reasons given by this Court to hold statute law void apply equally to a custom.

Bhau Ram v. B. Baijnath Singh, [1962] Supp. 3 S.C.R 724, followed. Digambar Singh v. Ahmad Said Khan, L.R. 42 I.A. 10, referred to.

(ii) Custom and usage having in the territory of India the '- force of law are included irt the expression "all laws in force".

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 299 of 1964. Appeal from the judgment and order dated September 26, 1961 of the Allahabad High Court in Second Appeal No. 620 of I 957.

J. P. Goyal, for the appellants.

B. C. Misra. for the respondent No. I.

April 15, 1964. The judgment of the C'.ourt was delivered by Hiilayatullah, J.

HIDAYATULLAH, J.-In this appeal by certificate from the -

High Court of Judicature at Allahabad the appellants are the four original defendants in a suit for pre-emption filed by '>-- the first respondent. Kaiseri Begam (respondent No: 2) sold a plot and two houses in mohalla Gher Abdul Rahman Khan,

Qasba Milak, Tehsil Milak, District Rampur, to the appellants on December 4, 1953. The first respondent Labh Singh owned the adjacent house and he claimed pre-emption on the ground of vicinage after making the usual demands. The suit' was filed by Labh Singh in the court of Munsif, Rampur who by his judgment dated September 25, 1955 held that there was a general custom of preemption in the town of Milak. He also held that Labh Singh was entitled to preempt and had performed the Talabs. He, however, dismissed the suit because the sale did not include a strip of land 3 feet 6 inches wide between Labh Singh 's house and the property sold. He made no order about costs. 'There was an appeal by Labh Singh and the present appellants objected.

The District Judge, Rampur allowed the appeal and dismissed the cross-objections. The appellants then filed a second appeal in the High 'Court of Allahabad, Mr. Justice V. D.

Bhargava, who heard the appeal, referred the following question to a Division Bench: -

"Whether after coming into operation of the Constitution, the right of pre-emption is contrary to the provisions of Art. l 9(l)(f) read with Art. 13 of the Constitution, or is it saved by clause (5) of Art. 19?" The Divisional Bench held that the law relating to pre-emption on the ground of vicinage was saved by clause (5) of Art. 19 and was not void under Art. 1:1 of the Constitution.

In view of this answer, the second appeal was dismissed. The High Court, however, certified the case and the present appeal has been filed.

The question which was posed by Mr. Justice V. D.

Bhargava was considered by this Court in connection with s. JO of the Rewa State Pre-emption Act. 1946 in Bhau Ram

v. B. Baijnath Singh ('). This Court held by majority that the law of pre-emption on the ground of vicinage illlposed unreasonable restrictions on the right to acquire. hold and to dispose of property guaranteed by Art. l 9(i)(fl of the Constitution and was void. It was pointed out that it placed restrictions both on the vendor and on the vendee and there was no advantage to the general public and that the only reason given in support of it, that it prevented person~ belonging to different religions, races or castes from ucquiring property in any area peopled by persons of other religions. races or castes, could not be considered reasonable in view of Art. 15 of the Constitution.

If this ruling applies the present appeal must succeed.

Mr. B. C. Misra, who appears for Labh Singh attempts to distinguish Bhau Ram's case('). He contends that the earlier case was concerned with a legislative measure whereas the

Olhe'8

La/Jh Singh ani

Othm

Hiclayatullah, J

Other1

Lab! Si1UJh and

OtMrs

Hidayatu/bJh, J.

present case of pre-emption arises from custom. He refers to the decision in Digambar Singh v. Ahmad Said Khan(') where the Judicial Committee of the Privy Council has given the early history of the law of pre-emption in village communities in India and points out that the law of pre-emption had its origin in the Mohammedan Law and was the result, some times, of a contract between the sharers in a village.

Mr. Misra contends that Arts. 14 and 15 are addressed to the "State as defined in Art. 12 and are not applicable to custom or contract as neither. according to him, amounts to law within the definition given in Art. 131J)(bl of the Constitution. He submits that the ruling of this Court does not cover the present case and that it is necessary to consider the question of the validity of the customary law of pre-emption based on vicinage.

It is hardly necessary to go into ancient law to discover the sources of the Jaw of pre-emption whether customary or the result of contract or statute. In so far as statute law is concerned Bhau Ram's case(') decides that a Jaw of pre-emption based on vicinage is void. The reasons given by this Court to hold statute law void apply equally to a custom.

The only question thus is whether custom as such is affected by Part III dealing with fundamental rights and particularly Art. 19(i)(f). Mr. Misra ingeniously points out in this connection that Art. 13(1) deals with "all Jaws in force" and custom is not included in the definition of the p:1rase "laws in force" in clause (3)(b) of Art. 13. It is convenient to read Art. 13 at this stage:

"13. (!) All laws in force in the territory of India intmediately before the commencement of this Constitution, in so far as they are inconsistent with the provisions of this Part, shall, to the extent of such inconsistency, be void.

(2) The State shall. not make any law which takes away or abridges the rights conferred by this Part and any law made in cOntra vention of this clause shall, to the extent of the contravention, be void.

(3) In this article, unless the context otherwise rerequire&,-

(a) "Jaw" includes any Ordinance, order, bye-Jaw, rule, regulation. notification, custom or usage having in the territory of India the force of Jaw;

(b) "law in force" includes laws passed or made by a Legislative or other competent authority in the territory of India before the commencement of this Constitution and not previously

(') L.R. 42 I.A. 10, 18. (') [1962] Supp. 3 S.C.R. 724. -

repealed, notwithstanding that any such law or any part thereof may not be then in operation either at all or in particular areas." The argument of Mr. Misra is that the definition of "law''. in Art. 13(3)(a) cannot be used for purposes of the first clae. because it is intended to define the word "law" in the second clause. According to him. the phrase "laws in force" which is used in clause (I) is defined in (3)(b\ and that definition alone governs the first clause, and as that definition takes no account of customs or usage, the law of pre-emption based on custom is unaffected by Art. l 9(i)(f). In our judgment, the definition of the term "law" must be read with the first clause.

If the definition of the phrase "laws in force" had not been given. it is quite clear that the definition of the word "law" would have been read with the first clause. The question is whether by defining the composite phrase "laws in force" the intention is to exclude the first definition. The definition of the phrase "laws in force" is an inclusive definition and is intended to include laws passed or made by a Legislature or other competent authority before the commencement of the Constitution irrespective of the fact that the law or any part thereof was not in operation in particular areas or at all. In other words, laws, which were not in operation, though on the statute book, were included in the phrase "laws in force".

But the second definition does not in any way restrict the ambit of the word "law" in the first clause as extended by the definition of that word. It merely seeks to amplify it by including something which, but for the second definition, would not be included by the first definition. There are two compelling reasons why custom and usage having in the territory of India the force of the law must be held to be contemplated by the expression "all laws in force". Firstly, to ho!d otherwise, would restrict the operation of the first clause in such ways that none of the things mentioned in the first definition would be affected by the fundamental rights.

Secondly, it is to be seen that the second clause spea-ks of "laws" made by the State and custom or usage is not made by the State. If the first definition governs only cl. (2) then the words "custom or usage", would apply neither to cl. (I) nor to cl. (2) and this could hardly have been intended. It is obvious that both the definitions control the meaning of the fits! clause of the Article. The argument cannot, therefore, be accepted. It follows that respondent No. I cannot now sustain the decree in view of the prescriptions of the Constitution and the determination of this Court in Bhau Ram's case('). The appeal will be allowed but in the circumstances of the case parties will bear their costs throughout.

Appeal allowed.

San/ Ram and .. Others

Lablt Sin.gh r, ind

Others

Hidaynluflail, .T.

SANT RAM AND ORS

LABH SINGH AND ORS

P. B. GAJENDRAGADKAR

K. N. WANCHOO

K. C. DAS GUPTA

Constitution of India

Arts. 13, 19

Art. 19(5)

Art. 13

Bhau Ram

Art. 13(1)

Art. 13

L.R. 42 I.A. 10

India

Allahabad High Court

J. P. Goyal

B. C. Misra

Hiilayatullah

HIDAYATULLAH

High Court of Judicature at Allahabad

Kaiseri Begam

Labh Singh

Labh Singh

Munsif

Rampur

September 25, 1955

Milak

District Judge, Rampur

High 'Court of Allahabad

V. D.

Bhargava

Art. 13

Art. 19

Art. 19

Art. 1

JO of the Rewa State Pre-emption Act

Art. 15

Hiclayatullah

Hidayatu

Misra

Arts. 14 and 15

Art. 12

Art. 131J

Art. 19(i)(f)

Art. 13(1)

Art. 13

Art. 13

L.R. 42 I.A. 10

Art. 13(3)(a)

Hidaynluflail


April 15

71)0

SUPREME COURT REPORTS [19.64)

RUP CHAND GUPTA

RAGHUVANSHI PRIVATE LIMITED & ANR. (P.9b. GAJENDRAGADKAR, C. J. AND K. C. DAS GUPTA, J.)

Decree-Collusion-Ingredients of collusimt-A . party who need not be impleaded was not impleaded-Does not constitute collusi<>'l-Two limited companies-All directors common- Suit by one-Other does not defend-Does not make the suit collusive.

Respondent No. 2 is the lessee of Respondent No. 1 and the appellant is the sub-lessee. Both the respondents Nos. 1 and 2 had the same directors. Respondent No. 1 brought a suit against respondent No. 2 for eviction in which the appellant was not impleaded as a party. By agreement between the pr£sent respondent Nos. 1 and 2 that suit was not defended and ex-parte decree was obtained in favour of respondent No. 1. By virtue of this decree the appellant as a sub-lessee of respondent No. 2 became a tresspasser and had no right to remain on the land.

To avoid this situation the appellant filed a suit to set aside the decree on the ground that it was obtained by collusion.

The Trial Judge accepted his contention and gave a direction that the appellant still remained a tenant and directing the tlefendants in that suit from taking any steps in execution of the ex-parte decree. On appeal the trial Court's decree was set aside on the ground that the present appellant had failed to prove that the ex-parte decree was obtaind collusively.

Before this Court the same contentions as in the courts below were raised.

Held: (i) The mere fact that the defendant agreed with the plaintiff that if a suit is brought he would not defend it would not necessarily prove coJ.lusion. It is only if this agreement is done improperly in the sense that a dishonest purpose was intended to be achieved that they can be said to have colluded.

Scott v. Scott. 1913 Law Reports (Probate Division) 52 and Nagubai Ammaz & Ors. v. B. Shamma Rao, [1956) S.C.R 451, referred to.

(ii) The law allows a landlord to institute a suit against a lessee for the possession of the land on the basis of a valid notification without impleading the sub-lessee and the decree in such suit would bind the sub-lessee and hence the suit instituted by respondent No. 1 in the present case cannot be said to have constituted an improper act.

(iii) The omission of the respondent No. 2 to defend the earlier suit was not also an improper act because even if it had a good defence it was not bound to take it.

(iv) Even if the appellant was a Thika tenant within the meaning of the Calcutta Thika Tenants Act, 1949, it would have protected him against eviction by respondent No. 2 but It would not have given protection against the evictim1 by respondent No. 1 because the Act was designed to protect the Thika Tenant from eviction by the landlord only and not against eviction from any other source.

Shamsuddin Ahmad v. Dinanath l\fa!iick, Appeal from 1964 original decree No. 123 of 1957, decided on 13-8-59.

Bup Chand Guplal

. (v) The respondents Nos. 1 and 2 are two distinct legal Baghvra:.hi Pri .. ie entitles and therefore simply because both had the same d:rec- Ltd. "' Anolhu tors it cannot be said that the purpose of the suit was dishonest or sinlster.

(vi) The appellate Bench of the High Court has correctly decided that the present appellant has failed to establish that the impugned decree was procured collusively.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 172 of 1964. Appeal from the judgment and decree dated July 6, 1962 of the Calcutta High Court in Appeal from Original Decree No. 213 of 1959.

S. T. Desai, B. Sen and B. P. Maheslnvari, for the appellant.

H. N. Sanyal, Solicitor-General, Ajit Kumar Sen and S. N. Mukherjee, for the ; espondent No. I.

April 15, 1964. The judgment of the Court was delivered by

DAS GUPTA, J.-The subject-matter of this litigation. is Do.! 1Jv¥o, J. a piece of land in the heart of the business centre of the city of Calcutta. This was part of a block of 52 cottahs of land taken on lease on January 21. 1950 from the Official Trustee, West Bengal, by a private limited company. Raghuvanshi Private Ltd. The lease was a building lease for a period of 75 years commencing from January 21, 1950. The lessee .was required to complete the construction of a three or four storeyed building on the land within 10 years. In September 1960, Raghuvanshi Private Limited in its turn leased 10! cottahs out of the 52 cottahs to a public limited company, Land and Bricks Ltd. This lease by Raghuvanshi Private Ltd., (hereinafter referred to as "Raghuvanshi") in favour of Land & Bricks Ltd., (hereinafter referred to as "Land & Bricks") created a monthly tenancy commencing froin the !st October 1950. Land and Bricks in its turn sub-let the entire IO! cottahs to the present appellant, Rupchand Gupta in his business name of Hind Airways. The lease was on the terms as settled by two letters dated August 19, 1950 and September 5, 1950 between Hind Airways and Land and Bricks. By the terms of the sub-lease, the sub-lessee undertook not to sub-let the land to anybody, to vacate the land as soon as it was required by Land and Bricks for any purpose and not to construct anything on the land but only to' use the open land for "garage purpose for mo_tor vehicles". lnspite of this undertaking however the appellant constructed a pacca structure on the land. Land and Bricks protested unsuccessfully and then started proceedings under the Calcutta

SUPRE~IE COURT R'EPORTS (1964)

1964 Municipdity Act for demolition of the structures. Those pro- Rup c/lanci '111pta ceedings were also unsuccessful. Land and Bricks, it appears,

•· also served on the appellant in February 1953 a notice to Rauhum1u/li Private .

Tl . r' II d b . .

B Ltd . .c- .dnotl.er qlllt. 11s was not o owe up y any smt m court. ut a suit for arrears of rent was instituted by Land and Bricks o,., Gupta, J. against the appellant in September 1955 and another in 1957.

Consent decrees were passed in both of these suits. It appears that in about May or June 1954, Raghuvanshi was desirous of getting possession of the land it has leased to Land and Bricks. The difficulty was that Land and Bricks having sublet to the appellant was not in a position to deliver possession to its lessor Raghuvanshi until anj unless possession was obtained from the appellant. It was in these circumstance;

that Rahuvanshi determined its lease in favour of Land and Bricks by a notice to quit dated the J J th April 1955.

Raghuvanshi then instituted a suit No. 3283 of 1955 in the High Court of Calcutta against Land and Bricks for possession of the land. The appellant was not impleaded in the suit and Land and Bricks did not contest it. An ex parte decree was made by the Court in favour of Raghuvanshi on the l lth May l 956.

The necessary legal consequences of that decree is that the plaintiff as the sub-lessee of Land and Bricks has no right to stay on the land and has become a trespass€r. It is to avoid the consequence of that decree, that the present suit was brought by Rupchand Gupta. His case is that the decree

had been obtained "by fraud and collusion between the defenJants in order to injure the plaintiff and to evict the plaintiff from the said premises without any decree being passed against the plaintiff." Both Land and Bricks and Raghuvanshi have been impleaded in the suit-Land and Bricks as the first defendant. and Raghuvanshi as the second defendant.

Both of them denied the allegations of fraud and collusion.

The case that the decree was obtained , by fraud was given up at the hearing and only the allegation that it was a collusive suit was presse(l.

The Trial Judge held that there was collusion between defendant No. l and defendant No. 2 in the matter of obtaining an ex-parte decree in suit No. 3283 of 1955 nd that the plaintiff was not bound by that decree. He gave a declaration that the plaintiff was still a tenant under defendant No. I and was not liable to be ejected under the ex-parte decree.

He also ordered the issue of an injunction restraining the defendants from taking any steps in execution of the ex-parte decree.

On appeal by the defendant No. 2, Raghuvanshi, the decree made by the Trial Judge was set aside. The learned Judges, who heard the appeal, came to the conclusion that

Rup Oltand Gupl4'

the plaintiff had failed to prove that the decree in suit No. 3283 of 1955 had been procured collusively. So, they held that the plaintiff was bound by the decree in that suit.

RaghuvafUJhi Prioolt' It is against this decree of the appellate Bench of the Ltd. "' A"°""' High Court that the present appeal has been filed by the Das Gupta, J. plaintiff Rupchand Gupta.

The only question for decision in the appeal is whether the plaintiff had establislied his allegation that the ex-parte decree had been obtained as a result of collusion between Raghuvanshi and Land and Bricks. The main circumstances on which the plaintiff relied to i prove collusion and which according to _the learned Judge established his case were these: Raghuvanshl and Land and Bricks though distinct entities had the same persons as directors. The construction of building in terms of indenture of lease with Official Trustee was necessarily in the interests of shareholders of Raghuvanshi and so this was in the interest of Land and Bricks also as the main shareholders were the same. The Calcutta Thika Tenancy Act, 1949 was a serious impedil)lent in the way of the plaintiff's eviction in any suit by Land and Bricks. So, Land and Bricks attempted to get possession of the land by obtaining an order of demolition of structures by proceedings under the Calcutta Municipality Act. When these failed and it was apprehended that a suit for ejectment by Land and Bricks might not succeed against the plaintiff that this device of having a suit by Raghuvanshi against Land and Bricks was decided upon by agreement between Raghuvanshi and Land and Bricks. By arrangement between the two, Land and Bricks did not contest the suit and to avoid any risk of any defence being raised by the plaintiff he was not implead~ ed in the suit at all.

All the circumstances taken together justify, it was- . urged by the appellant. the conclusion that the defendant

No. 2 colluded with-defendant No. l to procure the ex-parte decree for the purpose of executing that decree against the plaintiff.

One of the simplest definitions of collusion was given by Mr. Justice Bucknill in Scott v. Scott('). "Collusion may be defined", said the learned Judge, "as an improper act done or an improper refraining from doing an act, for a dishonest purpose". Substantially the same idea is expressed in the definition given by Whatron's Law Lexicon, 14th Edition,_ p. 212, viz., "Collusion in judicial proceedings is a secret arrangement between two persons that the one should institute a suit agaimt the other in order to obtain the decision

(') [1913] Law Reports (Probate Division) 52.

1964 of a judicial tribunal for some sinister purpose". This defini- 1

Rup Clland Gupta non of collusion was approved by the Court in Nagubai v.

Ammal & ors., v. B. Shamma Rao and ors.(').

Raghui1anshi Private

Lid. &> A1IOlher Thus the mere fact that the defendant agrees with the plaintiff that if a suit is brought he would not defend it, would Dtu Gupta, J. not necessarily prove collusion. It is only if this agreement is done improperly in the sense that a dishonest purpose is intended to be achieved that they can be said to have colluded. - There is little doubt that in the present case Land and Bricks agreed with Raghuvanshi that the suit for ejectment would not be contested. When the suit was instituted Land and Bricks did not contest and the ex-parte decree was passed.

Raghuvanshi did not implead this 11ppellant in that suit. Can any of these acts, viz., Land and Bricks agreeing with Raghuvanshi that it would not contest the suit, the actual refraining by Land and Bricks from contesting the suit or the act of Raghuvanshi in not impleading the appellant, be an improper act or improper refraining from an act? We do not see how any of these things can be said to be in1proper.

Taking the last action first, viz., Raghuvanshi's omission to implead the appellant, it is quite clear that the la~ does not require that the sub-lessee need be made a party. it has been rightly pointed out by the High Court that in all cases where the landlord institutes a suit against the lessee for possession of the land on the basis of a valid notice to quit served on the lessee and does not implead the sub-lessee as 11 party to the suit, the object of the landlord is to eject the sub-lessee from the land in execution of the decree and such an object is quite legitimate. The decree in such a suit would bind the sub-lessee. This may act harshly on the sub-lessee; but this is a position well understood by him when he took the sub-lease. The law allows this and so the omission cannot be said to be an improper act.

Nor is it possible, in our opinion, to say that the omission of Land and Bricks to contest the ejectment suit was an improper act. It has not been suggested that Land and Bricks had a good defence against the claim for ejectment but did not take it for the. mere purpose of helping Raghuvanshi to get possession of the land. Even if it had a good defence, we do not think it was bound to take it. It may be that if Land and Bricks had a defence and the defence was such which if brought to the notice of the court would have stood in the way of any decree being passed in favour of Raghuvanshi there would be reason to say that the omission to implead the sub-lessee was actuated by a dishonest purpose and consequently was improper. It is not necessary for

(') [1956] S.C.R. 451.

us however to consider the matter further as neither in t1le 1964 courts below nor before us was any suggestion made on R•p o;;;;; llflf'l4 behalf of the appellant sub-lessee that Land and Bricks had ... . . eyen a plausible defence against Raghuvanshi's claim for~"";'~~;:''" eiectment.

We have already mentioned the fact thai one of the circumstances which the plaintiff claimed showed collusion was that the Calcutta Thika Tenancy Act stood in the way of the plaintiff's eviction of Land and Bricks. It is unnecessary for us to decide whether or not the appellant was a Thika tenant within the meaning of the Calcutta Thika Tenancy Act, 1949. If he was, that Act would undoubtedly have protected him against eviction by Land and Bricks.

That Act could however have no operation in a suit brought by Raghuvanshi against Land and Bricks. It has been held by the High Court of Calcutta that the Thika Tenancy Act was designed to protect the Thika renant from eviction by his landlord only and not against viction from any source. (Shamsuddin Ahmed v. Dinal!ilth Mullick & ors., Appeal from Original Decree No. 123 of 1957. decided on August 13, I 959). The correctness of this view has not been challenged before us. Nor is it the appellant's case that Land and Bricks was a Thika tenant of Raghuvanshi. Obviously, this could not be suggested, because Land and Bricks never erected any structure at all. (See the definition of a Thika tenant ins. 2. cl. 5 of the Calcutta Thika Tenancy Act; 1949).

On the materials on the record we are satisfied that there was no defence that Land and Bricks could have raised for resisting Raghuvanshi's claim for ejectment.

The crux of the matter is: Was thi~ attempt by Raghuvanshi to get possession of the land a dishonest or sinister purpose? We are asked by Mr. Desai to spell dishonesty out of the fact that the directors of Raghuvanshi and Land and Bricks were common and so the persons who were interested in La net and Bricks were also interested in seeing that Raghuvanshi had not to suffer for forfeiture of his lease for failure to comply with the covenant to construct a building by 1960.

All this may be taken to be true. But, we are unable to see how this would make Raghuvanshi's attempt to get possession of the land dishonest or sinister. It is not as if Raghuvanshi did not actually want to get possession of the land but wanted to help Land and Bricks to get possession. lt has also to be remembered that the identity of the directors and the identity of the main shareholders do not in any way affect the position that in law and in fact Raghuvanshi and Land and Bricks were distinct and separate entities. It is not even remotely suggested that Raghuvanshi and Land and Bricks were really one and the same person with two names.

Dal llvpla, J.

1961 If that had been so, there might have been g'JOd reason for Rup Chand o.,,1a thinking that it was in an attempt to surmount the obstacle R h v.h. P . presented by the Calcutta Thika Tenancy Act, 1949, that "/,1t"':;,'A'...Ih::" this mode of Raghuvanshi suing Land and Bricks for ejectment was resorted to. Indeed, if Raghuvanshi and Land and Daa Gupta, J.

Bricks were one and the same person possession of Land and Bricks would be possession of Raghuvanshi and a suit by Raghuvanshi to eject Land and Bricks would be meaningless.

But, that is not the appellant's case. It appears from the High Court's judgment that the plaintiff's counsel made it plain before the court that it was not his client's case that the plaintiff's real lessor was Raghuvanshi Private Ltd., and not Land and Bricks Ltd. In the present appeal before us also Mr.

Desai argued on the basis that Land and Bricks and Raghuvanshi were distinct entities and that the lease of Land and Bricks under Raghuvanshi was a real subsisting lease at the time of Suit No. 3283 of 195 5.

In our judgment, the appellate Bench of the High Court has rightly come to the conclusion that the plaintiff has failed to establish that the decree in Suit No. 3283 of 1955 was procured collusively. The suit was therefore rightly dismissed.

The appeal is accordingly dismissed with costs.

Appeal dismissed.

' '

RUP CHAND GUPTA

RAGHUVANSHI PRIVATE LIMITED & ANR

Bup Chand Guplal

Calcutta High Court

S. T. Desai

B. Sen

B. P. Maheslnvari

H. N. Sanyal

Ajit Kumar Sen

S. N. Mukherjee

DAS GUPTA

Calcutta

January 21. 1950

Raghuvanshi Private Ltd.

January 21, 1950

Raghuvanshi Private Limited

Land and Bricks Ltd.

Land & Bricks Ltd.

Rupchand Gupta

Hind Airways

August 19, 1950

September 5, 1950

Land and Bricks

Gupta

Raghuvanshi

Rahuvanshi

High Court of Calcutta

Rupchand Gupta

Raghuvanshi

RaghuvafUJhi Prioolt

Das Gupta

Rupchand Gupta

Calcutta Thika Tenancy Act, 1949

Bucknill

Whatron

Rup Clland Gupta

Dtu Gupta

Land

Bricks

August 13, I 959

cl. 5

Desai

Dal llvpla

Rup Chand

Calcutta Thika Tenancy Act, 1949

Daa Gupta


7 S.C.R.

SUPREME COURT REPORTS 767

THE COMMISSIONER OF INCOMETAX, MADRAS v.

A. GAJAPATHY NAIDU

(K. SUBBA RAO, J. C. SHAH AND S. M. SIKRI, JJ.]

Indian Incometax Act, 1922 (11 of 1922), s. 4(1)(b)(ii)- Construction of-Analogy from English Statuaes-"Accrue" or "arise", meaning of-Income arising out of earlier :transaction-

Proper year of assessment.

A certain sum of money was received by the assessee as payment of compensation for the loss sustained by him in respect of a supply during the previous accounting year.

The Income-tax Officer included the amount in the assessment year it was received. Appeals to the Appellate Assistant Commissioner and to the Income-tax Tribunal were unsuccessful. But on a reference, the High Court held that though in fact the right to receive the amount did not accrue during the accounting year of the contract, it should be deemed to have related to the year of contract in respect whereof the amount was paid.

On appeal by certificate, Held: (i) The decision of the High Court was deflected by its reliance on English decisions delivered under circumstances peculiar to that country and on the construction of provisions which were not in pari materia with the provisions obtaining in India.

The provisions of the Indian Income-tax Act shall be construed on their own terms without drawing any analogy from English statutes whose terms may superficially appear to be similar but on a deeper scrutiny may reveal differences not only in the wording but also in the meaning a particular expression has acquired in the context of the development of law in that country.

Commissioner of Income-tax v. Vazir Sultan & Sons, [i959] Supp, 2 S.C.R., 375, followed;.

(ii) under the definition accepted by this Court of the word "accrue" or "arise" in s. 4(1)(b)(i) of the Indian Income-- tax Act. an income accrues or arises when the assessee acquires a right to receive the same.

S. D. Sassoon and Co. Ud. v. Commissioner of Income-tax, Bombay City, [1955) 1 S.C.R. 313, followed.

Rogers Pyatt She!lack. & Co. v. Secretary of State for India.

(1925) IL.R. 52 Cal. 1, approved.

When an Income-tax Officer proceeds to include a particular income in the assessment, he should ask himself, inter alia, two

queshons, namely (i) what is . the system of accountancy adopted by the assessee? and (ii) it it is mercantile system of accountancy, subject to the deemed provisions when has the right to receive that amount accrued? If he comes to the conclusion that such a right accrued or arose to the assessee in a particular accounting year, he shali include the said income in the assessment of the succeeding assessment year. No power is conferred on the Income-tax Officer under the Act, to relate

April 16

1964 back an income that accrued or arose in a later year to an earlier f'Atofyear on _the ground that the said income arose out of an earlier I"""""taz, MOllrM transaction.

. v. '.d

(iii) The meaning of the word "accrue" or "arise" in s. 4(1)- .A.Gajapalhy Na• u (b)(i) of the Indian Income-tax Act cannot be extended so as to - take in amounts received by the assessee in a later year, though the receipt was not on the basis of the right accrued in the earlier year. Such amounts are in law received by the assessee only in the year when they are paid.

Bub/JG Rao, J.

J. P. Hall & Co. v Commissioner of Inland Revenue, (1921) 12 T. C. 382 and Severns (H. M. Inspector of Taxes) v. Dadawa!l, (1954), 35 T. C. 649, referred to.

Commissioner of Income-tax. U.P. v. P. V. Kalichara.oi Jagannath, [1961] 41 I.T.R. 40, approved.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 617 of 1963. Appeal from the judgment and order, dated March 15, 1960, of the Madras High Court in Case referred No. 87 of 1955.

Gopal Singh and R.N. Sachthey, for the appellant.

K. Rajinder Chaudhuri and K.R. Chaudhuri, for the respondent.

April 16, 1964. The Judgment of the Court was delivered by

SuBBA RAo, J.-This appeal by certificate is preferred against the order of the High Court of Judicature at Madras holding that a sum of Rs. 12,447 /- received by the respondent from the Government during the accounting year 1950-51 was not assessable to tax for the asses;:ment year 1951-52.

Gajapathy Naidu, the respondent, was supplying provisions to the Government Stanley Hospital, Royapuram, Madras. During the financial year April 1, 1948 to March 31, 1949, he entered into a contract with the Government for the supply of bread to the said hospital at the rate of Rs. 0-4-6 per lb. As the respondent was maintaining his accounts on mercantile basis, it is common case that the amount due from the Government under the terms of the said contract was credited in the accounts of the respondent for that year. For the assessment year 1949-50 the Income-tax Officer assessed the respondent to income-tax on the basis of the accounts somade. It appears that some time after March 31, 1949, representations were made to the Government for relieving the respondent from the loss sustained in the supply of bread to the hospital.

The Government by its order dated November 24, 1950, directed payment of compensation for the loss sustained by the respondent in respect of the supply of bread to the hospital during the year 1948-49 under the said contract. The respondent received on that account payment of Rs. 12.447 /- during the 1964 year of account 1950-51. In the assessment year 1951-52 theTkeCommiasionuo/

Income-tax Officer included the said amount in the assess- Income-tax, Madr., ment of that year. The assessee, inter alia, contended that he A.GayNaid• received the said sum in respect of the contract that was enter- - ed into by him with the Government during the accounting BubbaRao, J. year 1948-49 and, therefore, it could not be included in the assessment year 1951-52. This contention was rejected by the Income-tax Officer and, on appeal, by the Appellate Assistant Commissioner and also, on further appeal, by the Income-tax Appellate Tribunal. But the contention received favour with the High Court on a reference made to it under s. 66(1) of the Indian Income-tax Act, 1922, hereinafter called the Act. The following two questions were referred to the High Court :

"l. Whether the sum of Rs. 12.447 /- is assessable to income-tax?"

"2. If so, whether it has been rightly assessed in the assessment year 1951-52."

On the first question the High Court held that the said amount was directly related to the business of the assessee and, therefore, was taxable as a trade receipt. It answered the first question in the affirmative. No argument was raised before us on the question of the correctness of this finding. Therefore, nothing further need be said about it.

The High Court answered the second question in the negative. Its conclusion is based upon the following three steps:

1. "The only right of the assessee on the date, when he supplied the bread, was to debit the Government the contract rate. He was entitled to nothing further. The Government Order which raised the rates, came into existence long after , payment thereunder was e; ic gratia, and not on the basis of a right. Therefore, the amount of Rs. 12,447 was not, and indeed could not have been debited in the books of the assessee for the year, when the supply of bread was made to the hospital, namely, 1948-49. Those accounts have been closed."

2. But where a receipt is correlated to and arises out of a commercial transaction between the parties, the right or liability should be deemed to have been established in the past accounting period.

That principle is based not only on any theory of accrual, because there was no legal right existing then; but being correlated to the transaction, it

L/P(D)ISCI-~5

TkCo mtlli#ioatr of

J~IQ, Jlaj)u

should properly belong to it, and the account should be re-opened when the payment came in.

J. "Being a receipt of an earlier year, the amount could not be included in the assessment for the year 1951-52." •.

A. GajapalAy .1.Vaid•

On the said reasoning the High Court held that though in fact the right to receive the amount did not accrue during the accounting year 1948-49, it should be deemed to have related to the year of contract in respect whereof the amount was paid.

The Commissioner of Income-tax has preferred the present appeal against the said order of the High Court.

Learned counsel for the Revenue contended that the High Court misdirected itself on the basis of English decisions and that on its finding that the amount accrued to the assessee only during the accounting year 1949-50 it should have held that the Income-tax Officer had correctly included it in the assessee's income for the year 1950-51. Learned cqunsel for

1 the respi>ndent argued that the said amount was paid in respect of the contract entered into between the assessee and the Government and, therefore, the said amount should properly

belong to the accounting year 1948-49, and should not have been included in the assessment of the year 1951-52. To rnstain his argument he relied upon certain English decisions referred to by the High Court which held that in such circumstances the relevant account of the year when the amount was due under the contract could be reopened and the additional amount, though an ex gratia payment, could be included therein. ·

With great respect to the learned Judges of the High Court we must point out that the decision of the High Court is deflected by its reliance on English decisions delivered under circumstances peculiar to that country and on the construction of provisions which are not in pari materia with the provisions obtaining in India. Th cobservaticns made by this Court in Commi5sioner of Income-tax v. Vazir Sultan & Sons(') may usefully be restated:-

"While considering the case law it is necessary to bear in mind that the Indian Income-tax Act is not in pari materia with the British income-tax statutes. it is less elaborate in many ways, subject to fewer refinements and in arrangement and language it differs greatly from the provisions with which the courts in England have had to deal. Little help can therefore be gained by attempting to construe

(') [1959] Supp. 2 S.C.R. 375.

...

'"'

...

the Indian In.x>me-tax Act in the light of deci- sions bearing upon the meaning of the income-taxTA<CoO..;,.;._q(

legislation in England. But on analogous provi-1""°"''"'""· Jl.W.. sions, fundamental concepts and general principle .l. Gaja;;,., Naid-o unaffected by the specialities of the English incometax statutes, English authorities may be useful Sr.IJbaIW>, J. guides." The cauticn administered by this Court shall always be borne in mind in construing the provisions of the Indian statute. The provisions of the Indian Income-tax Act shall be construed on their own terms without drawing any analogy from Englisl1 statutes whose terms may superficially appear to be similar but on a deeper scrutiny may reveal differences not only in the wording but also in the meaning a particular expression has acquired in the context of the development of law in that country.

The problem raised before us can only be answered on the true meaning of the express words used in s. 4 (l)(b)\i) of the Act. 1t reads:-

"Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived whichif such person is resident in the taxable territories during such year.- accrue or arise' or are deemed to accrue or arise to him in the taxable territories during such year.''

We are not concerned in this case with the expression "deemed to accrue or arise to him", as that expressfon refers to cases set out in the statute itself introducing a fiction in respect of certain incomes. In regard to the question when and whether an income accrues or arises within the meaning of the first part of the said clause, we have a decision of this Court which has clearly enunciated the principles underlying the said expression: that is the decision in E. D. Sassoon and Company, Ltd., v. The Commissioner of lnrome-tax, Bombay City('). In that decision this Court accepted the definition given to the words "accrue" and "arise" by Mukerji, J., in Roger.f Pyatt She1/ack &: Co. v. Secretary of State for lndiaf), which is as follows: - • ". . . . . . . . . . . . both the words are used in contradistinction to the word "receive" and indicate a right to

(') [1955] 1 S.C.R. 313, 342:(1954) 26 LT.R. Ti 50 (') (1925) 1 I.T.C. 363, 371:(1925) LI.R 52 ea't 1: L!P(D)i8Cl-20(a)

Tic 0-Uaiarlff of l nco.....W .Madrat1

v. .t. IJajapatig Nails

BllM>a 1/ao, J.

receive. They represent a stage anterior to the point of time when the income becomes receivable and connote a character of the income which is more or less inchoate."

Under this definition accepted by this Court, an income accrues or arises when the assessee acquires a right to receive the same. It is common place that there are two principal methods of accounting for the income, profits and gains of a business; one is the cash basis and the other, the mercantile basis. The latter system of accountancy "brings into credit what is due immediately it becomes legally due and before it is actually received; and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed." The book profits are taken for the purpose of assessment of tax, though the credit amount is not realized or the debit amount is not actually disbursed. If an income accrues within a particular year, it is liable to be assessed in the succeeding year. When does the right to receive an amount under a contract accrue or arise to the assessee i.e., come into existence? That depends upon the terms of a particular contract No other relevant provision of the Act has been brought to our notice-for there is none-which provides an exception that though an assessee does not acquire a right to receive an income under a contract in a particular accounting year, by some fiction the amount received by him in a subsequent year in connection with the contract, though not arising out of a right accrued to him in the earlier year, could be related back to the earlier year and made taxable along with the income of that year. But that legal position is sought to be reached by a process of reasoning found favour with English courts. It is said that on the basis of proper commercial accounting practice, if a transaction takes place in a parti cular year, all that has accrued in respect of it, irrespective of the year when it accrues, should belong to the year of transaction and for the purpose of reaching that result closed accounts could be reopened. Whether this principle is justified in the English law. it has no pla~ under the Indian Incometax Act. When an Income-tax Officer proceeds to include a particular income in the assessment. he should ask himself inter alia, two questions, namely. (i) what is the system of accountancy adopted by the assessee? and (ii) if it is mercantile system of accountancy, subject tO the deemed provisions, when has the right to recei~ that amount accrued? If he comes to the conclusion that such a right accrued or arose to the assessee in a particular accounting year. he shall include the said income in the assessment of the succeeding assessment year. No power is conferred on the Income-tax Officer under the Act, to relate back an income that accrued or arose in a

subsequent year to another earlier year on the ground that the 1964 said income arose out of an earlier transaction. Nor is the The Commis.!ioner of question of reopening of accounts relevant in the matter of _as-foe"""-""' Madraa certaining when a particular income accrued or arose. Section , a .,,.:;, N ,,

.".1, O.Jr-11Y al(l• 34 of the Act empowers the Income-tax Officer to assess the - income which escaped assessment or was under-assessed in the Sr/Jba Rao, J. relevant assessment year. Subject to the provisions of the section and following the procedure prescribed thereunder, he can include the escaped income and re-assess the asscssee on the basis of which the earlier assessment was made. So too, under s. 35 of the Act the officers mentioned therein can rectify mistakes either of their own motion or when such mistakes are brought to their notice by a party to the proceedings, For that purpose the correct item may be taken into consideration in the matter of assessment. But strictly speaking even in those cases there is no reopening of the accounts of the asscssee. but a re-assessment is made or the rnistake ts corrected on the basis of the actual income accrued or received by the assessee. We do not see any relevancy of the question of reopening of accounts in considering the question when an assessee acquired a right to receive an amount.

We shall now proceed to notice some of the decisions cited at the Bar. J.P. Hall & Co. v. Commissioner of Inland

Revem1e\ ') is a decision of the Court of Appeal under s. 38 of the Finance \No. 2) Act, 1915 (5 & 6 Geo. V, c. 89) dealing with excess profits duty. There it was held that for the purpose of Excess Profits Duty, the profits from the contracts for the purchase and sale of the control gear arose to the appellantcompany in the accounting years in which the gear was actually delivered and not in the pre-war period ending the 30th June, 1914, in which the contracts were made. The price of the control gear in that case was increased later without there being any contractual obligation but purely by a voluntary act of the purchaser. Though the additional amounts accrued to the assessee in a later year, it was regarded as analogous to a trade debt due in respect of the trading operation of the earlier year. On that principle the accounts were reopened in order to bring the increase into profits of the assessce in the year of transaction. This decision was accepted and extended in Severns (H.M. lrlspector of Taxes) v. Dad.swell(')_ As this decision i~ the basis fo_r the High Court's view we shall give its facts m s0me detul. The respondent therein was !!ranted a licence to mill flour in October. 1941. and carried on-the trade of flour milling until September, 1945. As he had not been a

(') (1921) 12 T.C. 382.

(') (1954) 35 T.C. 649.

11114 miller at the outbreak: of war, he was not entitled to the benefit n. a..-..- ., of a remuneration agreement whereby millers were compensat- ,,_, , raz, JLailrru ed by the Ministry of Food for losses incurred under warbme La.;;,,. NOW. arrangements for the purchase of wheat and sale of flour. _! •Having, however, been informed by the Ministry in 1943 and &Ma Jrao, J. twice later that the remuneration of millers who bad begun milling during the period of control was under consideration. be made a claim in 1949 on the same basis as that laid down in the remuneration agreement and received payments in settlement. The respondent contended that the sums received in 1949 were not trading receipts but ex gratia payments, and alternatively, that they were received after the cessation of his trade and that if there was a debt arising to the trade at the date of cessation its value at that date was nil. The Court held that the said payments were ex gratia; and it further held that. if on the discontinuam; e of a trade payment for work already done in a year had nOt been finaDy settled, accounts for that year could be reopened so as to bring in a gratuitous payment for such work made in a subsequent year. This judgment certainly supports the respondent. Though it could be distinguished on the ground in that case it was found that the payment for the work already done had not been finally settled whereas in the present case there is nothing on the record to disclose that it was not finally settled. We would prefer to base our conclusion on the ground that we cannot extend the meaning of the word "accrue" or "arise" in s. 4(1)(b)(i) of the Act so as' to take in amounts received by the assessee in a later year, though the receipt was not on the basis nf the right accrued in the earlier year. Such amounts are in law received by the a'lSeSSeC only in the year when they are paid. We cannot apply the English decisions in the matter of construction of_ the provisions of the Indian Act, particularly when they have received an authoritative interpretation from this Court, in this view, it is not necessary to consider further English decisions cited by learned counsel for the respondent in support of his contention. Before a Division Bench of the Allahabad High Court in Commissioner of Income tax, U.P. v. Kalicharan Jagannath('), when a similar question arose, learned counsel appearing for the Revenue relied upon the said English decisions. but the High Court, rightly, refused to act on them on the ground that they were not relevant in interpreting s. 4 of the Indian Income-tax Act. It further n•ade an attempt to distinguish those decisions on grounds based upon the alleged difference in the scope of the provisions nf the respective countries. It was said that under the relevant English Act the excess profits duty was payable on computation of profits arising from a trade or business in different chargeable accounting periods and, therefore, the emphasis there was more

(') {1961) 41 1.T.R 40.

upon the carrying on of the trade within the chargeable 19" period than on the income accruing during that period. But Tl.<lo•..U.Waf we do not propose to express our view on this aspect of the 1.,,,..,.,_, Madra question, as the relevant sections of the English Acts have A a,;,...::;, ..,, not been placed before us. The learned Judges, after having '

4,..,...-_1 B rightly refused to rely upon the English decisions, construed s.ua &w, J. the provisions of the Indian statute. There. during the accounting period April I, 1945 to March 31, 1946, the assessee eatered into a contract with and supplied fruits and bullock carts to. the military authorities at two different places at rates fixed by the agreement. The assessee incurred a loss and he submitted a petition for review under the terms of the agreement. On November 6, 1947, the military authorities sanctioned the payment of an additional sum which was paid to the assessee on February 17 and 24, 1948. The Income-tax Department sought to include this additional sum in the assessment for the accounting year 1945-46. The High Court held that until the order of review the only right that the assessee had was to claim the money payable at the rates laid down in the agreement itself and that the additional amount became payable to the assessee not by virtue of any right conferred by the agreement, but because of the order passed in review directing the payment of the amount and thus creating a right to this amount in favour of the assessee.

As the right to receive the payment of the additional sum arose after the closing of the accounting year 1945-46. the High Court proceeded to hold that the income did not accrue or arise to the assessee in the accounting yi:ar. It may be pointed out that in that case the original agreement gave a right to apply for review and notwithstanding that fact the court held that the additional payment could not be held to have accrued during the accounting year. For the reasons already stated by us, we are entirely in agreement with the view e•pressed by the Allahabad High Court.

In the result. we hold that the High Court in the present case should have answered the second question referred to it in the affirmative. The order of lhe High Court is set aside and the appeal is allowed with costs.

Appeal allowed.

A. GAJAPATHY NAIDU

K. SUBBA RAO, J.

C. SHAH

S. M. SIKRI, JJ.

Indian Incometax Act, 1922

s. 4(1)(b)(ii)

India

Income-tax Act

s. 4(1)(b)(i)

[1955) 1 S.C.R. 313

s. 4(1)

Income-tax Act

Bub/JG Rao

Madras High Court

Gopal Singh

R.N. Sachthey

K. Rajinder Chaudhuri

K.R. Chaudhuri

SuBBA RAo

High Court of Judicature at Madras

Gajapathy Naidu

April 1, 1948

March 31, 1949

November 24, 1950

BubbaRao

Income-tax Appellate Tribunal

s. 66(1)

Indian Income-tax Act, 1922

A. GajapalAy

England

Income-tax Act

s. 4

Mukerji

[1955] 1 S.C.R. 313

IJajapatig Nails

Jba Rao

s. 35

s. 38

30th June, 1914

Ministry of Food

of a remuneration agreement whereby millers were compensat- ,,, , raz, JLailrru ed by the Ministry of Food for losses incurred under warbme La.;;,,.

s. 4(1)(b)(i)

Allahabad High Court

s. 4

Income-tax Act

s.ua

March 31, 1946

November 6, 1947

February 17 and 24, 1948


.April 16

SUPREME COURT REPORTS [1964]

. THE COMMISSIONER OF INCOME-TAX, MADRAS.

A. KRISHNASW AMI MUD ALI AR AND OTHERS

[K. SUBBA RAO, J. C. SHAH AND S. M. SIKRI. JJ.J

Income-tax-Trading adventure-Profits of business Computation-Value of stock-in-trade-Inclusion of Value at the end of year of account-Necessity-Assessee's method of accountancy-Powers in Income-tax Officer in computing profits-Indian Income-tax Act, 1922 (11 of 1922) s. 13 proviso.

The assessee firm acquired for Rs. 1,00,000/- the exploitation rights of a cinematograph film which were to enu're for four years. For the period, December 25, 1947 to August 2, 1948, which was the previous year corresponding to the assessment year 1949-50 the firm filed a voluntary return declaring that Rs. 28,643/- were earned by the exploitation of the film. In the statement submitted by the firm the total receipts credited in the firm's books were Rs. 1,46,849/- and against that amount were debited Rs. 18,206/- as expenditure and Rs. 1,00,000/- as the amount disbursed for acquiring the exploitation rights. The Income-tax Officer was of the view that from the statement of account which omitted to include at the close of the account year the value of the right in the film for the unexpired period, the profits of the firm could not properly be deduced. Accordingly, he estimated the value of the rights for the unexpired period of exploitation to which the firm was entitled on August 2, 1948, at Rs. 65,000/- and computed the net profits of the firm .as an unregistered firm at Rs. 93.642/- and assessed income-tax and super-tax payable by the firm on that footing. In the appeals filed against the order or assessment, only the correctness of the estimated value of the rights of the film at Rs. 65,000/- was challenged. and the Appellate Tribunal reduced the valuation to Rs. 40,000/-. On reference, the High Court of Madras took the view that it was the cash system that the assessee had adopted, that valuation of the closing stock was not an incident of that system for ascertaining the profits and that the Incometax Officer had no power under the proviso to s. 13 of the Indian Income-tax Act, 1922, to force a different system on the assessee either the mercantile system or a hybrid system of cash plus valuation of closing stock.

Held: In a trading venture, for computing the true profits of the year, the stock-in-trade must be taken into account, whatever method of book-keeping was adopted; and the High Court was in error in holding that because the assessee had maintai.ned his accounts in the cash system it was not open to the Incometax Officer to add to the receipts from the business the value of the stock-in-trad• at the end of the year for the purpose of properly deducing the profits of the business for the year in question.

There was not warrant in the case of assuming that the Incometnx Officer sought to displace the method of accountancy adopted by the assessee; it was only by applying the proviso to s. 13 of the Indian IncomHax Act, 1922, that the Income-tax Officet made the computation upon the basis and in the manner in which in his opinion profits rould be properly deduced.

CIVIL A'PPEALLATE JURISDICTION: Civil Appeal No. 1'64 250 of 1963. Appeal by special leave from the judgment and The Comm.......,.

Qfder dated February 2, 1960 of the Madras High Court in °1 i:;; a"• Case Referred No. 1 of 1955. v.

A. Krilh.......,,..

R. Ganapathy Iyer and R. N. Sachthey, for the appel- Mudaliar and OtA.,, lant. -

S. Narayanaswamy and R. Gopalakrislman, for respondent nos. 1 and 3-6.

April 16, 1964. The Judgment of the Court was delivered by.

SHAH, J.-Respondents to this appeal are a firm constituted under a deed dated December 12, 1947. The firm originally consisted. of three partners: K. N.

Damodara Mudaliar. A. Krishnaswami Mudaliar and v. Thangaraja Mudaliar. K.N. Damodara Mudaliar acquired for the firm for Rs. 1,00,000 /- the exploitation rights which were to ensure for four years in a cinematograph film "Apoorva

Chinthamani" for the North Arco!, the South Arcot and the Chingleput districts and for Pondicherry. For the period, December 25, 1947 to August 2, 1948--which was "the previous year" corresponding to the assessment year 1949-50the firm filed a voluntary return declaring that Rs. 28,643 /- were earned by the exploitation of the film. In the statement

mbmitted by the firm the total receipts . credited in the lrm's books were Rs. 1,46,849 /-, and against that amount

; vere debited Rs. 13,206/- as expenses and Rs. 1,00,000/- as :he amount disbursed for acquiring the exploitation rights. rhereby in the computation of the profits of the business, the irm debited the amount paid for acquiring the rights of ex- J!oitation of the film. but did not take credit for the value

f the unexpired exploitation rights at the end of the "previous year". On August 15, 1948, a deed of dissolution of the partnership was executed. and Damodara Mudaliar sold with effect from August 6, 1948, his half interest in the assets of the partnership to Krishnaswami Mudaliar for Rs. 2,000/- and retired from the partnership. On August 27, 1948 a trial balance-sheet of the firm's books of account was prepared showing a cash balance of Rs. 190 /12 i 4, a debit against Krishnaswami Mudaliar for Rs. 2.64 Ii 8 / 8 and credits in favour of Damodara Mudaliar and Thangaraja Mudaliar respectively for Rs. 1.888/2/11 and Rs. 944/2/ I. Thereafter Krishnaswami Mudaliar, Thangaraja Mudaliar and V. S.

Lakshmanan (an outsider) formed themslves info another partnership to exploit the film for the unexpired period.

From this , partnership Krishnaswami Mudaliar retired on February 22, 194? agreeing to receive Rs. 12000 /- for his

Shah, J.

778 SUPREJ\ffi COURT REPORTS

(1964J

1964 six sixteenth share in the assets of the fmn on the date of PM Oommisaione' retirement. of lncome-taz,

Mo4ra1 h v.

In t e assessment of the respondent firm for the year .d. Krishruiswami 1949-50 the Second Additional Income-ta" Officer, Vellore Mtuialiar•ml Olhet-sdeclined to accept the statement of account that the firm had

Shah, J. earned till August 2, 1948, a net profit of only Rs. 28,643/- as truly representing the profits of the firm. He observed that "no stock valuation of the picture has been taken but only the excess collection over purchase value has been returned'', indicating thereby that in his view from the statement of account which omitted to include at the close of the year the value of the rights in the tilm for the unexpired period the profits of the firm could not properly be deduced.

The Income-tax Officer estimated the value of the rights for the unexpired period of exploitation to which the firm was entitled on August 2, 1948 at Rs. 65.l)()O,. and computed net profits of the firm as an unregistered firm at Rs. 93,642/- and assessed income-tax and super-tax payable by the firm on that footing.

In appeal by the firm to the Appellate Assistant Commissioner, the correctness of the estimated value of the exploitation rights of the film at Rs. 65.000.1was alone challenged and it wa~ submitted that the sum of Rs. 4,000 /- was the true value of the assets at the end of the previous year, Damodara Mudaliar the retiring partner having relinquished his rights representing half share for Rs. 2.000!- only. The Appellate' Assistant Commissioner rejected the contention, holding that the valuation of the exploitation rights for the unexpired period in the deed of dissolution dated August 15, 1948 was "dictated by extra-commercial considerntions". and confirmed-the valuation of Rs. 65,000/- made by the Incometax Officer. Even in appeal to the Income-tax Appellate Tribunal, Madras, the respondent firm merely contended that the valuation of the exploitation rights for the unexpired period was excessive. The Tribunal partially upheld the plea, and reduced the valuation to Rs. 40.000!- as on August 2, 1948, and directed modiHcation of the assessment on that footing.

Pursuant to an order issued by the High Court of Madras in a petition under s. 66(2) the Tribunal stated the case and referred the following question: --

"Whether on the facts and circumstances of this case

the Tribunal was justified in applying the proviso

to s. 13 of the Income-tax Act and in confirming the assessment on a mercantile basis of accounting."

The High Court held that it was open to the assessee to 1964 maintain accounts according to a recognised system of ac- Ti.. Oommi#imur counting and the assessee having adopted the cash system of 01 Irt.; taz, accounting, and the Tribunal having a~igned no reasons for v."" discarding that system in the computation of the profits the A. K~"""""'""'

Tribunal was in error in making the assessment on the basis Mudaloa• a.a Oilier• ()f the mercantile system of acct>unting.

Shah, J.

The High Court observed: -

"When we reach the position that it was the cash system that the assessee had adopted in this case, and that valuation of the closing stock was not an incident of that system for ascertaining the profits, it should be obvious that the Income-tax Officer had no power under the proviso to s. 13 to force a different system on the assessee either the mercantile system or a hybrid system of cash plus valuation of closing stock."

The High Court accordingly answered the question referred in the negative. Against the order, with pccial, leave, this appeal is preferred.

The question to be determined in this appeal is whether in the computation of the income of the firm under the head

"Profits and gains of business" the Income-tax Officer was bound by the method of accounting in which the cost of acquisition of the film of which the exploitation rights were . held was debited at the commencement of the year, but the value of the film at the end of the year was ignored. Section

10 of the Indian Income-tax Act, 1922, provide~ that tax shall be payable by an assessee under the head "Profits and gains of business, profession or vocation" in respect of the profits or gains of any business, profession or vocatibn carried on by him. Such profits or gains have to be computed after making the allowances set out in sub-s .. (2). Section 13 provides that the income, profits and gains shall be computed, for the purposes of ss. 10 and 12, in accordance with the method of accounting regularly employed by the assessee. provided that. if no method of accounting has been regularly employed or if the method employed is such that, in the opinion of the Income-tax Officer. the income, profits and gains cannot properly be deduced therefrom, then the com

putation shall be made upon such basis and in such manner as the Income-tax Officer may determine.

It may be recalled that the Income-tax Officer had in the order of assessment observed that the firm had not made a stock valuation of the film and had merely taken the excess c:ollcction over the purchase value and had submitted its

1964 return of income on that basis. No express order was re- T ht Oommi,.i<mer corded by the Income-tax Officer that in his opinion the in-

0/ J_;':._m•ta>, come, profits or gains of the business could not properly be

v • ..., deduced from the method of accounting employed by the A. Krj-ahnaswami firm, but it is implicit in what is stated by him that without Mudaltar and 011,, rs valuation of the unexpired exploitation rights the profits of

Shah, J. the year of account could not be computed. With this view, it appears, the Appellate Assistant Commissioner agreed.

In appeal to the Appellate Tribunal the only plea raised was that the Income-tax Officer had erred in estimating the value of the unexpired exploitation rights at Rs. 65,000 /-.

That was partially accepted, and the value was reducro to Rs. 40,000 /-. It is difficult to appreciate how any question about the regularity of the proceedings of the Income-tax Officer by the adoption of the mercantile system of accounting and by the application of the proviso to s. 13 of the Incometax Act arose from the order of the Tribunal. The High Court has ur, der the Income-tax Act power to call upon the Appellate Tribunal to state a case, only if the High Court is not satisfied about the correctness of the decision of the Tribunal that no question of law arises from the order of the Tribunal. The grounds of appeal filed before the Tribunal and before the Appellate Assistant Commissioner make it abundantly clear that the question as to the applicability of the proviso to s. 13 to the profits disclosed by the respondent firm was never challenged. Nor can it be said that the Tribunal "forced the x x x firm to adopt ror the purpose of computation of its profits" a &ystem of accounting other than the one adopted by the firm. Jn the title of the order by the Income-tax Officer it was recited that the method of accounting adopted by the firm was "mercantile", but that does not amount to saying that he proposed tc compute the income on the basis that the accounts should be re-written on the mercantile system.

The question referred to the High Court asks fur advice on the justification for applying the proviso to s. 13, and computation of the income on the basis of the mercantile system of accounting. On neither of these two branches there was any argument raised by the firm before the Tribunal. But we do not propose to dispose of this appeal on the limited ground that the question s framed did not arise oUt of the order of the Tribunal and need not be answered. The grounds given by the High Court in support of their answer to the question referred raise a matter of principle of some importance in the computation of income of an assessee carrying on a trading venture with the aid of a wasting asset. and we have heard elaborate arguments advanced by counsel at the Bar and we deem it necessary to express our opinion on the questions debated. '

It is true that the Revenue authorities and the Tribunal 1964 did take into consideration the stock valuation at the end TMOommi4Wm<r of the year of account, but that was not because in their view of I"""""-taz, the system of accounting adopted was or should be mercan-

M';!"" tile: the truth of the matter is that in their view, profits of A. Kri4h;.,,.,,,,,,., the firm for the year could not, having regard to the nature Mudaliar and01hm of the business, properly be deduced from the accounts, "un 8.~ •wh, J. less the Opening and closing stocks were brought into the picture". This is made clear by the observations of the Tribunal in paragraph-IS of the statement of the case:

" x x x in all trading cases the true profits cannot be deduced from any system of maintaining accounts whether cash or mercantile, unless the opening and closing stocks are brought into the picture at cost or market price whichever is lower; it will not avail an assessee to say that in his cash system, he had not made any profit on his cash sales till all his stock is disposed of.

Income-tax is an annual levy and the profits of each year require to be ascertained for that purpose as accurately as circumstances permit. If , i1erefore, in any system of accounting maintained by the assessec, otherwise acceptable, the stocks are left out of account, the aforesaid proviso, it is humbly submitted, necessarily has to be invoked, even if it were for the sole purpose of ad justing the book figures for the stock figu res." Correctness of this view especially in the context of a trading venture by the exploitation of a wasting asset, but which is the assessee's stock-in-trade, falls to be considered.

Section 13 of the Indian Income-tax Act was incorporat ed for the first time in the Income-tax legislation in India by the Income-tax Act 11 of 1922, because in a case decidea under the Income-tax Act, 1918, Wallis, C. J.,, delivering the principal judgment of the Full Bench in Secretary, Board of Revenue, Madras v. Arunachalam Chettiar(') expressed the view that whatever may be the system of accounting adopted bv an assessee, income assessable to tax means the income actually or constructively received and that the words of the charging section placed limits upon the succeeding sections specifying the different classes of income liable to tax. To supersede this exposition of the law the Legislature while enacting Act 11 of 1922 found it necessary to enact s. 13. The section leaves it to the assessee to adopt any compute of accounting and obliges the Income-tax Officer to compute tli.e income, profit~ and gains for the purposes of ss. IO and

(') I.L.R. 44 Mad. 65.

1964 12 in accordance with such method of accounting regularly Th< Commi88foner employed, if profits of the business can properly be deduced of Income-tax, therefrom. The Judicial Committee of the Privy Council ob- .Madras ..,, served in Commissioner of Income-tax, 8fJmbay v. Sarang- A. x,;,1., w., va111i pur Cotton Manufacturing Company Ltd, Ahmedabad('): Mud1'1iar and Otl1rra

Shalt,.!. " x x x the section relates to a method of accounting regularly employed by the assessee for his own purposes x x x and does not relate to a method of making up the statutory return for assessment to income-tax. Secondly. the section clearly makes such a method of accounting a compulsory basis of computation. unless. in the opinion of the Income-tax Officer. the income, profits and gains cannot properly be deduced therefrom. It may well be that, although the profit brought out in the accounts is not the true figure for . income-tax purposes. the true figure can be accurately deduced therefrom."

The Board also observed: -

"It is the duty of the Income-tax Officer.&where there is such a method of accounting '""> consider whether the income, profits and gains can properly be deduced therefrom, and to proceed according to his judgment on this question_"

Again as observed by this Court in Commissioner of Income-tax v. Mcmi//an & Co.fl the expression "in the opinion of the Income-tax Officer" in the proviso to s. 13 of the Indian Income-tax Act, 1922, does not confer a mere discretionary power; in the context it imposes a statutory duty on the Income-tax Officer to examine in every case the method of accounting employed by the assessee and to see whether or not it has been regularly employed and to determine whether the income, profits and gains of the assessee could properly be deduced therefrom.

But the section only deals with the computation of income, profits and gains for the purposes of ss. 10 and 12 and does not purport to enlarge or restrict the content of taxable income, profit and gains under the Act Section 2(15) of the Act defines "total income" as meaning total amount of in come, profits and gains referred to in sub-s. (I) of s. 4 computed in the manner laid down in the Act. Section 4(1) lays down what income shall be included in the total income. and ss. 10(2), 12(2), 12B(2), 14, ISA, 15B, 15C and 16 prescribe the manner of computation of income, profits and gains in

(') L.R. 65 I.A. 1.

(') 33 I.T_R. 182.

different circumstances, and also prescribe special excep- 191'.!_ tions. Section B does not directly impinge upon the applica- The Gcnnmi4rione1 tion of these provisions: it merely prescribes that the com- 01 I; r:j-taz, putation of taxable profits shall be made according to the ~-,... method of accounting regularly employed. Where in the A. Krisk""""""'' opinion of. the Income-tax Officer the incbme, profits and Mudaliaratld Olhera gains cannot properly be deduced from the method of ac- Shah, J. counting, it is open to the Income-tax Officer to compute the income upon such basis in such manner as he may determine.

The section does not compel the Income-tax Officer to accept a balance-sheet of cash receipts and outgoings prepared from the books of account; he has to compute the income in accordance with the method of accounting regularly employed by the assessee.

The only departure made by s. l 3 bf the Indian Incometax Act from the tax legislation in England is that whereas under the English legislation the Commissioner is not obliged to determine the profits of a business venture, according to the: method of accounting adopted by the assessee, under the Indian Income-tax Act, prima facie, the Income-tax Officer has for the purpose of ss. 10 and 12 to compute the income, profits and gains in accordance with the method of account ing regularly employed by the assessee. If, therefore, there is a system of accounting regularly employed and by appro priate adjustments from the accounts maintained taxable profits may properly be deduced, the Income-tax Officer is bound to compute the profits in accordance with the method of accounting. But where in the opinion of the Income-tax Officer the profits cannot properly be deduced from the system accounting adopted by the assessee it is open to him to adopt a more suitable basis for computation of the true profits.

Among Indian businessmen, as elsewhere, there are current two principal systems of book -keeping There is, firstly, the cash system in which a record is maintained of actual receipts and actual disbursements, entries being posted when money or money's worth as actually received, collected or disbursed. There is secondly the mercantile system, in which entries are posted in the books of account on the date of the transaction i.e. on the date on which rights accrue or liabilities are incurred, irrespective of the date of payment.

For example, when goods are sold on credit, a receipt entry is posted as of the date of sale. although no cash is received immediately in payment of such goods; and a debit entry is similarly posted when a liability is incurred although payment on account of such liability is not made at the time. There may have to be appropriate variations when this system is adopted by an assessee who carries on a profession. Whereas

1964 -· under the cash -system no account of what are called the TIM Commi., ioner outstandings of the business either at the commencement of Income-tax, h l f h Jlladr.., or at t e c ose o t e year 1s taken; according to the mercan- . ~- tile method actual cash receipts during the year and the actual A. K~· ' 1"'a.wami outlays during the year are treated in the same way as under .MudaZ.ar and Other& h h . . . __ t e cas system, but to the balance thus ansmg, there 1s added Shah, J. the amount of the outstandings not collected at the end of the year and from this is deducted the liabilities incurred or accrued but not discharged at the end of the year. Both the methods are somewhat rough. In some cases these methods may not give a clear picture of the true profits earned and certainly not of taxable profits. The quantum of allowances permitted to be deducted under diverse heads under s. 10(2) from the income, profits and gains of a business would differ according to the system adopted. This is made clear by defining in sub-s. (5) the word "paid" which is used in several clauses of sub-s (2) as meaning actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under s. 10. Again where the cash system as adopted, there is no question of bad debts or outstandings at all: in the case of mercantile system against the book profits some of the bad debts may have to be set off when they are found to be mercantile system, there are innumerable other systems of accounting which may be called hybrid or heterogeneous-in which certain elements and incidents of the cash and mercantile systems are combined.

But whatever method of book-keeping is adopted, in the case of a trading venture, for computing the true profits of the year the stock-in-trade must be taken into account. If the va!ue of stock-in-trade is not taken icto account, in the ultimate result the profit or loss resulting f1 om trading is bound to get absorbed or reflected in the stock-in-trade unless the value of the stock-in-trade "emains ur:r!-?ned at the commencement of the year and at the end of theyear. It must be remembered that under the Income-tax Act, tax is levied on income, protits and gains, and not on re.:eipts: taxable profits therefore cannot ordinarily be deduced from cash receipts alone. If in the computation of profits of a trading venture, only the cash receipts and outgoings are taken into account, in substance emergence of profits would be deferred, till the firm's capital outlay is completely recouped, thereby transforming what in truth are profits of the business into capital, by book-keeping entries.

In this case it is unnecessary to consider whether the method of accounting adopted cif ignoring the value of the stock-in-trade may be regarded as regularly employed by the respondent firm, when it is the first year of account. It is common ground that the method of accounting was not mercan- 1964

tile. but was wholly or primarily cash. The Income-tax Officer PM Oommi••io•er was of the view that in the absence of stock-valuation of the 011; o.:;•lax, film which was a wasting asset of the partnership and which v.""' was exploited for earning profits, the income of the firm could A. Kr.ishnaswami not properly be deduced and with that view the Appellate As-'Mudaliar and O!hera sistant Commissioner and the Tribunal have agreed. The High Shah, J.

Court, however, held that the maintenance of account on cash basis being a recognised method of accounting, the Income-tax Officer was bound by the choice of the assessee who had adopted that system of accounting, and to compute the income in accordance with that method, unless the Income-tax Officer was satisfied that the assessee had not regularly adopted that system. The High Court also observed that what the Department had done was to make the assessment on the basis that the system of accounting adopted by the assessee was mercantile-a system which the assessee had never adopted, and thereby computed the profits of the assessee, by taking into considera lion valuation of the closing stock which was not an incident of the cash system. The Income-tax Officer had in the view of the High Court no power under the proviso to s. 13 "to force . a different system on the assessee either the mercantile system

or a hybrid system of cash plus valuation of closing stock".

In coming to that conclusion, in our judgment, the High Court erred. Note the facts: an amount of Rs. 1,00,000/- was paid by the firm for acquiring a wasting asset, which was to be exploited for the benefit of the partnership. The price paid for acquiring the asset was debited as an outgoing. At the end of /the year there was a total collection of Rs. 1,46,849 /- by the

exploitation of the asset. The expenses for carrying on the business amounted to Rs. 18,206 /-. The result according to the respondent firm was a net profit of Rs. 28,647 /-. This was arrived at by posting the outgoing for acquiring its stock-in-trade as a proper debit. and ignoring the value of that asset at the end of the year altogether. Under the Income-tax Act for the purpose of the assessment each year is a self-contained unit, and if out of the receipts the cost of the film was to be deducted ih the absence of an entry crediting the value of the asset at the end of the year, for arriving at the income of the profit of !ht' firm '-'; ould either wholly or substantially be absorbed in the amortization of the capital value of the asset. The result of the accounting would therefore give a false picture of the partnership, however lucrative the business may in reality be.

The methods of computation of taxable incomes prescribed by the Act of different kinds of income are undoubtedly highly artificial, but the Act does not compel the Income-tax Officer

o accept a statemnt of accoun.t which is not prepared accordmg to any recogmsed accountmg practice .

T!te Crn11missioner

of I mom~-tax,

Madra.B

786 SUPREl\IE COURT REPORTS [1964]

In Commissioner of Inland Revenue v. Cock B11ssell cu1d Co. Ltd.('). Croom-Johnson J., in dealing with valuation of stock-in-trade for purposes of taxation observed:

A. Kli.~11nas10a111i Mu•ltdiar tind Ollil'I>'

"there is no word in the statutes or rules which deals with this question of valuing stock-in-trade. There. is nothing in the relevant legislation which indicates that in computing the profits and gains of a commercial concern the stock-in-trade at the start of the accounting period should be taken in an<! that the amount of the stock-in-trade at the end of the priod should also be taken in. It wculd be fantastic not to do it: it would be utterly impossible accurately to assess profits and gains merely on a statement of receipts and payments or on the basis of turnover. It has long been recognised that the right method of assessing profits and gain~ is to take into account the value of the stock-in-trade at the beginning and the value of the stock-in-tra<lc at the end as two of the items in the computation. l need not cite authority for the general proposition. which is admitted at the Bar. that for the purposes of ascertaining profits and gains the ordinary principles of commercial accounting should be applied. so long as they do not conflict with any express prevision of the relevant statutes "

Slialt,, l.

We have already said that in England there is no provision which compels the tax officer to adopt in the computation of income the system of accounting regularly employed by the assessee. But whatever may be the system-whether it is cash or mercantile-as observed by Croom-fohnson J.-in a trading venture it would be impossible accurately to assess the true profits without taking into account the value of the stock in trade at the beginning and at the end of the year. Reference may also be made to Whimsier & Co.

v. The Commissioner of Inland Revenue(') in which Lord President Clyde observed at p. 823: -

"In computing the balance of profits and gains for the purposes of Income Tax, x x x two general and fundamental commonplaces have always to be kept in mind. In the first place, the profils of any particular year or accounting period must be taken to consist of the difference between the receipts from the trade or business during uch year or accounting period and the expenditure laid out to earn those receipts. In the second place, the

(') 29 T.C. 387.

(') T.C. 813.

account of profit and loss to be made up for tbe 1964 purpose of ascertaining that difference must be T!ie Com111fasio., r framed consistently with the ordinary principles 01 Inco111e-tax, of commercial accounting, so far as applicable.

M":~"' and in conformity with the rules of the Income-tax A. Kri8/1nasu:ami Act, or of that Act as modified by the provisions Mwl<lli<.r and 0th" and schedules of the Acts regulating Excess Pro si;;;: J. fits Duty as the case may be. For example the ordinary principles of commercial accounting require that in the profit and loss account a merchant's or manufacturer's business the values of the stock-intrade at the beginning and at the end of the period covered by the account should be entered at cost or market price, whichever is the lower: although there is nothing about this in the taxing statuteS." Similarly in Commissioner of Income-tax and Excess Profits Tax, Madras v. Messrs. Chari and Ram, Madura(') Rajamannar C.J., observed that stock-in-trade in hand is an essential item in the computation of the profits for a period.

"Profits" as ob.served by Fletcher-Moulton, L.J ., in the Spanish Prospecting Co_mpany Ltd. in re.(').

"implies a comparison between the state of a business at two specific dates usually separated by an interval of a year. The fundamental meaning is the amount of gains made by the business during the year. This can only be ascertained by a comparison of the assets of the business at the two dates. "We start therefore with this fundament~) definition of profits, namely. if the total assets of the business at the two dates be compared. the increase which they show at the later date as compared with the earlier date x x x x represents in strictness the profits of the business . during the period in question." It is true that in that case Fletcher-Moulton, L.J., made the observations not in dealing with a profit and loss account in a case relating to taxation, but with a, balance-sheet of a company intended to show the actual financial condition of a business at the end of a year_ The observations however do show that in ascertaining profits what may be regarded as nornial book-keeping practice has to be observed. Whether in the case of trading in special classes of assets appropriate adjustments may have to be made it beside the point.

The Income-tax Act makes no provision with regard to tl; e valuation of stock. Jt charges for payment of tax the income,

(') 17 I.T.R. 1. (') [1911] 1 Ch. 92.

SUPREME COURT UEPORTS [1964]

19G4 profit> and gains which hae to be computed in the manner Ti<e c.";;;;;; issianer provided by the Income-tax Act. In the case of a trading \en·

of ln~>me-tax, turc these profits have to be adjusted in the light of the provi- Madras sions of !he Income tax Act permitting allowances prescribed A. Krish:;,, aarr.i thereby. For that purpose it is the duty of the Income-tax Mwlaliar anti Othm Officer to find out what profits the business has made accord-

Shah, J. ing to true Accountancy practice, in the light of the system adopted, and thereafter lo make. the requisite adjustments, and even appropriate modificat'on of the rule suggested by Fletcher-Moulton, L.J. to ascertain the taxable profits. It is true as observed by Lo:d Buckmaster in Tlze Naval Colliery C n. Ltil .Y--The Commissioner of Inland Revenue(') that the principle of determining the profits of the trade by valuing everything at the beginning and the end of the accounting period and by finding the difference may not be universally

~•pplicable in all cases, and needs material modification. The formula suggested in the Spanish Prospecting Company's case(') was sought to be applied lo a case in which Excess

Profits duty was assessed. The assessee a mining ccmpany was unable to work its colliery on account of a strike. The asscsscc sought lo introduce into its account which normally ended on June 30, 1921, the estimated expenses for repairing the damage (which though arising in the account period was restored laterl on the plea that the expenses were in the nature of liability of business and properly debitablc before they were actually incurred. The House of Lords rejected that contention. lt was in this context that Lord Buckmaster observed that the accountancy rules. applicable to wise and prudent trading could not be used in connection with the working of a mining lease.

These observations do not affect the true character of the profits of a business. Adjustments may have to be made in the principle having regard to the special character of the asets, the nature of the business and the appropriate allowances permitted, in order to arrive at the taxable profits. They do not support the proposition that in the case of a trading venture. you can arrive at the true profits of a year by ignoring altogether the valuation of the stock-in-trade at the end of the year, while debiting its value at the commencement of the year . , as an oulgoing, for determination of the profits by ignoring the valuation of the stock at the end of the year and debiting the value of the assets at the commencement of the year would not give a true picture of the profit for the year of account.

There is no warrant in this case for assuming that the Revenue authorities and the Tribunal had sought to displace the method of accountancy adopted by the assessee. By applying ; the proviso to s. 13, they made the computation upon the basis

(') 12 T.C. 1017. (') [19111 1 Ch. 92.

7 S.C.H.

SUPHE1IE COURT REPORTS -789

and in the manner in which in their opinion profits would be 1964 properly deduced. That they were entitled to do. We are there The Oommi.,;,,,..r fore of the view that the High Court was in error in holding 0/ lnrome-tax,

Madras that because the assessee had maintained his accounts in the •. r.ash system it was not open to the Income-tax Officer to add A. x,;.,,,,.,,,., .• .,; to the receipts from the business the value of the stock-in-trade , ltudalwr and Otlem at the end of the year for the purpose of properly deducing the s1i0 1, J. profits of the business for the year in question.

The appeal therefore must be allowed and the answer to the question referred to the High Court will be in the affirmative. The Commissioner will be entitled to his costs in this Court s well as in the High Court.

Appeal aiiQ1red

THE COMMISSIONER OF INCOME-TAX, MADRAS

A. KRISHNASW AMI MUD ALI AR AND OTHERS

K. SUBBA RAO, J.

C. SHAH

S. M. SIKRI

s. 13

December 25, 1947

August 2, 1948

High Court of Madras

s. 13

Indian Income-tax Act, 1922

s. 13

Indian IncomHax Act, 1922

CIVIL A'PPEALLATE JURISDICTION

Madras High Court

A. Krilh

R. Ganapathy Iyer

R. N. Sachthey

S. Narayanaswamy

R. Gopalakrislman

SHAH

K. N.

Damodara Mudaliar

K.N. Damodara Mudaliar

Pondicherry

August 15, 1948

Damodara Mudaliar

August 6, 1948

Krishnaswami Mudaliar

August 27, 1948

Thangaraja Mudaliar

V. S.

Lakshmanan

Shah

Income-tax Appellate Tribunal, Madras

s. 66(2)

s. 13

Income-tax Act

s. 13

Section

10

Indian Income-tax Act, 1922

Section 13

ss. 10 and 12

A. Krj-ahnaswami firm

No express order was re- T ht Oommi,.i<mer corded by the Income-tax Officer that in his opinion the in-

0/ J;':.m•ta>, come, profits or gains of the business could not properly be

v • ..., deduced from the method of accounting employed by the A. Krj-ahnaswami firm, but it is implicit in what is stated by him that without Mudaltar and 011,, rs valuation of the unexpired exploitation rights the profits of

Shah, J. the year of account could not be computed.

s. 13

Income-tax Act

s. 13

s. 13

Section 13

India

Income-tax Act

Income-tax Act

Income-tax Act, 1918

Wallis

s. 13

s. 13

Indian Income-tax Act, 1922

ss. 10 and 12

Section 2(15)

s. 4

Section 4(1)

ss. 10(2), 12(2), 12B(2), 14

L.R. 65 I.A. 1

England

Income-tax Act

ss. 10 and 12

.MudaZ.ar

s. 10(2)

s. 10

Income-tax Act

s. 13

Income-tax Act

Croom-Johnson

Croom-fohnson

Commissioner of Inland Revenue(')

Clyde

Rajamannar

Fletcher-Moulton

Income-tax Act

Income-tax Act

Tlze Naval Colliery

June 30, 1921

Buckmaster

s. 13