S S.C.R.

SUPREME COURT REPORTS

COMMISSIONER OF INCOME-TAX, MADRAS

EXPRESS NEWSPAPERS LTD., MADRAS

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

111con1e-tax-Sale of 111achiner)' after cfO.H! of busi111'.s-A:no1111t i11 excess received 01er written dow1t 1·11/11c a11d 01er Ifie ori;; i11(/I cost price of n1aclli11ery-Whetlier 1axah!t1-IVherlier Stl(Tt'.\'.W!f !iahfr 1,., be assessed 011 capital gains-f/uo111c-tax Act, 1922 ( 11 of 1922;, ss. 19(2) (vii) second pro1iso, s. 26(2) 011d prvri!>o.

The Free Press Company was a private limited conipany carrying on business ".\S printers and publishers of certain newspaper~. On • .\ugust 31, 1946, tl: Free Press Company transferred the right 10 print and publish the newspapers to the assessee company and let out i1s n1achinery and assets to the latter v,.ith effect from Septen1ber l, ! 946. The ascssee

company al!cordingly started publishing nc\vspapers fro•n September 1, 1946.

The Free Press Company \\ent into voluntary liquidation on 01.'.:tober 31, 1946_. and the Liquidator, on November 1, 1946, confirn1ed the transfer of the assets made by the Free Press Con1pan;· to the assessee-company. On November l, 1946 the aforesaid tn.:i.chiti:ry was sold yielding a profit of Rs. 6,08,666. That sun1 wus made up of.

(i) the difference between the original cost price rtnd the written down of price machinery R'i. 2.14,090. (ii) the an1ount in l'X( C'>S over rhe original cost price . . Js. 3,94,576. In assessing the assessee to incomctax for the accounting year 1946-47 the Income-tax Officer included. the said two items in the total income of the assessee-con1pany. The first item was assessed as profit under proviso to s. 10(2) (vii) of the Incometax Act and the second item was assessed as capital , gains.

The matter went up to the High Court. On a reference the High Court held that the assessee was not liable to tax in respect of the said two items.

Held: (i) The second proviso to s. 10(2)(vii) of the Act wduld only aprly to the sale of such machinery which was used for the purpose of business during the accounting year. In order to bring the sale proceeds to charge under the second proviso the foUowing conditions shall be fulfilled: (I) During the entire previous year or a part of it the business sha11 have been carried on by the assessee; (2) the machinery shall have been used in the business; and (3) the machinery shall have been sold when the business was being carried on and not for the purpose of closing it down or winding it up.

On the facts of this case it was held that the sale of the machinery in the instant case having taken place after the business \Vas closed and during the '\vinding up proceedings therefore it would fall outside the scope of the said proviso and thus the first item i.e. the sun1 of Rs. '.!,14.090 could not be assessed to income-tax.

.\fay 7

190 SUPl<EME COURT REPORTS [1g64]

1964 The Liquidator9 of Pnrsa Lilnited v. Comniissioner of Income-tax, Bihar, [19541 S.C.R. 76i an<l K.

Af.

Reddy, Con1n1issioner of 1

C.!:T. lncon1e-tax, Kerala v. West Coast Chemicals and Industries Ltd. (in Express Newsliquidation), Alleppy, [1962] Supp. 3 S.C.R. 960, relied on. papers Ltd.

I Co111n1issioner of lnco1ne-tax, Bonibay Circle fl v.

The National Syndicate, Bombay, [1961] 2 S.C.R. 229, explained.

(ii) Both the sub-s. (2) of s. 26 and the proviso deal only with profits under the 4th bead mentioned in s. 6 and, so construed, it excludes capital gains. The profits and gains of business and capital gains are two distinct concepts in the Income-tax Act: the former arises front the activity which is called business and the latter accrues because capital assets are disposed of at a value higher than what they cost the assessee. Therefore under s. 26(2) of the Act the assessee being the successor could not be liable to income-tax in respect of Rs. 3,94,576 (the second item) which represented the capital gains because capital gains are excluded from the purview of s. 26(2) of the Act.

United Conunercial Baok Ltd. v. Commissioner of lncome•tax1 We.st Be11g11/, [1958] S.C.R. 79, referred to,

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 596 of 1963.

Appeal from the judgment dated March 1, 1960 of the Madras High Court in Case Referred No. 11 of 1955.

K. N. Rajagopal Sastri and R. N. Sachthey, for the appellant.

R. Ganapathy Iyer and R. Gopalakrishnan. for the respondent.

May 7, 1964 The Judgment of the Court was delivered by

Subba Rao J.

SUBBA RAo, J.-This appeal by special leave is preferred against the order of the Madras High Court in a reference made to it by the Income-tax Appellate Tribunal under s. 66 ( l) of the Income-tax Act, 1922, hereinafter called the Act.

The facts leading up to the reference and relevant to the present enquiry are as follows. The Free Press of Tndia (Madras) Ltd., hereinafter called the Fre.e Press Company, was a private limited company carrying on business as priaters and publishers of certain newspapers, namely, "Indian Express", "Dhinamani" and "Andhra Prabha" at

Madras, "Eastem Express" and "Bharat" at Calcutta and 1964 "Sunday Standard" and ''Morning Stal\dard" at Bombay. c.r.i.

On Agust 31, 1946, the Free Press Company passed a •· resolution transferring to the Express Newspapers Limited, Exp;::,,, !::, ws a ne\'I company formed on or about April 22, 1946, here- - f II d h h h d Suhha Rao J ma ter ca e t e assessee-company, t e ng t to pnnt an pc1blis!t the said newspapers from September 1, 1946. letting out its machinery and assets and authorizing the assessee-company to collect the book debts and pay off the liabilities of the Free Press Company.

The asscsseecornp:my accordingly started publishing newspapers from September J, 1946. On October 31, 1946. the Free Press

Com;:ony resolved at a General Body Meeting to wind up the company voluntarily.

The liquidator appointed thereunder was directed not to carry on the business of the comp::my.

On November 1, 1946, the liquidator ascertained

th~ \:-Jue of the assets over the liabilities taken over by the assessee-company as per the bal".ice-sheet at Rs. 19,36.000/- and tl1is amount was credited to the 'account of the two direc:ors of the Free Press Company in the assessee's books.

The profit of the Free Press Company was worked out to be Rs. 6.08,666, being the difference between the written dcwn value and the sale price of the machinery. That sum was made up of, (i) the difference between the original cost price and the written dowri price of the machinery .... '

R~. 2.14,090/-, (ii) the amount in excess over the original cost rricc ... Rs. 3,94,576/-. The Income-tax Officer included the said two items in the' total income of the assesseecompany under the following heads, (i) profit under proviso to s. l0(2)(vii) .... Rs. 2.14,090/-. and (ii) capital gains under s. 12B .... Rs. 3,94,576/-, and assessed each to tax.

The Income-tax Appellate Tribunal upheld the validity of the inclusion of the item under capital gains in the total income of the assessee but decided against the inclusion of the first item. The Appellate Tribunal referred the following two questions, among others. for the decision of the High Court of Madras under s. 66 (1) of the Incometax Act:-

"4. Whether Free Press Company made a business profit of Rs. 2,14,090/- under proviso to section 10 ( 2 )(vii) of the Act?"

1'64

CJ.T.

v. llxp1"u Ntw1paptrs Ltd.

"6. Whether the capital gain made by the Free

Pres& Company is liable to be assessed in the hands of the Express Company, under section 26(2) of the Act?"

Subba Rao 1.

The reference was heard by a Division Bench of the High Court, consisting of Rajagopalan and Ramachandra Iyer, JJ., who by th.cir judgment answered the two questions in the negative and against the department.

The present appeal is preferred against the said judgment of the High Court.

The argument in the appeal proceeded on the basis of the following facts.

During the accounting year 1946-4 7 the Free Press Company did not do the business of printing and publishing newspapers from_ September 1, 1946, and thereafter the assessee-company alone was carrying on the said business.

The Free Press Company went into voluntary liquidation on October 31, 1946, and the liquidator, on November 1, 1946, confirmed the transfer of the assets made by the Free Press Company to the assessee-company.

Therefore, on November 1, 1946, the aforesaid machinery was sold yielding a profit of Rs. 6,08,666/- to the. Free Press Company being the difference between the written down value and the sale price of the machinery. Broadly stated, the machinery was sold by the Free Press Comp2ny during the accounting year after it closed down its business and after it went into yoluntary liquidation. On those facts learned counsel for the Revenue raised before us the following two contentions: ( 1) The first item of Rs. 2,14,090/-, representing the surplus over the written down value of the machinery was assessable in accordance with the proviso to s. 10(2) (vii) of the Act; and (2) the second item of Rs. 3,9.4,576/-, representing the capital gains made by the Free Press Company is assessable in the hands of the assessee-company, who succeeded to the said business, under s. 26(2) of the Act.

Learned counsel for the respondent contended that neither the conditions laid down in s. 10(2) (vii) of the Act nor those laid down in s. 26(2) thereof attracted the said two items of income and, therefore, they were not

sse"3ble in the hands of the assessee-company.

The first question turns upon the relevant provisions ot 1964 s. IO of the Act. To 'have a clear view of the scope of the C.l.T. relevant provisions it will be convenient to read them at v.

Express New,.. one place. papm Ltd.

Section 10.-(l) The tax shall be payable by an assessee under the head "Profits and gains of business, profession or vocation" in respect of the profit or gains of any business, pr0fession or vocation carried on by him.

! 2) Such profits or gains shall be computed after making the following allowances, namely:-- • • • *

(iv) in respect of insurance against risk of damage or destruction of buildings, machinery, plant, furniture, stocks or stores, used for the purposes of the business, profession or vocation. the amount of any premium paid:

(v) in respect of current repairs to such buildings, machinery, plant or furniture, the amount paid on account thereof:

(vii) in respect of any such building. machinery

or plant which has been sold or discarded or demolished or destroyed, the amount by which the written down value thereof exceed1 the amount for which the building, machinery or plant, a:1 the case may be. is actually sold or its scrap value: • * • Provided further that where the amount for whicl1 any such building, machinery or plant is sold, whether during the continuance of the business or after the cessation thereof. exceeds the writte!l down value, so much of the excess as does not exceed the difference between the original cost and the written

~I S.C.-13

S11bha Rao I.

CJ.T. v.

&prU8 New.-

down value shall be deemed to be profits of the previous year in which the sale took place: papen Lid.

Subbn Rao J. • • •

We are concerned with the second proviso to s. 10 ( 2 J l vii) of the Act. The substantive clause grants a balancing allowance in respect of building, llllichine_ry 01 plant which has been sold or discarded or demoli'lhed or destroyed.

The allowance represents the excess of the written down value over the sale price.

Under the proviso, if the sale price exceeds the written-down value, but does not exceed th! original cost price, the difference between the original cos• and the written down v; tlue shall be deemed to be profits of the year previous to that in which the sale t::kes place; that is to say, the difference between the price fetched at the sate am! the written down value is deemed to be the escaped profits for which the assessee is made liable to tax As the sale price is higher than the written down value, the difference represents the excess depreciation mistakenly granted to the assessec.

To illustrate: assume that the original mst of a machinery or plant is Rs. 100/· and depreciation allowed is Rs. 25/-; the written down vaiue is Rs. 75.

If the machinery is sold for Rs. lOO/-, it is obvious that depreciation of Rs. 25/- was 'wrongly allowed.

If it had not been allowed that amount would have swelled the profits to that extent.

When it is found that it was wrongly allowed that profit is brought to charge.

The second proviso, therefore, in substance, brings to charge an escaped profit or gain of the business carried on by the assessee.

The scope of this proviso cannot be ascertained in vacuum.

The conditions for its applicability can he ascertained only in its relation to the other related provi·· sions.

Under s. 3 of the Act income-tax shall be chareed for any year in accordance with and subject to the prvi. sions of the Act in respect of the total income of the previous year of everv assessee: under s. 6. one of the heads of taxable income is "profits and gains of busines>, profession or vocation"; under s. 10( 1), the tax under th3t head is payable in respect of profit or gains of any busine>'

carried on by the assessee during the accounting year. Th<:

S S.C.R.

SUPREME COURT REPOl~TS 195

main condition which attracts all the other sub-sections and

19U clauses of the section is that the tax shall be payable by an c.1x. assessce in respect of the profit or gains of any business E

9 • N etc. carried on by him.

The crucial words are "business xp=,. £14-:-- canied on by him". If the profit or gains were not earned Suba Rtll> I. when the business was being carried oil by the asscsse~ durin_g -the accounting year, they would fall. outside th~ prmi1ion of s. 10(1). For instance, if the machinery sold after the business was closed or when the business was under liquidation, it would not be appropriate to hold that the profit or gains earned by the sale were in respect of th~

bUBiness that was befug c11rried on by the assessee.

Th., second condition that attracts the second proviso is implicit in the adjective "sucq" preceding "building, machiner) or. plant" sold.

The adjective "such" refers back to els. (iv), (v), (vi) and (vii) of s. 10(2). Under cl. (iv) an anovlance is allowed in regard to any premium paid in respect of insurance l!gainst risk of damage or destruction of buildings, machinery, plant etc. used for .the purpose c\ the business, profession or vocation.

Under this clausr allowance is allowed only in re,<; pect of the machinery used for the purpose of the business. Clauses (v), (vi) and

(vii) refer to su_ch buildings, machinery, plant etc.; that j, to say, such buildings, _machinery, plant etc. _used for the purpose of the business. The resuit is that the second proviso will only apply to the sale of such machinery which was used for the purpose of the business during the accounting year. It brings in to charge the escaped profit~ under the guise of superfluous allowances if the machinery sold was used for the business during the accounting year when the business was being carried c:_>n.

Therefore. to brlng the sale proceeds to charge the following conditions shall be fulfilled: (1) During the entire previous year or a part of it the business shall have been carried .on by the

assessee; (2) the machinery shall have been used in the business; and (3) the machinery shall have been sold when the business was being carried on and not for the purpose of closing it down or winding it up. If these were the conditions for the applicability of the said proviso. the sale of the machinery in the instant case having taken placl.' after the business was closed and during the winding

UP'

<:.J:r . ... /llJqlHa Nn11- ~Lid.

bl>o Roe J.

proceedings, it would fall outside the scope of the said proviso and therefore the first item is not assessable to tax.

This point directly arose for consideration in Tire Liquidators of Pursa Limited v. Commissioner of lncometax, Bihar('). There, the assessee-company carried on the

business of growing sugarcane and manufacturing and selling sugar. In the year 1943 it negotiated for the sale ot the factory and other assets with the object of winding up the company. It received a firm offer on August 9, I 943, and concluded the agreement of sale on December 7, 1943.

Between August 9, 194~, and December 7, 1943, it never used the machinery and p1ant for the purpose of manufacturing sugar or for any other purpose except that of keeping them in triln and running order. In the assessment of the co, Qlpany to income-tax for the accounting period from October l, 1943, to September 30, 1944, tbe income-tax authorities treated the surplus made by the company on the sale of the buildings, plant and machinery as profits under proviso (2) to s. 10(2)(vii) of the Act.

This Court held that the .said amount was not taxable.

This Court rejected the contention of the Revenue that the said excess was taxable on two grounds, namely, ( I ) "the sale of the machinery and plant was not an operation ic11 furtherance of the busin~ carried on by the company but was a realisation of its assets in the process of gradu::il winding up of its business which eventually. culminated in the voluntary liquidation of the company; (2) "even if the

sale of the stock of sugar be regarded as carryinl!; on of business by the company_ and not a realisation of its assets with a view to winding up, the machinery or plant not being used in the accounting year at all and in any event not having had connection with the carrying on of that lim.ited business during the accounting year, s. 10(2) (vii) could have no application to the sale of any such machinery or plant". Learned couns~ for the Revenue contends ttist the main reason for the decision was that the machinery -0r the plant was not used in the accounting year for the bvsiness and that the second reason, namelv, that the assets were sold in the process of gradual winding up of the COM

(I) [r954) S.C.R. 767

~· S.C.R.

SUPREME COUl\.T REPORTS

pany was only an observation and that the decision was not !964 based upon the said observation. But a careful perusal of c1.r. tlie judgment discloses beyond any reasonable doub.t that F.xP'"# "· N._

the decision was based upon both the grounds.

As m the pqer-1 UL present case the machinery was sold not for the business Suboo llDlJ 1. but only for closing it up during the liquidation proceedings, this decision directly covers the present case. This question again fell to be considered by this Court in The Commissioner of Income-tax, Bombay Circle ll v.

The Natimia/ Syndicate, Bombay(').

There, the National Syndicate, a Bombay firm, acquired on January 11, 1945.

a tailoring business as a going concern for Rs. 89,321/- which included the consideration paid for sewing machines znd a motor lorry. Soon after the purchase the respondent found it difficult to continue the business, and therefore it closed its business in August, 1945. Between August 16. 1945, and February 14, 1946, sewing machines and the motor lorry were sold at a loss. The relipondent closed it<

<Jfount books on February 28. 1946, showing the two losses and writing them off.

For the assessment year

:I 946-47, the respondent claimed a deduction under s .. to

(2) (vii) of the Indian Income-tax Act.

The question fell to be considered on a construction of the provisions of ,;, !0(2)(vii) of the Act.

This Court, sp.eaking through Hidayalullah, J., held that the loss was a business Joss. t.'iough the machines and the motor lorry were sold after

the business was cloed down, as the said machines and Jorry were used for the purpose of the business during a part of the accmnting year and were sold during the accounting vear.

This Court, after noticin!!- the decision under appeal and that of this Court in The Liquidat,,,.,,. nf Pursa Limited v. Commi.rsinner nf Income-tax, Bih,, r(2 ), and the amendment introduced in the second proviso to s. 10(2) (vii) of the Act, observed:

"But it is to be noticed that no such amendment was made in cl.

(vii) to exclude loss over buildin!!-s. machinery or plant after the closure of the business.

It is thus clear that the principles which govern the proviso cannot be -----

(1) [1961) 2 S.C.R. 229

(2) [1954J S.C.R. 767

lilU

C.l.T.

Y. ,,,,... . N.w1- ; o,.,. Lid.

Subba Rao J.

used to govern the main clause, because profit or loss arise in different ways in business. The two rulings do not, therefore, apply to the facts here."

It is contended that the principle accepted by this decision is in conflict with that laid down in the case of The

Liquidators of Pursa Limited('). It is said that the condition that the sale of the machinery at a loss should have been before the closing of the business is lmpliedly laid down by s. I 0( I) of the Act which applies equally to cl (vii ) as well as to the second proviso thereto, and that if the condition need not be fulfilled in the case falling under the substantive part of cl. (vii) of s. 10(2) of the Act, it will be incongruous to apply it to a case falling under the second proviso before it was amended.

So stated there is some plausibility in the argument. But this Court in express terms made a distinction between the scope of the substantive part of cl. (vii) and that of the second proviso thereto and expressly distinguished those rulings on the ground that they would not apply to the construction of the substantive part of cl. (vii).

When this Court expressly confined the scope of the decision to the substantive part of

cl. (vii) without disturbing the validity of the decision.' governing the second proviso, it is not proper that we should rely upon it in preference to a direct decision on the second proviso to cl. (vii) of s. 10(2) of the Act before it was amended. This Court in K. M. S. Reddy, Commissioner of Income-tax, Kera/a v. The West Coast Chemicals and Industries Ltd. (in liquidation), Alleppy(") held that a winding up sale was not trading or doing business.

There. chemicals and other raw-materials were sold not in the course of ordinary trading but only in realisation sale after the company had been wound up.

This Court, speaking through Hidayatullah, J., posed the following question:

"The question, therefore, is whether there can be said

to be a sale in the carrying on of the business in respect of the chemicals and other raw materials." ·--·---------

(I) [1954) S.C.R. 767

(2) (1962] Supp. 3 S.C.R. 960, 965.

,/· ...

After referring to the 'passages in Halsbury's Laws ·of Eng-

- 1964 land; 3rcf-Edn., Vol. 20, -pp. 115-117, wherein it was

CJ.T. stated that 'mere re21isnion of assets is -not trading" and E

v. N . . . - I f . . -- f h xpres• •w ... that there v .•·.c-'-'' -,-1,.>n between sa es orrmng part o t e papeTJ Ltd, trading acii"11.i~ a.1..i 1.i1ose where the realisation \Vas not Subba Rao J • .anact of trading,

0 the learned Judge observed that the said distinction was a sound one. The learned Judge, on a consideration of other decisions, also accepted as correct the distinction made between a sale of the entire stock as part of trading and the sale of a part of the stock as a winding up sale.

Then-the learned Judge applied _ the principles to the facts of the case l!nd held that it was impossible to infer that the chemicals and raw materials were sold in the ordinary wayof business or that the assessee company was carrying on a trading business. This decision again accepts the distinction between a sale held in - the ._ ordinary way of business and that held for the purpose of winding up the business and that in the latter case the profits accrued-are not trading profits. This case no doubt did not turn upon the provisions of the second proviso to d. (vii) of s. 10(2) of the Act, but the principle accepted therein is the basis for the application of s. IO of the Act and that will -apply to all provisions of s. 10, unless an exception is made in a particular provision. For the foregoing reasons we hold that the first item is not liable to tax and the High Court bas given th_e correct answer to the first question submitted to it:

The second - item relates to capital gains. That represents the excess of the price obtained on the sale of the machinery over its original cost price. It is conceded that it does not represent_ profits and gains of business, but , it falls under the heading "capital gains". But it is, argued that. as the Free Press Company was wound up and, therefore, could not be found, the assessee, who had succeeded to it. would be liable to be assessed for the said capital gains under the proviso to s. 26(2) of the Act. ; ro appre- Ciate the contention some of the relevant provisiqns of the ·

Act may be read: Section 6.ave as otherwise provided by this Act, the following head' of in<.ome, profits and ! /- / /

C.T.T. v . .-' ExpreS3 New34 paper.r Ltd,.:

Subba Rao 1.

gains, shall be chargeable to income-tax in the manner hereinafter. app~ring, namely:-~

• • , (v). Profits and gains of business, 'vocation:

* • •

(vi). Capiial gains. . . ' . .

. .

profession or

Section 10.-.. ( 1) The tax shall be payable by an assessec under the head. "Profits and gains of . business, profession or vocation" , in respect of •the profit oJ" gains of any business, profession or vocation carried on by hi~.. ·

(2} Such profits or gains shall be computed after making the "following allowances, namely:-

• • • •

Section 128.-· (I) The tax shall be payable by an assessee under the head "Capital . gains" in. respect of any profits or gains arising from the sale, exchange, relinquishment or transfer of a capital asset effected after the 31st day of March, 1956, and such profits and gains shall be deemed t~ be income of the previous year in which the sale, exchange, relinquishment or transfer. took place: · ·

-Section 24.-. -(2A) Not\\ithstanding anything con- . tained in sub-section ( 1), where the lo>s sustained is a Joss falling under the head "Capital

gains.~· such. loss. shall not be set ofI except . against any profits and gains falling under that head.

(2Bi Where an assessee sustains a loss such as is

referred'to iri sub; seetion. (2A)' and the los~ rnnnot be wholly set off in accordance with the provisions of that sub-section, the . portion not soset off shall becarried forward to the

' \ \ _J

_.}

8 S.C.R

SUPH.EME COURT REPORTS 201

following year and set off ag:.iinst capjtc.1 gain.., 1964 for that year, and if it cannot be so set otf, the C.l.T. amount thereof not so set off shall be carried v. f d t h f II . d E:i:press Ntw~ orwar o t e o owmg year an so on. so P"P'" ltd. however that no such loss shall be carried forward for more than eight years:

Provided that where the loss sustained by an assesscc. not being a company, in any previou:; year does not exceed five thousand rupees, it shall not be carried forward.

Section 26.-(2) Where a person carrying un any

business. profession or vocation bas beer: succeeded in such cap2city by ~!nothi.:r pi:rson. such person and such other person shul\ .. :.ubject to the provisions of sub-section ( 4 l of section 25, each be asscc>sed in rc:.p:xt of hi< actual share. if any, of the income. p;-ofit; anc!, gains of the previous year:

Provided that. when the person succeeded in the business. ptofl!Ssion or vocation cannot h¢ found. the assessment of the profits of the year. in which the succession took place up to rhc date of succession, and for the year precedini~ that year shall be made on the person succecdin!! him in like manner and to the sanJ<; amount

:"it would have been made on the person succeeded or when the tax in re, pect of the assessment made for either of such ye:m a%essed on the person succeeded cnnnot he recovered from him, it shall be payable by and recoverable from the person succecdin.~. nd such nerson shall be entitled to recover from the nerson succeeded the amount of env 1:1' '" paid.

A con<1'cctus of the said sections discloss clearcut scheme.

Though income-tax is onlv one tax levied on the rnt:il income. s. 6 enumerates six heads whe•eundcr the inc0me of an asse<se falls to be chareed.

This Court in United Commercial Rank Lid. v. Crmimi<iin:'<>• ,., fnf'<'1W-

Sul>lw P.i J

SUPREME COURT REPORJS

196' tax, West Bengal(') laid down tht ss./ to12 a;.; mutuallv c.1.T. exclusive and where an item of income falls specifica11;- v. under one head it is to be. charged under that head and -no. :Iizpreu Newsoth r Th · "' ·. f. • " 6 P<ZIHn Ltd. e . e expressmn mcome. rir;. .t< ""<I gams m s. is a composite concept which 0 '.:~"' , the six heads of' ~•bba Rao I • ' mcome mentioned therein. i .. ~· -.L~·· --! is "profits and gains of business, profession or vocation"' and the 6th head is "capital gains". Section 10 taxes the profits and gains of a business, profession or vocation carried on by an assessee; it also. enumerates. the different kinds of allowances that cau be made in computing the profits.

Under s. 10(1), as we have already pointed out, the necessary condition for the application of the section is that the assessee should have carried on the business for some part of the accounting year. Section 26(2) indicates the manner of assessment of the income, profits and g_ains of any business, profession or vocation. This section does not provide for the assessment of income under any other head. - It only says that if thre is a succession to a person carrying on business during an accounting year, the person succeeded and the person succeeding can each of them be assessed in respect of his actual share. The proviso deals with a case where the person succeeded cannot be found; in that event, the assessment of the profits of the year in which the succession took place upto the date of the succe5'ion and for the year preceding that year shall be made on the person succeeding him. If an assessment has already been made in respect of the said years on the person succeeded, it can be recovered from the person succeeding.

But both sub-s. (2) and the proviso. deal only with income, profits and gains of the business, that is to say, for_ the assessment made fo respect of profit and gains , under the 4th head of s. 6. Now .. turning to s. 12B, it provides for capital gains. Under that section the tax shall be payable by the assessee. under the head capital gains in respect of any profits or gains arising from the sale of a capital asset effected during th~ prcsc.ribed period. It says further that such profiN or gains_ shall be deemed to be income of the previous year in which the sale etc. took place. This deeming dame does not Jiff. the capital gains from the 6th head in s. 6 ant!. place it

(1) [1958] S.C.R. 79 (~)[r957) 31 l.T R. fn.

Ullder the 4th head. It only introduces a limited fiction, lHf named that capital gains accrued will be deemed to be c.1.r. income of the previous year in which the sale was effected. E

Y. N l'he fiction does not make them the profit or gains of the xp:;.,~,, Lt~ business.

It is well settled that a legal fiction is limited Subba Rao J. to the purpose for which it is created and should not be extended beyond its legitimate field.

Sub-sections (2A) and (2B) of s. 24 provide for the setting off of the Joss falling under the head "capital gains" against any capital gains falling under the 5ame head. Such loss cannot be set off against an income falling under any different head.

These three sections indicate beyond any doubt that the capital gains are separately computed in accordance with the said provisions and they are not treated as the profits from the business. The profits and gains of business and capital gains are two distinct concepts in the Income-taic Act: the former arises from the activity which is called business and the latter accrues because capital assets are disposed of at a value higher than what they cost the asses.see.

They are placed under different heads; they are derived from different sources; and the income is computed under different methods.

The fact that the capital gains are connected with the capital assets of the business cannot make them the profit of the business.

They are only deemed to be income of the previous year and not the profit or gains arising from the business <luring that year.

If that be the scheme of the Act, the contention of the learned counsel for the Revenue can easily be answered.

He asks that ifs. 26(2) deals with only profits aml gains of the business, why should the Legislature use the word "income" therein? As we have indicated, the expression "income, profits and gains" is a compendious term to connote the income from the various sources mentioned in s. 6; tlaetefore, the use of such an expression does not efface the

distinction between the different heads, but only describes the income from the business.

The expression "profits" in 1he proviso makes it clear that the income, profits and gains in sub-s. (2) of s. 26 only refer to the profits under the 4th head in s. 6.

On the other hand, if the interpretation

1964 sought to be put upon the expression "income~ in su!J:.s.' (2)

CJ.T; o( s. 26 by the Revenue is . accepted, then the absence of

Express v'. Newstli.~! _word in the ?rov!-5° destroys the argume?t.

Bu! the. papers Lldi' more reasonable .view IS that both the sul>-section and. the

Subba-ao J. pov_is() deal only with the profits unclr ihe 4th head men" tioJ'led in s. 6 and, so construed, it cxcludci capital g:tlns:· 'fl1e argument that sub-s:. (2) of s. 26 re..:d v, ith the prbviso theretO _indicates that the total · income of the person st1cceeded. is the !=r!_terion f_?r' separate .assessment ·~-~,.: __ ..- sub-s. (2) and for assessment and realisaticm-unoer the ··pf.ovis0 is on. the assumption.thatruO:S.-(2) and the proviso_ deal with all the huds n1entionect in s. 6 of the Act; nut. if,· as; ve.hav(fbeld, the scope of sul>-s.-(2)of s. 26 fa only ---- ·fonrted to the income from the busirtess, ; the" share' under ---- suJ; s. (2) and the assessment and realisation•· under the

l\fay 7

pro.visa can only relate to the inrome , from the businCs.5.

The argument is really begging the question itself. Jn the' result we agree with the High Court in regard to" the answer it has given in respect of the second question.

In. this view no other ' questidn" arises . for· oor consideiatiOn: , In the result, the appeal fails and is dismissed with costs. .

Appeal 'dismin.ed:

COMMISSIONER OF INCOME~TAX, MADRAS

KUMBAKONAM MUTUAL' BENEFiT FUNn LTD.

I •; • . • ._ • .' • '. • ' ; / . ' • . . (K. SUBBA RAo, J. C. SHAH ANDS. M. SIKRI, J.J.)

Mutual Btnefit Socfety2-company engd:; id ili'"bmillng bU°sine.U restrldeii"J

to ml'mbers-Not e,,•ery member-made deposit} or_ loaii.J-.P~ mainly earned fr~1n ln.s to mmber;-All me"m.be~$ enlitlM.llt.;

diVidend~Whe.tfi~, rquiren?e;.tt"' of 'mUfi, Y' 1>et;:een 'cOnt~.c;;-· -

,.-.,.--- .·

- , ••! ' "';,; -, '"- .,.

P. - . ' • '<'

I '•·.'I arid · partici,, Dtors satisfied~Ther_tfore. wtller company eic1"pt ,,;, a; r i. •1ocziiwi;'1.Coine-i;._,, ;1c;;-1m · ·

~ ;,_._-' (_ 1' 1-· .; ii·;.-' h, ;~ ,; j._A .•.

I ·, /1'.:.,_ ,,~,- .The ~Ssee~ Kumb3.kon3.in tutual Be1:iefit Fund;. _Ltd. •. carried_. on,: ruiokini' buSiDcSS wbiCh. 'wis-- reStncted i.o! its s?iareholdd.t! In the"COum . . . ' ' . . . . . .

COMMISSIONER OF INCOME-TAX, MADRAS

EXPRESS NEWSPAPERS LTD., MADRAS

K. SUBBA RAO, J.

C. SHAH

S. M. SIKRI

ss. 19(2)

s. 26(2)

November l, 1946

s. 10(2)

s. 10(2)(vii)

Reddy

[1961] 2 S.C.R. 229

s. 26

s. 6

Income-tax Act

s. 26(2)

s. 26(2)

K. N. Rajagopal Sastri

R. N. Sachthey

R. Ganapathy Iyer

R. Gopalakrishnan

Subba Rao

SUBBA RAo

s. 66

Income-tax Act, 1922

Free Press of Tndia (Madras) Ltd.

Calcutta

Bombay

Agust 31, 1946

Express Newspapers Limited

November 1, 1946

s. 12B

High Court of Madras

s. 66

section 10

CJ.T.

section 26(2)

Subba Rao

Rajagopalan

Ramachandra Iyer

September 1, 1946

October 31, 1946

s. 10(2)

s. 26(2)

s. 10(2)

s. 26(2)

Section 10

Subbn Rao

s. 10

s. 3

s. 6

s. 10( 1)

s. 10(1)

s. 10(2)

August 9, I 943

December 7, 1943

August 9, 194~

October l, 1943

September 30, 1944

s. 10(2)(vii)

s. 10(2)

National Syndicate

January 11, 1945

August 16. 1945

February 14, 1946

February 28. 1946

Income-tax Act

Hidayalullah

s. 10(2)

[1961) 2 S.C.R. 229

s. 10(2)

s. 10(2)

K. M. S. Reddy

Hidayatullah

s. 10(2)

s. 10

s. 26(2)

Section 6

Section 10

Section 128

31st day of March, 1956

Section 24

Section 26

section 25

s. 6

Section 10

s. 10(1)

Section 26(2)

s. 6

s. 12B

s. 6

s. 24

s. 6

s. 26

s. 6

s. 26

s. 6

s. 26

s. 6

s. 26

K. SUBBA RAo

C. SHAH ANDS. M. SIKRI

Mutual Btnefit Socfety2-company


Cj.T., Madras

Amrutan; an Ltd.

Shah J.

April, 29.

SUPREME COURT REPORTS

But even that argument is of no value, for twenty-five per cent of the voting power attached to the ordinary shares is not exercisable by the public.

Thi3, tlmefore, is a case in which shares not entitled to a fixed dividend cauying not less than twenty-five per cent of the voting power are not shown to have been allotted unconditionally to, or acquired unconditionally by or beneficially held by the public.

The Explanation, therefore, has no operation.

Whether in view of the third proviso the company may be regarded as one in which the public are substantially interested, is a question to which no attention was paid by the Tribunal.

Whether in fact there exists such a control ling interest in the hands of one shareholder or a group of shareholders as would render the company one in which the public are not substantially interested is a question which therefore cannot be decided by this Court.

The order of the High Court must therefore be con tirmed, but on different grounds. The interpretation of the Explanation by the High Court, for reasons already set out, was incorrect.

The Explanation had no application, because no presumption on the facts found could arise thereunder.

The Revenue authorities have not made any investigation on the question whether there existed any controlling interest in a group of persons. so as to bring the

cse within the third proviso.

The appeals must be dismissed with costs. One hearing fee.

Appeals dismissed.

COMMISSIONER OF INCOME-TAX, MADRAS v.

SJVAKASI MATCH EXPORT COMPANY

(K. SUBRA RAo. J. C. SHAH AND S. M. SIKRI. JJ.)

Income Tax-Partnership deed-Application for registratio11-Discretion

of [11come-tax Officer in granting Registration-Jurisdiction of the Income Tax Officer-Jurisdiction of High Court on reference on

questions of fact-Indian Income-tax Act, 1922 (11 of 1922), s. 26-A -Indian Income-tax Rules, 1922, rr. 2, 3, 4.

There were five 5.r..:is in Sivakasi manufacturing matches under the name and style of Shenbagam Match Works:, Brilliant Match Works, Manoranjitha Match Works, Pioneer Match Works and Gnanam Match Works. The sole proprietor of Shenbagam Match Works and ono partner from each of the four firms entered into a partnership in their individual capacity and executed a partnership deed dated April 1, 1950.

The Income-tax Officer registered the said partnership lleed under s. 26(A) of the Act; but the Commissioner of Income-tax acting under s. 33B of the Act. cancelled the registration of the sai'd partnership deed.

On appeaL the Tribunal held that the said partnership deed was not a genuine one. On a reference the High Court held on. a constn1ction of the partnership deed that the Match Works were not the real parties to the partnership -but the parties to the document were the real partners.

This appeal has come by way of special leave.

HELD:-(i) (per K. Subba Rao and S. M. Sikri JJ) that the discretion conferred on the Income-tax Officer under s. 26-A of the Act is a judicial one and he cannot refuse to register a firm on mere speculation, but he shall base his conclusion on relevant evidence. The jurisdiction of the Income-tax Officer under s. 20-A is, confined to the ascertaining of two facts namely,

(i) whether the application for registration is in conformity with the rules made under the Act, and

(ii) whether the firm shown in the document. (Partnership deed) presented for registration is a bogus one or has no legal exis

tence.

(ii) In the present case the partnership deed ex jacie conforms to the requirements of the law of partnership as well as the Incometax Act. There is no prohibition under the partnership Act against a partner or partners of other firms combining together to form a separate part nership to carry on a different business. The fact that such a partner or partners entered into a sub-partnership with others in respect of their share does not detract from the validity of the partnership; nor the manner in which the said partner deals with the share of his profits is of any relevance to the question of validity of the partnership.

(iii) The tribunal erred in holding the partnership deed as not a genuine one. In the present case the assessee-firm has a separate egal existence, and as such the two circumstances relied upon by the Tribunal. namely, that one of the partners of the assessee firm, brought in the capital from his parent firm or that the profits earned by some of tho partners were surrendered to the parent firm, would be irrelevant. A partner of a firm can certainly secure his capital from any source or

C.1.T., Madr41 v.

Sivakasi Match Export Co.

C.I.T., Mndras v.

Sivakasi Match

Export Co.

surrender his profits to his sub-partner or any other person. Those facts cannot conceivably convert a valiCl partnership into a bogus one.

In the present case the partnership deed is a genuine document and it complies with the requirements of law. It is not an attempt to evade tax, but a legal device to reduce its tax liability.

(iv) A question of law within the meaning of s. 66(2) of the Act arose for decision in this case as the Tribunal misconstrued the provisions of the partnership deed and relied upon irrelevant considerations in coming to the conclusion.

Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax, ,\1adras. [1956] S.C.R. 691. relied on.

Per Shah. J.-(i) It was exclusively within the province of the Tribunal to tlecide the question whether the partners entered into the partnership in their individual capacities or as representing their match factories and its decision that in entering into the deed of partnership. the named partners represented their respective match factories, was not open to be canvassed in a reference under s. 66(2) of the Indian Incomee tax Act. In a reference under s. 66(2) the High Court was not authorised to disregard the finding of the Tribunal on a question which was essentially one of fact.

In the present case the High Court was not justified in interfering with the fin'ding of the Tribunal on a question of fact because it was not the case of the assessee that the conclusion of the Tribunal was based on no evidence or that it was perverse

(ii) Where the law prescribes conditions for obta!ning the benefit of reduced liability to taxation, those conditions. unless otherwise provided, must be strictly complied with. and if they are not so complied with, the taxing authorities would be bound to refuse to give the tax payer the benefit claimed. It would be open to the Income-tax OJlicer to decline to register a 'deed, even if under the general law of partnership the rights and obligations of the partners ex nomine thereto may otherwise be adjusted.

If the requirements relating to the form in which the petition is to be presented are not complied with, and the relevant information is withheld the Income-tax Officer may be justified in refusing registration. In the present case the Income-tax Officer was bound to refuse registration as the application submitted by the five partners of the assessee did not conform to the requirements of rr. 2 and 3 of Indian Income-tax Rules.

CNIL APPELLATE JURISDICTION: Civil Appeal No. 700 of 1963.

Appeal by special leave from the judgment and order dated January 11, 1961 of the Madras High Court in Case Referred No. 131 of 1956.

H. N. Sanyal, Solicitor-General, N. D. Karkhanis and 1964 R. N. Sachthey, for the appellant. c.1.r:, Madras v.

K. Srinivasan and R. Gopalakrishnan, for the respond- Sivakasi Match ent.

Export Co.

April 29, 1964.

The judgment of SUBBA RAo AND SIKR1 JJ. was delivered by SuBBA RAo J. SHAH J. delivered a dissenting opinion.

SUB BA RAo, J .-This appeal by special leave is directed against the order of the High Court of Madras in a reference made to it by the Income-tax Appellate Tribunal under s. 66(2) of the Indian lncome-tax Act, 1922, hereinafter called the Act.

The facts that have given rise to the appeal may briefly be stated.

There are 5 firms in Sivakasi manufacturing matches under the name and style of Shenbagam Match Works, Bri1- Iiant Match Works, Manoranjitha Match Works, Pioneer Match Works and Gnanam Match Works. The total number of the partners of all the 5 firms does not exceed 10 or 11 in number. Rajamoney Nadar is the sole proprietor of Shenbagam Match Works and in the other 4 firms there are more than one partner. In the year 1948 a person from each of those firms in )lis representative capacity formed a partnership to carry on the business of banking and commission agents, the principal business being the marketing of the products of the different match factories in Sivakasi. When the said partnership applied for registration for the assessment year 1949-50, it was refused by the Income-tax Department on the ground that different firms could not constitute a valid partnership. Thereafter, Sankaralinga Nada_!', Arumughaswarni Nadar, Arunachala Nadar, Palaniswamy Nadar and Rajamoney N adar the first four being one of the partners of their respective firms and the last being the sole proprietor of his firm, in their individual capacity entered into a partnership for the aforesaid purpose and executed a partnership deed dated April 1, 1950. They presented the said deed of partnership to the Income-tax Officer for registration. The Income-tax Officer by his order dated October 27, 1952, re

gistered the same under s. 26A of the Act: but the Commissioner of Income-tax, acting under s. 33B of the Act, cancell-

Subba Rao I.

.J.T., Madras

ed the registration by an order dated October 23, 1954, and directed the assessment to take place as that of an unregistered firm. On appeal, the Income-tax Appellate Tribunal held, on a construction of the partnership deed and also on

v. oVakasl Match

Export Co.

'.ubba Rao I. the basis of some other circumstances, that the said deed "is not genuine and brought into existence only as a simulate arrangement, that the profits which are distributed under the deed to the individuals mentioned th, rein are not the true profits of those individuals." In short it held that the said partnership deed was not a genuine one.

On a reference made to the High Court of Judicature at Madras; a Division Bench of that High Court, on a construction of the document, came to the conclusion that the Match Works were not the real parties to the partnership but the parties of the document were the real partners. Hence the present appeal.

Learned counsel for the Revenue raises before us the following two points, namely, (i) the findings of the Appellate Tribunal was one of fact and that the High Court had no jurisdiction to canvass the correctness of its finding on a reference made under s. 66(2) of the Act, and (ii) the conclusion arrived at by the Tribunal was the correct one and the High Court erroneously interfered with it.

It is common place that under s. 66(2) of the Act a reference to the High Court lies only on a question of law.

The scope of the provision has been elaborately considered by this Court in Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax, Madras( 1 ). Therein the scope of the provision has been laid down under different propositions.

On the basis of the judgment it cannot be gainsaid that if the order refusing registration goes beyond the scope of the jurisdiction conferred on, the Income-tax Officer under s. 26A of the Act and the Rules made thereunder or if the decision depends upon the construction of the partnership deed or if there is no evidence to sustain the finding of the Tribunal, then the High Court will have jurisdiction to entertain the reference under s. 66(2) of the Act. In our view, the finding of the Tribunal falls squarely under the said three heads.

The relevant provisions of the Act read thus:

(t) r19s6J s.c.R. 691.

1964 Section 26A. ( 1) Application may be made to the Income-tax Officer on behalf of any firm, constituted under an instrument of partnership specifying the individual shares of the partners, for registration for the purposes of this Act and of any other enactment for the time being in force relating to income-tax or super-tax.

C.l.T., Madras v.

Sivakasi Match Export Co.

( 2) The application shall be made by such person or

persons, and at such times and shall contain such particulars and shall be in such form, and be verified in such manner, as may be prescribed; and it shall be dealt with by the Income-tax

Officer in such manner as may be prescribed.

In exercise of the powers conferred by s. 59 of the Act, the Central Board of Revenue made the following rules:

Rule 2.

Any firm constituted under an instrument of partnership specifying the individual shares of the partners may, under the provisions of Section 26A of the Indian Income-tax Act, 1922 (hereinafter in these rules referred to as the Act), register with the Income-tax Officer, the particulars contained in the said Instrument on application made in this behalf.

Such application shall be given by all the partners

(hot being minors) personally and shall be made-

(a) before the income of the fili!Il is assessed for any year under Section ~3 of the Act, or ....................................

Rule 3. The application referred to in Rule 2 shalf

be made in the form annexed to this rule and shall be accompanied by the original Instrument of Partnership under which the firm is constituted, together with a copy thereof; ................................. ' ..

Subba Rao J.

FORM I C.l.T., Madras v.

For of Application for Registration of a Firm under section 26A of the Indian Income-tax Act, 1922 Sivakasi Match Export Co.

:Subba Rao I. . .................................. .

Rule 4. If, on receipt of the application referred to in Rule 3, the Income-tax Officer is satisfied that there is or was a firm in existence constituted as shown in the instrument of partnership and that the application has been properly made, he shall enter in writing at the foot of the instrument or certified copy, as the case may bi:, a certificate in the following form, namely:- ................................. ..

Rule 6B. In the event of the Income-tax Officer being satisfied that the certificate granted under Rule 4, or under Rule 6A, has been obtained without there bi:ing a genuine firm in existence, he may cancel the certificate so granted.

A combined effect of s. 26A of the Act and the rules made thereunder is that if the application made by a firm gives the necessary particulars prescribed by the rules, the Income-tax

Officer cannot reject it, if there is a firm in existence as shown in the instrument of partnership. A firin may bi: said to be not in existence if it is a bogus or not a genuine one, or if in law the constitution of the partnership is void. The jurisdiction of the Income-tax Officer is, therefore, confined to the ascertaining of two facts, namely, (i) whether the application for registration is in conformity with the rules made under the Act, and (ii) whether the firm shown in the document presented for registration iS a bogus one or has no legal existence. Further, the discretion conferred on him under s. 26A is a judicial one and he caM.ot refuse to register a firm on mere speculation, but he shiill base his conclusion on relevant evidence.

\)'hat are the facts in the present case? The partnership deed is dated April 1, 1950. In the document five persons are shown as its partners.

The name of the firm is given, the

objects of the partnership business are described, the duration of the business is prescribed and the capital fixed is divided between them in equal share.

Clause 16 of the Partnership deed, on which the Tribunal relied, r\)ads:

"This firm shall collect a commission of half an anna per gross on the entire production of the match factories of the .12_artners, respectively, the Brilliant Match Works, Manoranjitha Match Works, Pioneer Match Works, Shenbagam Match Works and Gnanam Match Works produced from 1st April 1950 whether sales were effected through this firm or not and a further commission of half an anna per gross on the sales effected through this firm. This commission will be collected on all kinds of matches produced from the abovesaid factories.

The commission of half an anna per gross on the entire production of these factories accrued due at the end of every month shall be debited to the respective factories under advice to them."

Clauses 2.2 and 23 which throw further light on the question raised read:

Clause 22. The business of this firm shall have and has no connection with the match manufacturing business carried on now by the partners separately or in partnersliip with others.

Clause 23. Any loss to the firm by way of fire accident or by any other cause during the course of the business of the firm, notwithstanding the fact that the loss might have arisen on the sale of or transaction relating to the match , manufacturing concerns of the partners to this geed, shall be borne by this firm and shall be equally divided between the partners to this deed.

It is not disputed that the partnership deed ex facie conforms to the requirements of the law of partnership as well as the Income-tax Act. Under s.4 of the Indian Partnership Act partnership is the relation between persons who have agreed

C.l.T., Madra. v.

Sivakasi Match,

Export Co.

Subba Rao J.

C.I.T., Madras to share the profits of the business carried on by all or any of them acting for all persons who have entered into the partnership with one another called individually partner> and collectively a firm and the name under which the bus:ness is carried on is called the firm name.

The document certainly conforms to the said definition.

There is also no prohibition under the Partnership Act against a partner or ; iartners of other.firms combining together to form a separate partnership to carry on a different busines. The fact that such a partner or partners entered into a sub-partnership_ with others in respect of their share does not detract from the validity of the partnership; nor the manner in which the said partner deals with the share of his profits is of any relevance to the question of the validity of the partnership. The document, therefore, embodies a valid partnership entered into in conformity with the law of partnership.

v. 6ivakasi Match Export Co.

Subba Rao J.

But the Tribunal has held that the partnership i~ not a genuine one for the following reasons: ( i) previously the firm entered into a partnership but the registration of the same was rejected; (ii) under cl. 16 of the partnership deed the firm has the right to collect the commission of the entire match production of the larger partnerships whether they effect their sales through the firm or not; •:iii) the books of Gnanam Match Works show umnistakably that the capital was contributed not by Palaniswamy Nadar in his individual capacity but by the larger firm as such; and (iv) regarding the othe~ three larger firms also the profit delivered by their renresentatives from the assessee firm was divided amongst all the partners according to their profit sharing ratio in the larger firms. On the other hand, the High Court found, on a construction of the relevant clauses of the partnership deed that the business was the business of the partners of the firm alone and that the two circumstances relied upon by the Tribunal were irrelevant in acertaining whether the said patnership was real or not.

We have already pointed out that the document ex facie discloses a valid partnership. The partnership was avowedly entered into by the partners in their individual capacity as their previous partnership in their representative capacity was not registered on the ground that such a partnership was illegal. If the larger firms cannot constitute members of a new partnership, some of the partners of those firms can certainly enter into a partnership shedding their representative capacity if they can legally do so. If they can do so, the mere fact that one of them borrowed the capital from a parent firm-we are using this expression for convenience of reference-or some of them surrendered their profits to the parent firm cannot make it anytheless a genuine firm.

Nor does cl.16 , of the partnership deed detract from its genuineness: that clause does not create any right in the partnership to collect the commission; in view of the close

conn-;:ction between the assessee firm and the parent firms, the parent firms were expected to effect all their sales through the assessee firm. If they did not and if they refused to pay commission, the assessee-firm could not enforce its right under the said clause.

Clause 22 in express terms emphasize:> the separate identities of the assessee-firm and the parent firms, and cl. 23 declares that notwithstanding the fact that

the loss to the assessee-firm has arisen on the sale or transaction relating to the match manufacturing concerns, the assessee-firm alone shall bear the loss and thereby indicates that the loss of the assessee-firm will not be borne by the parent firms. If the assessee-firm has a separate legal existence, the two circumstances relied upon by the Tribunal, namely, that Palaniswamy Nadar, one of the partners of the assessee-firm, brought in the capital from his parent firm or that the profits earned by some of the partners were surrendered tq_ the parent firms, would be irrelevant. A partner of a firm can certainly secure his .capital from any source or surrender his profits to his sub-partner or any other person. 1bose facts cannot conceivably convert a valid partnership

into a bogus one.

CJ.T., Mad,_, v.

Sivakasi Match Export Co.

The Tribunal mixed up the two concepts, viz., the legality of the partnership and the ultimate destination of the partners' profits. It also mixed up the question of the validity of the partnership and the object of the individual partners in entering into the partnership. If to avoid a legal difficulty S individuals, though four of them are members of different firms, enter into a partnership expressly to comply with a provision of law, we do not see any question of fraud

Subba Rao 1.

C.l.T., Madras v.

Sf•:akasi Match Export Co.

Subba Rao J.

Sha~ /.

or genuineness_ involved. It is a genuine document and it complies with the requirements of law. It is not an attempt to evade tax, but a legal device to reduce its tax liability. The fact that all the partners qf all the firms did not exceed 12 in number and if they chose all of them could have entered into the partnership indic.ltes that there was no sinister motive behind the partnership. As the Tribunal misconstrued the provisions of the partnership deed and relied upon irrelevant considerations in coming to the conclusion it did, the High Court rightly differed from the view of the Tribunal. In the circumstances, in view of the decision of this Court in Sree Meenakshi Mills' case('), a question of law within the meaning of s.66(2) of the Act arose for decision. The High Court rightly answered the question in the negative.

In the result, the appeal is dismissed with costs.

SHAH J.-Sivakasi Match Export Company-hereinafter referred to as 'the assessee'-is a partnership "carrying on business as bankers, commission agents and distributors of the products of different match factories at Sivakasi in the State of Madras".

The assessee was formed under a deed dated April 1, 1950. There were five partners of the firm (1) N.P.A.M. Sankaranlinga Nadar (2) K. S.S. Arumughaswami Nadar (3) K. A. S. Arunuchala Nadar (4) K. P.A. T.

Rajamoney Nadar and (5) V. S. V. P. Palaniswamy Nadar.

Before April 1, 1950, there existed a firm also named Sivakasi Matches Exporting Company which "consisted of a combine of six match factories" at Sivakasi constituted under a partnership deed dated March 12, 1948.

Registration of this partnership under s. 26-A of the Income-tax Act, 1922, was refused on the ground that the partnership deed did not specify the actual shares of the individual partners. 'Thereafter a deed forming the partnership which is sought to be registered in these proceedings was executed on April l, 1950.

It. was recited in the preamble that originally four out of the five partners had been carrying on business in partnership as representatives of their respective match concerns, and it was found necessary that they should carry on the said business from April 1, 1950, jointly in their individual capacity, and it was agreed to admit into their part-

(1) [1956] S.C.R. 691

nership as and from April 1, 1950 the fifth person, namely V. S. V. Palaniswamy Nadar.

The following are the material paragraphs of the agreement of partnership:

" ( 16) This finn shall collect a commission of haif

an anna per gross on the entire production of the match factories of the partners, respectively, the Brilliant Match Works, Manoranjitha Match Works, Pioneer Match Works, Shenbagam Match Works and Gnanam Match Works, produced from 1st April 1950 whether sales were effected through this firm or not and a further commission of half an anna per gross on the sales effected through this firm.

This commis- •; ion will be collected on all kinds of matches produced from the abovesaid factories.

The commission of half an anna per gross on the entire production of these factories accrued due at the end of every month shall be debited to the respective factories under advice. to 'them.

" ( 22) The business of this firm shall have and has

no connection with the match manufacturing business carried on now by the partners separately or in partnership with others.

(23) Any loss to the firm by way of fire, accident or by any other cause during the course of the business of the firm, notwithstanding the fact that the foss might have arisen on the sale of or transaction relating to the match manufacturing concerns of the partners to this deed, shall be borne by this firm and shall be equally divided between the partners to this deed."

It is common ground that each partner was concerned in the manufacture of matches either as owner or as partner with others.

Sankaralinga Nadar carried on business as a manufacturer of matches with two others in the name ofthe Brilliant Match Works; Armughaswamy Nadar as a partner with three others in the name of the Manoranjitha Match Works; Arunachala Nadar as a partner with two others in

the name of the Pioneer Match Works. Rajamoney Nadar

C.l.T., Madru v.

Sivakasi 1l1atch Export Co.

Shah J.

C.1.T., Mtidra8 v. $111aktul Match

Export Co,

SW/.

as a sole proprietor of the Shenbagam Match Works, and Palaniswamy 'Nadar as a partner with three others in the name of the Gnanam Match Works.

On October 27, 1952, the Income-tax Officer passed an order under s. 26-A granting registration of the partnership

consttuted under the deed dated April 1, 1950, but the Commissioner of Income-tax, Madras, exercising revisional jurisdiction under s. 33-B of the Act, set aside the order and directed that the partnership be assessed to tax as an unregistered firm.

In the view of the Commissioner the partnership deed did not represent the true state of affairs anq that "the actual position as distinguished from the recitals in the partnership deed was that all the partners of the Match Factories were directly partners of the assessee" and as the names of all the partners were not set out in the deed and the other requirements relating to registration had not been complied with, registration be refused.

The order was confirmed in appeal to the Income-tax Appellate Tribunal.

At the direction cif the High Court of Madras under s. 66(2) of the Indian Income-tax Act, 1922, the Tribunal referred the following question:

"Whether on the facts and the circumstances of the case the refqsal of registration of the assessee firm under s. 26-A of the Income-tax Act was correct in law?"

The High Court answered this question in the negative.

Against that order, with special leave, the Commissioner of Income-tax has appealed to this Court.

The Tribunal held that the covenants in the deed of partnership and especially in paragraphs 3 and 16 viewed in the light of the entry in the books of account of Gnanam Match Works debiting the capital contributed in the name of Palamswamy N adar to the assessee, and not in the name of its partner, .and division of the profits received from the assessee by Palaniswamy Nadar, Sankarlinga Nadar, Arumaghaswamy Nadar and Arunachalam Nadar with others

owriers of their respective business, indicated that the named partners were acting as representatives of those owners. The

High Court also held that cl. 16 of the partnership agreement did not impose any liability upon the manufacturing concerns to pay any commission as stipulated therein on the

"production of the match factories".

The High Court observed:

"Clause 16 does not Jay any liability upon the manufacturing conc::rns and cannot operate as an enfo; ceable contract against those other match companies. If one of those match companies should decline to put through its sales business through the assessee-firm, the only result would perhaps be that the partnership would not advance moneys or finance to that manufacturing concern; it might also be that the particular partner interested in the manufacturing concern might stand to lose the benefit of this partnership.

But that is not the same thing as to say that those manufacturing concerns themselves had become partners of the asses see partnership." The High Court also observed that the assessee was not concerned with the disposal of the profits received by its partners.

Finally the High Court observed that "an individual member of the partnership is not prevented from engaging in business as member of another partnership. The law does not prohibit such a course and even the Income-tax law relating to registr_ation of partnerships only refuses registration when the formation of such pattnerships is intended to evade the incidence of income-tax and nothing more.

We are not satisfied that the Tribunal correctly appreciated the facts of the present case in coming to the conclusion that the match works were the real parties to this instrument of partnership''.

The Solicitor-General appearing for the Commissioner contended that the High Court had in exercising its advisory jurisdiction, in substance assumed appellate powers and had sought to reappraise the evidence on which the conclusion of the Tribunal was founded.

Counsel contended that the Tribunal had recorded a clear finding on the facts that the

C.l.T., Madras

Sivakasi Match Export Co.

Shah J,

CJ.T., Madras v.

Sivakasi Match Export Co.

Shah J.

"match works were the real" partners, and the High Court was bound on the question framed to record its opinion on the questions of law referred on the basis of that finding.

Section 26-A of the Indian Income-tax Act enacts the procedure for registration of firms. By that section on behalf of any fim1 application may be submitted to the Incometax Officer for registration, if the firm is constituted under an instrument of partnership, specifying the individual shares of the partners. The application has to be made by such person or persons and at such times and shall contain such particulars and shall be in such form as may be prescribed. It is open to a firm to carry on business without registration under the Indian Registration Act. By obtaining an order of registration, the partners of the firm are enabled to get the benefit of lower rates of tax than those applicable to the whole income of the firm, when charged as a unit of assessment. In the relevant year of assessment if the firm was unregistered the tax payable by it had to be determined as in the case of any other distinct entity and tax had to be levied on the firm itself. If, however, the firm was registered, the firm d.id not pay the tax and therefore the tax payable by the firm was not determined, but the share of profit received from the firm was added to the income of each partner, and on the total so determined tax was levied against the partners individually. It is manifest that if the firm desired to secure this privilege it had to conform strictly to the requirements prescribed by law. Under the rules framed under s. 59 of the Indian Income-tax Act, 1922, rules 2 to 6B deal with registration and renewal of registration of firms. The application for registration has to be signed by all the partners (not being minors) personally, and the application has to be in the form prescribed by rule

3. The form prescribed requires the partners of the firm to disclose the names of each partner, his address, date of admittance to partnership. and other relevant particulars including each partner's share in the profits and loss, "particulars

of the firm as constituted at the date" of the application, and particulars of the apportionment of the income, profits or gains or loss of the business, profession or vocation in the previous year between the partners who in that previous

year were entitled to share in such income, profits or gains or loss, where the application is made after the end of the relevanc previous year. If the Income-tax Officer is satisfied that tl.ere is a firm in existence constituted as shown in the

instru.nent of partnership and the application has been properly made, he h&s to enter in writing at the foot of the instrument or certified copy, as the case may be, a certificate of registration of the partnership under s. 26-A of the Act.

This certificate of registration ensures only for the year mentioned therein. but the firm is entitled to obtain renewal of the registration.

On the conclusion recorded by the Tribunal that the partnership deed dated April I, 1950 was in truth an instrument relating to an agreement to carry on business by all the persons who owned the five businesses of which the

representa.ives signed the deed, the application submitted by the five named partners of the assessee did not conform to the requirements of rules 2 and 3 and the Income-tax Ofilcer was bound to refuse registration. It is true that the ground given by the Tribunal that the share of profits received by individual partners of the assessee was distributed by four of those partners who had entered into partnership contracts with other persons in the business of their respective match factories, standing independently of other grounds, may not be of much value in deciding whether all the partners of the match factories were intended to be partners of the assessee. It is open to a partner who receives his share in the profits of the firm to dispose of that share in any manner he pleases, and no inference from 'the distribution of the share of such profits alone can lead to the inference that the persons who ultimately received the benefit of the profits are partners of the firm which had distributed the profits.

But the Tribunal adverted to three circumstances. The terms of the deed of partnership purported to impose an obligatio1 to pay Commission on the production of the five match factories, representatives of which sought to join as partners eo nomine. Imposition of such an obligation was in the view of the Tribunal inconsistent with the representatives of those factories being partners of !he assessee in their individual capacities.

Again it was

51 S. C.-3

C.1.T., MadrM "· Sivakasi Match Export Co.

Sh•lz J.

CJ.T., MQIJr.., v.

Sivakasi Maleh

Export Co.

Shah J.

found that Gnanam Match Works had contributed capital to the assessee directly and not through its representative.

These , wo circumstances, coupled with the ultimate distribution of profits by the individual partners among the panners of the match factories, led to the inference that each partner who signed the deed dated April 1, 1950 was acting not in his personal capacity, but as represen.ing his match factory.

Granting that the evidence from which the inference was drawn was not very cogent, it was still exclusively within the province of the Tribunal to decide that question on the evidence before it, and its decision that in entering into the deed of partnership, the named partners represented their respective match factories, was not open to be canvassed in a reference under s. 66(2) of the Indian Income-tax Act. The High Court observed that cl. 16 of the partnership deed did no, impose any obligation upon the partners or their representatives of the five firms to pay commission as stipulated under that clause.

Undoubtedly, there is no covenant expressly imposing such liability upon the matcil factories, but it was open to the Tribunal from , he incorporation of such an unusual covenant to infer that the named partners of the assessee were acting as representatives of their respective factories. To assume from the , erms of cl. 16 that the owners of these match factories were not bound by the covenants contained in cl. 16 is to assume the answer to the question posed for opinion.

There was also ; he circumstance that in the books of account of the Gnanam Match Works of which Palaniswamy Nadar was a representative, capital was debited as contributed to the assessee.

This indicated that the Gnanam Match Works was directly interested in the partnership. If that factory had made an advance to Palaniswamy Nadar to enable the latter to contribute his share of the capital, the entry in the factory's books of account would have been in the name of its partner and not in the name of the assessee. That also is a circumstance justifying an inference that in e'1tering into the deed dated April I, 1950 Palaniswamy acted for and on behalf of all the partners of the Gnanam Match Works.

Sharing of profits received by !he named partners, with their partners in the respective match factories may not, as I have

already observed, by itself be a decisive circumstance. But that did not authorise the High Court to disregard the finding of the Tribunal on a question which was essentially one of fact.

When the High Court observed that they were satisfied that the Tribunal had not correctly appreciated the evidence in arriving at the conclusion that each Match factory was the real party in the instrument of partnership, they assumed to themselves jurisdiction which they did not possess.

It was not the case of the assessee that there was no evidence on which the conclusion arrived at by the Tribunal could be founded, nor was it the oase of the assessee that the conclusion was so perverse that no reasonable body of men properly instructed in the law could have arrived at that conclusion. It is also clear from the record that no such question was even canvassed before the Tribunal.

Manifestly such a question could not arise out of the order of the Tribunal, and none such was referred to the High Court.

By the question actually referred, the Tirbunal sought the opinion of the High Court whether on the facts and circumstances refusal of the application for registration .of the assessee was correct in law. If it was the case of the assessee that the conclusion of the Tribunal was based on no evidence, or that it was perverse, the High Court could be asked to call for a reference from the Tribunal on that question. But that was never done.

It is true that the object of enacting s. 26-A and the rules relating to the procedure for registration is to prevent escapement of liability to tax. But it is not necessary that before an order refusing registration is made, it must be established that there was evasion of tax attempted or actual.

It is always open to a person, consistently with the law, to so arrange his affairs that he may reduce his tax liability to the minimum permissible l!lnder the Jaw. The fact that the liability to tax may be reduced by the adoption of an expedient which the law permits, is wholly irrelevant in considering the validity of that expedient. But where the law prescribes conditions for obtaining the benefit of reduced liability to taxation, those conditions, unless otherwise provided, must be strictly complied with, and if they are not

C.I.T Madrta ....

Slvakml Molcl&

Export Co.

w /.

CJ.T., Modrt11 •• Slvaklui Match

Export Co.

SWJ.

so complied with, the taxing authorities would be bound to refuse to give the taxpayer the benefit claimed. When application for registration of the firm is made, the Incometax Officer is entitled to ascertain whether the names of the partners in the instrument are of persons who have agreed to be partners, whether ihe shares are properly specified and whether the statement about the shares is real or is merely a cloak for dis, ributing the profits in a different manner.

If all persons who have in truth agreed to be partners have not signed the deed or their shares are not truly set out in the deed of partnership, it would be open to the Incometax Officer to decline to register the deed, even if under the general Jaw of partnership the rights and obligations of tke partners eo nomine thereto may otherwise be adjusted. As a corollary to this, if the requirements relating to the form in which the petition is to be presented are not complied with, and the relevant information is withheld, the Incometax Officer may be justified in refusing registration.

In my view the High Court was in error in holding on the question submitted that the registration of the assessee under s. 26-A of the Income-tax Act was wrongly refused.

The answer to the ques:ion referred to the High Court lhould be in the affirmative.

ORDER In accordance with the opinion of the majority, the appeal is dismissed with costs.

Appeal dismissed

COMMISSIONER OF INCOME-TAX KERALA AND

COIMBATORE

KRISHNA WARRIAR

(K. SUBBA RAo, J. C. SHAH, ANDS. M. SJKRI JJ.) ltteome Tax-Exemption from taxation-Businen held in trUll- Pllrl of profit• to be utiliud for religiOIU or charitable purp"'•,_

Madras

Shah J.

COMMISSIONER OF INCOME-TAX, MADRAS

SJVAKASI MATCH EXPORT COMPANY

K. SUBRA

C. SHAH

S. M. SIKRI

Income Tax-Partnership

Income-tax Act

s. 26

Indian Income-tax Rules, 1922

Shenbagam Match Works

Brilliant Match Works

Manoranjitha Match Works

Pioneer Match Works

Gnanam Match Works

April 1, 1950

s. 26(A)

s. 33B

K. Subba Rao

S. M. Sikri

s. 26

s. 20

s. 66(2)

s. 66(2)

s. 66(2)

Indian Income-tax Rules

CNIL APPELLATE JURISDICTION

H. N. Sanyal

K. Srinivasan

R. Gopalakrishnan

SUBBA RAo

SuBBA RAo J. SHAH

SUB BA RAo

High Court of Madras

s. 66(2)

Indian lncome-tax Act, 1922

Rajamoney Nadar

Sivakasi

Sankaralinga Nada

Arumughaswarni Nadar

Arunachala Nadar

Palaniswamy Nadar

Rajamoney N

s. 26A

s. 33B

Subba Rao

.ubba Rao

High Court of Judicature at Madras

s. 66(2)

s. 66(2)

s. 26A

s. 66(2)

Section 26A

s. 59

Central Board of Revenue

Section 26A

Indian Income-tax Act, 1922

section 26A

Indian Income-tax Act, 1922

s. 26A

s. 26A

Clause 16

1st April 1950

Clause 22

Clause 23

Income-tax Act

Indian Partnership Act

6ivakasi Match Export Co.

cl. 16

Clause 22

cl. 23

Sivakasi Match Export Co.

Subba Rao

Sree Meenakshi Mills

SHAH J.-Sivakasi Match Export Company

N.P.A.M. Sankaranlinga Nadar

K. S.S. Arumughaswami Nadar

K. A. S. Arunuchala Nadar

K. P.A. T.

Rajamoney Nadar

V. S. V. P. Palaniswamy Nadar

Sivakasi Matches Exporting Company

March 12, 1948

s. 26

Income-tax Act, 1922

April l, 1950

V. S. V. Palaniswamy Nadar

Sankaralinga Nadar

Armughaswamy Nadar

Palaniswamy 'Nadar

October 27, 1952

s. 26

s. 33

Income-tax Appellate Tribunal

s. 66(2)

Indian Income-tax Act, 1922

s. 26

Income-tax Act

Palamswamy N adar

Sankarlinga Nadar

Arumaghaswamy Nadar

Arunachalam Nadar

cl. 16

Clause 16

Section 26

Income-tax Act

Registration Act

s. 59

Indian Income-tax Act, 1922

s. 26

Sivakasi Maleh

s. 66(2)

Income-tax Act

cl. 16

cl. 16

cl. 16

Palaniswamy

s. 26

s. 26

Income-tax Act

COMMISSIONER OF INCOME-TAX KERALA

K. SUBBA RAo

ANDS. M. SJKRI