SUPREME COURT REPORTS [rg64J

IfJfU "such" may . as weU refer to the "income" in the opening

CJ.T. sentence of sub-s. (3). The said rnb-section says that the

~I h "· WanllJ incomes mentioned thereunder shall not be included in the • "°- ' total income, but the proviso lifts the ban and says that such Sublla Rao 1. incomes shall be included in the to:al income if the conditions laid down are satisfied.

We think that the expression usuch income" only means the income accruing or arising in favour of the trust.

April, 29.

The legal position may briefly be stated thus.

Clause

(i) of s. 4,(3) of the Act takes in every property or a fractional part of it held in trust wholly for religious or charitable purposes.

It also takes in :mch property held only in part for such purposes.

Business is also property within the meaning of the said clause. Clause (b) of the proviso to s. 4(3)(i) applies only to a business not held in trust but carried on on behalf of religious or charitable institutions.

For the foregoing reasons we hold that the High Court has coectly answered the question referred to it.

In the result, the appeals fail and are dismissed with costs.

One set of hearing fees.

Appeal dismissed.

JAGDISH CHANDER GUPTA v.

KAJARIA TRADERS (INDIA) LTD.

(K. N.

WANCHOO, M.

HIDAYATULLAH, K.

DAS

GUPTA AND N. RAJAGOPALA AYYANGAR JJ.)

hrbitration Act-Partnership agreement-Provision for referring to arbitration-Partnership not registered-Application in the High Court for appointment of arbitrator-If maintainable-Interpretation of statute-Ejusdem Generis--No1citur a sociis-Indiarc Partnership Act, 1932 (9 of 1932), •· 69-Arbitration Act, 1940 (Act 10 of 1940), " 8(2). lbo respondent entered into a partnership agreement with tho appellant. But this was not registered. There was an arbitration clauoe stipulatiog that in case of dispute the matter will be referred for arbitration in accordance \\ith Arbitration Act, 1940. Dispute having l\risen between the respondent and the appellant the former wrote to tho latter stating that the dispute be referred for arbitration and that the respondent has appointeil one K as the sole arbitrator. On the failure of the appellant to agree to this the respondent filed an application under s. 8(2) of the Indian Arbitration Act for the appointment of arbitrator. The application was hearil by a Division Bench of the High Court before which the appellant contended that s. 69(3) of the Indian Partnership Act, 1932 afforded a bar to tho petition because the partnership was not registered.

One of the Judges upheld the contention while the other rejectell it and the matter was referred to another Judge who held that the application was competent. The present appeal was filed by special leave granted by this Court.

HELD:-(i) That since the arbitration clause formed a part of the agreement constituting the. partnership it is obvious that the proceeding which is before the Court is to enforce a right which arises from a contract.

Whether one views the contract between the parties as a whole or on• Tiews only the arbitration clause it is impossible to think that the. riaht to proceed to arbitration is not one of the rights which are founded OD the agreement of the parties.

The words of s. 69(3) "a right arisina from a coiitract" are in either sense sufficient to cover tho present matters.

(ii) Interpretation ejusdt:m ge11eris or nosc:itur a l'Ociis need not always be made when showing particular classes are followed by general words. Before the general wvrds can be so interpreted theremust bo a genus constituted or a category disclosed with reference" to which tho 1eneral words can and are intende'd to be restricted. The expression "clairp. of set off" does not disclose a category or a genus.

Set. offs are of two kinds legal and equitable and both are already comprehended and it is difficult to think of any right ""arising from a contract• which is of the same nature as a claim of set otl and can be raised bJ a 4efendent in suit.

Allen v. Emerson, (1944) I K.B. 362. referrell to.

Hafiz Qamar Din v. Nur Din, A.I.R. 1936 Lah. 136, /Tabulal Dhaft Dhania v. Mis. Gautam & Co. A.I.R. 1950 Cal. 341, Kottama1u Sreemannarayanamurthy v. Chakka Arja11ad11, A.l.R. 1939 Mad. 145, Jarnal

Y. Firm Umar Haji Karfm, l.L.R. 1943 Nag.- 540, and R, tm Lal Harnam Das v. Bal Kishan. A.l.R. 1957 Punj. 159, distinguished.

(iii) The . words "other proceeding" in sub-section (3) must rec:eift lheir full meaning untramelled by the words "a claim of set oil". Tho latter words neither intend nor can be construed to cut down the senerality of the words "other proceeding". The sub-section provides for the application of tho provisions of sub-sections (!) and (2) to claims ol. aet otl an'd also to other proceedings of any kind which can proper)J be said to be for eQ{orcemeD; t of any right arising front contract except

lhexpressly mentioned aa exceptions in sub-sections (3 T llld ( 4).

Jagduh Chantl1r ...

Ka/aria T1'fllhn

1964 Crvn. APPELLATE JURISDICTION: Civil Appeal No. 791 lagdishchander of 1962 . ...

La/aria Tradm Appeal by special leave from the judgment and order dated March 22, 1960, of the Bombay High Court in Award No. 18 of 1959.

S. T. Desai and /. N. Shroff, for the appellant.

B. C. Misra, for the respondent.

April 29, 1964. The Judgment of the Court was delivered by

Hldt1)•atullah J.

HIDAYATULLAH J.-This appeal by special leave is directed against an order of the High Court of Bombay dated Marc;1 22, 1960 in its ordinary original civil jurisdiction.

The facts are simple.

By a letter dated July 30, 1955, Messrs. Kajaria Traders (India) Ltd., who is the respondent here and Messrs.

Foreign Import and Export Association (sole proprietory firm owned by the appellant Jagdish ('.

Gupta) entered into a partnership to export between January and June 1956, 10.000 tons of manganese ore to Phillips Brothers (India) Ltd., New York.

Each partner was to supply a certain quantity of manganese ore. We are not concerned with the terms of the agreement but with one of its clauses which provided:

"That in case of dispute the matter will be referred for arbitration in accordance with the Indian Arbitration Act."

The company alleged that Jagdish Chander Gupta failed to carry out his part of the partnership agreement.

After some correspondence, the company wrote to J agdish Chander Gupta on February 28, 1959 that they had appointed Mr. R. J. Kolah (Advocate O.S.) as their arbitrator and asked Jagdish Chander Gupta either to agree to Mr. Kolah's appointment as sole arbitrator or to appoint his own arbitrator.

J agdish Chander Gupta put off consideration and on March 17, 1959 the company informed Jagdish Chander Gupta that as he had failed to appoint an arbitrator within 15 clear days they were appointing Mr. Ko lab as sole arbitrator.

Jagdish Chander Gupta disputed this and the company filed on March 28, 1959 an applicMion under s. 8(2) of the Indian Arbitration Act, 1940 for the appointment of Mr. Kolah or any other peron as arbitrator.

Jagdish Chander

Jagdish Chander Gupta appeared and objected inter alia to the institution of the petition. Two grounds were urged

(i) thats. 8(2) of the Indian Arbitration Act was not applicable as it was not expressly provided in the arbitration clause quoted above that the arbitrators were to be by consent of the parties and (ii) that s. 69(3) of the Indian Partnership Act, 1932 afforded a bar to the petition because the partnership was not registered.

The petition was referred by the Chief Justice to a Divisional Bench consisting of Mr. Justice Mudholkar (as he then was) and Mr. Juscice Naik. The two learned Judges agreed that in the circumstances of the case an application under s. 8 of the Indian Arbitration Act was competent and that the court had power to appoint an arbitrator.

They disagreed on the second eoint: Mr. Justice Mudhollcar was of the opinion thats. 69(3) of the Indian Partnership Act barred the application while Mr. Justice Naik held othe<wise. The case was then referred to Mr. Justice K. T. Desai (as he then was) and he agreed with Mr. Jutice Naik with the result that the ap?lic:ition was held to be competent.

In this appeal it was not contended that the conclusions of the learned Judges in regard to s. 8(2) were erroneous.

The decision was challenged only on the ground that s. 69 (3) was wrongly interpreted and the bar afforded by it was wrongly disallowed.

Section 69 of the Indian Partnership Act may be reproduced here :

"69. ( 1) No suit to enforce a right arising from a contract or conferred by this Act shall be instituted in any Court by or on behalf of any person suing as a partner in a firm against the firm or any person alleged to be or to have been a partner in the firm unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm.

...

Kajaria Traden

Hidayatul/JJ~ I.

Jagdi.rh Chander

•• Kajar/a Tradm

Hldayatullah J.

(2) No suit to enforce a fight arising from a contract shall be instituted in any Court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the Register of Firms as partners in the firm.

( 3) The provisions of. sub-sections (1 ) and ( 2) shall apply also to a claim of set-off or other proceeding to enforce a right arising from a contract, but shall not affect- ( a) the enforcement of any right to sue for the dissolution of a firm or for accounts of a dissolved firm, or any right or power to realise the property of a dissolved firm, or

(b) the powers of an official assignee, receiver or Court under the Presidency-towns Insolvency Act, 1909, or the Provincial Insolvency Act, 1920, to realise the property of an insolvent partner.

( 4) This section shall not apply-

( a) to firms or to partn.ers in firms which have no place of business in the territories to which this Act extends, or whose places of business in the said territories are situated in areas to which, by notification under section 56, this Chapter does not apply, or

(b) to any suit or claim of set-off not exceeding one hundred rupees in value which, in the Presidency towns, is not of a kind specified in section 19 of the Presidency Small Cause Courts Act, 1882, or outside the Presidency-towns, is not of a kind specified in the Second Schedule to the Provincial Small Cause Courts Act, 1887, or to any proceeding in execution or other proceeding inciden ta! to or afising from any such suit or claim.

The section, speaking generally, bars certMn suits and proceedings as a consequence of non-registration of firms. Subs. ( 1) prohibits the institution of a suit between partners inter se or between partners and the Jinn for the purpose ot enforcing a right arising from a contract or conferred by the Partnership Act unless the firm is registered and the person suing is or has been shown in the Register of Firms

as a partner in the firm.

Sub-s. ( 2) similarly prohibits a suit by or on behalf of the firm against a third party for the purpose of enforcing rights arising from a contract unless the fum is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm. In the third sub-section a claim of set-off which is in the nature of a counter claim is also similarly barrd. Then that subsection bars "other proceedings". The only doubt that has arisen in this case is regarding the meaning. to be given to the expression "other proceeding". One way to look at the matter is to give these words their full and natural meaning and the other way is to cut down that meaning in the light of the words that precede them. The next question is whether the application under s. 8(2) of the Arbitration Act can be regarded as a proceeding "to enforce a right arising from a contract'', and therefore, within the bar of section 69 of the Indian Partnership Act.'

Mr. Justice Mudholkar in reaching his conclusion did not interpret the expression "other proceeding" ejusdem generis with the words "a claim of set-off". He held further that the application was to enforce a right arising from the contract of the parties. Mr. Justice Naik pointed out that the words used were not "any proceeding" nor "any other proceedings" but "other proceeding" and that as these words were juxtaposed with 'a claim of set off' they indicated a proceeding of the nature of a claim in defence. On the second point Mr. Justice Naik held that this was not a procf', eding to enforce a right arising from a contract but was a c!ltim for damages and such a claim could be entertained because it was based on something which was independent of the contract to supply ore.

He held that the right which was being enforced was a right ansing from" the Arbitration Act and not from the contract of the parties.

Mr. Justice K. T. Desai agreed with most of these conclusions and sugQested that the words preceding "other proceed-

Jagdish Chand•

Ka/aria Trtukr

Hidayatullah I

Jagdish Chttnder

Kaiaria Trf!.4.11~

Bidayatu/lah J.

ing", namely, "a claim of set-off" had 'demonstrative and limiting effect'. He seems to have a5certained the meaning of the expression "other proceeding" by n; ference to the meaning of the words "a claim of s~.t off", which he considered were associated with it.

The first question to decide is whether the present proceeding is one to enforce a right arising from the contract of the parties. The proceeding under the eighth section of the Arbitration Act has its genesis in the arbitration clause, because without an agreement to refer the matter to arbitration that section cannot possibly be invoked. Since the arbitration clause is a part of the agreement constituting the partnership it is obvious that the proceeding hich is before the court is to enforce a right which arises from a contract.

Whether we view the contract between the parties as a whole or view only the clause about arbitration, it i<i impossible to think that the right to proceed to arbitration is not one of the rights which are founded on the agreement of the parties. The words of s. 69 ( 3) "a right arising from a contract" are in either sense sufficient to cover the present matter.

It remains, however, to consider whether by reason of the fact that the words "other proceeding" stand opposed ( to the words "a claim of set-off" any limitation in their meaning was contemplated. It is on this aspect of the case that the learned Judges have seriously differed. "ihen in a statute particular classes are mentioned by name and then are followed by general words, the general words are sometimes construed ejusdem generis, i.e. limited to the same category or genus comprehended by the particular words.

But it is not necessary that this rule must always apply.

The nature of the special words and the general words must be considered before the rule is applied.

In Allen v.

Emerson ('), Asquith J. gave interesting examples of particular words followed by general words where the principle ot efusdem generis might or might not apply. We think that the following illustration will clear any difficulty.

In the expression "books, pamphlets, newsppers and other

(I) [1944) I K.B. 36z,

... 1 ._,.'

IS.CR.

SUPREME COURT REPOKfS 57

documents" private letters may not be held included if 1964 other documents' be intepreted ejusdem generis with what lagdishChalllh goes before.

But in a provision which reads "newspapers . v. or other document likely to convey secrets to the enemy'", KaJarra Trader: the words 'other document' would include document of Hidayatullah I any kind and would not take their colour from 'newspapers'.

It follows, therefore, that interpretation ejusdem generis or noscitur a sociis need not always be made when words

showjpg particular classes are followed by general words.

Befor~ the genezal words can be so interpreted there mu:st be a genus constituted or a category disclosed with referenc~ to which. the general words can and are intended to be restricted. Here the expression "claim of set-off" does not disclose a category or a genus. Set-offs are of two kinds-- legal and equitable-and both are already comprehended and it is difficult to think of any right "arising from a contract" which is of the same natuce as a claim of set-off and can be raised by a defendant in a suit.

Mr. B. C'.

Misra, whom we invited to give us examples, admitted frankly that it was impossible for him to think of any proceeding of the nature of a claim of set off other than a claim of set-off which could be raised in a suit such as is described in the second sub-section. In respect of the first snb-sect!on he could give only two examples. They are (i) a claim by

a pledger of goods with an unregistered firm whose goodc. are attached and who has to make an objection under O. 21 r. 58 of the Code of Civil Procedure and (ii) proving a

debt before a liquidator. The latte; is not raised as a defence and cannot belong to the same genus as a "claim of set-off". The former can be made to fit but by a stretch of some considerable imagination. It is difficult for us to

accept that the Legislatu~; was thi11king of such far-fetced things when it spoke of "other proceeding" ejusdem generi.• with a claim of set-off.

Mr. Justice Naik asked the question .that if all proce_edings were to be excluded why was it not considerecl suffi cient to speak of proceedings along with suits in sub-ss.

(1) and (2) instead of framing a separate snb-sec!ion about proceedings and coupling 'other proceeding' witli 'a claim of set-off'? The question is a proper one to ask but

"1a,.U.h Chander v.

Kafin'la Trader1

Hidayalullah I.

!Jie search for the answer in the scheme of the section itself gives the clue. T!J.e section thinks in terms of (a) suits and (b) claims of set-off which are in a sense of the nature of suits and ( c) of other prnr; ec<lings. The section first provides for exclusion of suits :n '.; Jb-ss. ( 1) and (2).

Then it says that_ the same ban applies to a c:aim of set-off and other proceeding to _enforce a .right arising from a contract. Next it excludes the ban in respect of the right to sue (a) for the dissolution of a firm, (b) for accounts - ., of a dissolved firm and ( c) for the realisation of the property of a dissolved firm. The emphasis in each case is on dissolution of the firm. Then follows a general exclusion of the section. The fourth sub-section says that the section as a whole, is not to apply to firms or to partners and firms which have no place of business in the territories of India or whose places of business are situated in the territories of India but in areas -to which Chapter VIl is not to apply and to suits or claims of set off not exceeding Rs. 100 in value.

Here there is no insistence on the dissolution of the firm. It is significant ,.that in the latter part of clause (b) of that section the words are "or to any proceeding in execution or other proceeding incidental to or arising from any such sujt or claim" and this clearly shows that the word "proceeding" is not limited to a proceeding in the nature of a suit or a claim of set-off. Subsection ( 4) combines suits and a claim of set-off and t!Jen ipeaks of "any proceeding in execution" and "other proceeding incidental to or arising from any such suit or claim"

as being outside the ban of the main section. It would hardly have been necessary to be so explicit if the words 'other proceeding' in the main sec,(ion had a meaning as restricted as is suggested by the respondent. It i~ possible that the draftsman wishing to make exceptions of different kinds in respect of suits, claims of set-off and other proceedings grouped suits in sub-ss. (1) and (2), set-off and ot!ler proceedings in sub-s. (3) made some special exceptions in respect of them in sub-s. (3) in respect of dissolved firms and then viewed them all together in sub-s. ( 4) providing for a complete exclusion. of the section 'in respect of 1mits -0f particular classes. For convenience • of drafting this

scheme was probably followed and nothing can be spelled out from the manner in y.'hich the section is sub-divided.

Some cases noticed by the High Co.art were cited to us but none of them appear§ to be really in point. In Hafiz Qamar Din v. Nur Din( 1) and Babu/al Dhandhania v.

Messrs. Gauttam and Co. (2) proceedings were started on an award, in one to mi\ke it a rule of the Court and in the other to get it set aside. These cases are distinguishable because they deal with awards and it is not necessary to decide whether after an award the proceeding is one to enforce a right arising from a contract.

We do not refer to them.

In Kottamasu Sreemannarayanamuthy and another v. Chakka Arjanadu( 3 ) a petition for adjudication of a partner as insolvent was held to be a right arising not from a contract but from statute. Here the right that is being enforced through the medium of the Arbitration Act arises from the contract between the parties and is a part of it. In Jamal v. Firm Umar Haji Karim(') the bar of s. 69 ( 3) was claimed during the execution of a consent decree and was disallowed. Grille C. J. observed that the 1xpression 'other proceeding' indicated something which was 'sui generis of a claim of set-off', If the partners cf an unregistered firm go to court without either asking for a dissolution of the firm or dissolving it themselves and enter into an agreement and compose their differences it is possible to say that the enforcement of the consent decree is no more than the enforcement of a right arising from a contract and is . within the ban. It is, however, not necessary to decide. this point here. ln Ram Lal Hw, ram Das v. Bal Krishan and others(") it was expressly f!Ointed out that the expression 'other proceeding' in the third sub-section applied to proceedings of the nature of a claim of set-off and nothing else. This case cannot be said to interpret the sub-section correctly.

Similarly, Mahendra v. Gurdeyal("), which lays down that s. 69 does not bar a partner of an unregistered partnership firm from applying to the court under ~- 8 of the Arbitration Act for referring the dispute

(t) A.I.R 1936 Lah. 136.

(3) A.I.R. t939 Mad. 14,. (,) A.l.R. I9j7 Punjab r,,.

(2) A.T.R. 1950 Cal. 391.

(4) I.L.R. 1943 Nag. s40.

(6) I.L.R- 30 Pat. 109. ·

J964

Jagdi>h Chandu

Ka/aria Trad""

Hldaya1ulla& J.

1964 between partners to arbitrator as provided in the condition

Ja11dtsh Chander of t4eir agreement, cannot be accepted as souud.

The

v . . Y.T d , reason given by the Divisional Bench that as s. 69 alows .n.a]Orio ra er' - . . . - d1Ssc:Jl.utJ.on and accounts of unregistered partnership it Hidayarul/ah J. cannot bar such an application appe<:rs •, "'; to be not quite

m point.

April, 30.

1n our judgment, the words '0th.er proceeding' in subs. (3) must receive their full meaning untramelled by the words a claim of set-off'.

The latter words neither intend nor can be construed to cut down the generality of the words 'other proceeding'. The sub-section provides for the application of the provisions of sub-ss. (1) and (2) to claims of set-off and also to other proceedings of any kind which can properly be said to be for enforcement of any right arising from contract except those expressly mentioned as exceptions in sub-s. ( 3) and sub-s. ( 4).

The appeal is, therefore, allowed.

The decision of the High Court will be set aside and the application under s. 8(2) of the Arbitration Act shall stand dismissed with costs throughout on the applicant in the High Court.

Appeal allowed

STATE OF MADRAS

C. J. COELHO

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

Incon1e Tax-Interest paid on monies borrowed for purchase of plantation-I/ deductible from the assessable income-Expsnditur•

if laid out or expended wholly and exclusively for the purpose of plantation-Madras Plantations Agricultural Income .. fax Act (Mad.

V of 1955), s. S(e) and (k). ·

The respondent, assessee purchased an estate, consi!lling of tea. coffee and rubber plantation•. Out of the sale price of Rs. 3,10,000/· ho borrowed Rs. 2,90.000/· at interest. For the assessment year 1955·56.

s. 4

s. 4(3)(i)

JAGDISH CHANDER GUPTA

KAJARIA TRADERS (INDIA) LTD

WANCHOO

HIDAYATULLAH

N. RAJAGOPALA AYYANGAR JJ.

Indiarc Partnership Act, 1932

Arbitration Act, 1940

Arbitration Act, 1940

s. 8(2)

s. 69(3)

Indian Partnership Act, 1932

s. 69(3)

S. T. Desai

N. Shroff

B. C. Misra

Kajaria Traders (India) Ltd.

Jagdish

Phillips Brothers (India) Ltd.

New York

Jagdish Chander Gupta

J agdish Chander Gupta

February 28, 1959

R. J. Kolah

agdish Chander Gupta

March 17, 1959

Ko lab

March 28, 1959

s. 8(2)

Indian Arbitration Act, 1940

Jagdish Chander

s. 69(3)

Indian Partnership Act, 1932

Mudholkar

Juscice Naik

s. 8

Mudhollcar

Indian Partnership Act

Naik

K. T. Desai

Jutice Naik

s. 8(2)

s. 69

Section 69

Indian Partnership Act

Provincial Insolvency Act, 1920

section 56

section 19

Presidency Small Cause Courts Act, 1882

s. 8(2)

section 69

Indian Partnership Act

s. 69

Asquith

KaJarra Trader

Hidayatullah

B. C'.

Misra

the Code of Civil Procedure

Hidayalullah

India

s. 69

Grille

s. 69

Jagdi>h Chandu

s. 69

s. 8(2)

STATE OF MADRAS

C. J. COELHO

K. SUBBA RAo

J. C. SHAH

S. M. SIKRI


SUPREME COURT REPORTS

1964 between partners to arbitrator as provided in the condition

Ja11dtsh Chander of t4eir agreement, cannot be accepted as souud.

The

v . . Y.T d , reason given by the Divisional Bench that as s. 69 alows .n.a]Orio ra er' - . . . - d1Ssc:Jl.utJ.on and accounts of unregistered partnership it Hidayarul/ah J. cannot bar such an application appe<:rs •, "'; to be not quite

m point.

April, 30.

1n our judgment, the words '0th.er proceeding' in subs. (3) must receive their full meaning untramelled by the words a claim of set-off'.

The latter words neither intend nor can be construed to cut down the generality of the words 'other proceeding'. The sub-section provides for the application of the provisions of sub-ss. (1) and (2) to claims of set-off and also to other proceedings of any kind which can properly be said to be for enforcement of any right arising from contract except those expressly mentioned as exceptions in sub-s. ( 3) and sub-s. ( 4).

The appeal is, therefore, allowed.

The decision of the High Court will be set aside and the application under s. 8(2) of the Arbitration Act shall stand dismissed with costs throughout on the applicant in the High Court.

Appeal allowed

STATE OF MADRAS

C. J. COELHO

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

Incon1e Tax-Interest paid on monies borrowed for purchase of plantation-I/ deductible from the assessable income-Expsnditur•

if laid out or expended wholly and exclusively for the purpose of plantation-Madras Plantations Agricultural Income .. fax Act (Mad.

V of 1955), s. S(e) and (k). ·

The respondent, assessee purchased an estate, consi!lling of tea. coffee and rubber plantation•. Out of the sale price of Rs. 3,10,000/· ho borrowed Rs. 2,90.000/· at interest. For the assessment year 1955·56.

he claimed deduction on interest amounting to Rs. 22,628-9-8 under 1•

S(Jtl of the Madras Plantations Agricultural Income-tax Act. The Agrl. cultural Income Tax Officer allowed only Rs. 1.570-10-7 under the Act.

The <!Ssessee appealed to the Assistant Commissioner 11.nd to the Tribunal,

without success. On his revision application, the High Court held that the deduction claimed by him fell within the scope of s. 5 ( e) of tho Act and that the whole of Rs. 22.628-9-8, should have been deducted from his sscssable income. On appeal by special leave, the appellant contendeCI that the interest paid by the assessee was not deductible under

1. S(e) of the Act on three grounds; first, it was in the nature of capital

exren'diture; secor.dly, it was a personal expense of the asscssee, and

thirdly, it was not laid out or expended wholly and exclusively for the purpose of the plantation.

liELD:-(i) There is no force in the contention that the payment ot interest was capital expenditure within s. 5(e) of the Act. In the instant case. the payment of interest was revenue expenditure. No new asset was acquired with it; no enduring benefit was obtained. Expenditure incurred was par of circulating or fiating capital of the asscssee.

In cr'dinary co1nmercial practice. payment of interest would not be termed ., capital expenditure.

Assam Bengal C~"ment Co. Ltd. v.

CommissloMr of lncome-taz, [ 1955] l S.C.R. 972. relied on.

S. Kuppuswami v. Commissioner of Income-tax, Madras,

I.L.R. {1954] Mad. 977; and Co1nr11issior1er of lncomctax, Madras v. Siddareddy

Venkatasuvba Reddy, [1949] 17 I.T.R. 157, held inapplicable.

The luropea11 llivest1nent Trust Company Ltd. v. Jackson, 18 T.C. 1 and Greshan Life Assurance Society v. Styles, 3 T.C. 185, distinguished.

(ii) The second contention is equally without' substance.

It Is impossible to hoJd that any expense to discharge a personal obligation becomes a personal expense within s. 5(e) of the Act. Personal expenses , vouid include expenses on the person of the assessee or to satisfy his personal needs such as clothes. food etc.) or purposes not related to the business for which the deduction is claimed.

(iii} On the fact-; of the present case it is impossible to dissociate the character of the assessee as the owner of the plantation and as a person working the plantation. The assessee had bought the plantation for working it as a plantation. The payment of interest on the amount borrowed for the purchase of the plantation. when the whole transaction of purchae ana the working of the plantation is viewed as an integrated whole, is so closely related to the plantation that the expenditure can be said to he laid out or expended whoUy and exclusively for the purpose of tho plantation. In principle there is no distinction between interest paid on t.:itpitiil borrowt for the acquisition of a plantation acd between interest paid on capital borrowed for the purpose of runni111 an existing plaotation, both arc for the purposes of th• plantation.

State of Modttu ...

C. /, Coe/lio

StoJI of Madru

C. 1. C01lho

Slkri I.

SUPREME COURT REPORTS (Iif>4i

Commissioner. of Income-tax. Kerala "f. Malavaltm Plantation Ud.

C.A. No. 389/63 dated 10th October, 1964. relied on.

Eastern Investments Ltd. v. Commissioner of Income-tax, Wes/ Bengal, [1951] S.C.R. 594. Scottish NorJh American Trust v. Funner.

S 'f.C. 693, Dharamvir Dhir v. Co1r.m:ssioner of lnconie-tax, [196!J 3 S.C.R. 359 ana Commissioner of Income-tax, Bombay v.

Jagannath Kissonbl, [1961] 2 S.C.R. 645, referred to.

Metro Theatre Bombay Ltd. v. Commissioner of Income-tax, 14 I.T.R. 638, distinguished.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 701/1963.

Appeal by special leave from the judgment and order dated January 19, 1960 of the Madras High Court in T.R.C. No. 53 of 1957.

A. Ranganadham Chetty and A. V. Rangam, for the appellant.

C. P. Lal, for the respondent.

April 30, 1964. The Judgment of the Court was delivered by

SIK.RI J.-The respondent, hereinatter reforrd co a; the assessee, purchased an estate in 19 50, known as Silver Cloud Estate, consisting of tea, coffee and rubber plantations?< in Gudalur, Nilgiris, Madras State. Out of the sak price of Rs. 3,10,000, he borrowed Rs. 2,90,000. at inte rest varying from seven to eight per cent per annum.

For the assessment year 1955-56, the assessee claimed to deduct interest on this sum, amounting to Rs. 22.628-9-8.

The Agricultural Income Tax Officer, Gudalur, disallowed Rs. 21,057-15-1, allowing Rs. 1,570-10-7, under s. 5(k) Of the Madras Plantations Agricultural Income-Tax Act (Madras Act V of 1955) (hereinafter referred to as the Act). The relevant part of the assessment order is reproduced below:

"Interest on borrowings Rs. 21,057-15-1.

The assessce has claimed Rs. 22,628-9-8 towards interest. It is seen that about Rs. 80,000

has been borrowed from various parties, for

the maintenance of th.e estate. Under section 5 (k) the interest has to be limited to six per cent on an amount equivalent to 25 per cent of the agricultural income in that year.

The gross income is Rs. 1,04,710-13-11.

So the borrowing has to be limited to 25 per cent of Rs. 1,04,710-13-11, which is Rs. 26,177-11-6.

Interest at six per cent on this amount is Rs. 1,570-10-7. So a sum of Rs. 21,057-15-1 is disallowed (22,628-9-8 minus 1,570-10-7) ."

The assessee appealed to the Assistant Commissioner of Agricultural Income Tax, without success. He then appealed to. the Madras Plantations Agricultural. Income Tax Appellate Tribunl, \Jere'.nfter referred to as the Tribunal.

The tribunal observed a> follows:

"Jt is not possible to agree with the contention that interest paid in the year of account towards a loan borrowed by the proprietor for the purpose of acquisition of the estate will fall within the category of "expenditure wholly and exclusively laid out for the purpose of the plantation".

The immediate object of the expenditure. i.e., payment of intere>t, is to liquidate a personal liability of the proprietor, as a debtor.

That after such borrowing the debtor used it as sale price and_acquired the estate, cannot make the payment of interest an "expenditure wholly and exclusively laid out for the purpose of the plantation." The language of the various subdivisions of section 5 of the Act referring to the various items of permissible deductions towards expenditure shows that the expenditure and the plantation must have a direct and proximate connection. Here, th~ proximate connection of the payment is with a personal Joan and not with the plantation."

The assessee filed a revision application to the High Court under s. 54 (1) of the Act, and raised the following

qution before it:

Stat• of Mad,..

Sikri I.

Stat~ of MadtaJ

C. J. C°"Uw

SU:rl J.

"Question of law raised for decision by the High

Court-Whether interest pa'~ on monies borrowed for the purchase of the plantation is expenditure of the nature referred to in section 5 ( e) of the Act and should therefore be deducted in assessing the income of the Plantatin during the year." The High Court held that the deduction claimed by the assessee fell within the scope of s. 5 ( e) of the Act, and that the whole of Rs. 22.628·9-8, and not merely Rs. 1,570-10-7, should have been deducted from his assessable income. It ordered that the assessment be revised accordingly.

The High Conrt refused to certify the case as a fit one, under article 133(l)(c) of the Constitution. But this Cot:rt gave special leave to the appellant to appeal agaimt the j'.!Jgment and order of the High Court.

The relevant statutory p; ovisions are as under. S. 2( a) defines 'agricultural income' i; d s. 2 ( ,) define' 'plantat1on :-

"2(a) 'agricultural income' means- ( l) any rent or revenue derived from a plantation;

(2) any income derived from such plantation in the State by-

(i) agriculture, or

(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market. or

(iii) the sale by a cultivator or receiver of rentin-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in sub-clause (ii);

Explanation !-Agricultural income derived from such plantation by the cultivat:o11 of

tea meansthat portion of the income derived from the cultivation, manufacture and sale of tea .as is defined to be agricultural income for the purposes of the enactments relating to Indian Income-tax;

Explanation II-Agricultural income derived from such plantation by the cultivation of coffee, rubber, cinchona or cardamom means that portion of the income derived from the cultivation, manufacture and sale of coffee, rubber, cinchona or cardamom, as the case may be, as may be defined to be agricultural income for the purposes of the enactments relating to Indian Incometax; ..................................

( 2 )( r) 'plantation' means any land uood for growing all or any of the following,

namely~ tea, coffee, rubber, cinchona or cardamom;". - Section 3 is the charging section and tt directs that "agricultural income-tax at the rate or rates specified in Part I of the Schedule to this Act shall be charged for each financial year commencing from 1st April, 1955 in accordance with and subject to the provisions of this Act, on the total agricultural income of the previous year of every person." Section 4 describes what is 'total agricultural income'.

Section 5 is concerned with the computation of agricultural income and directs the deduction of various items.

We are concerned with two sub-clauoos and they are set out below :

"5 ( e) any expenditure incurred in the previous year (not being in the nature of capital expenditure or personal expenses of the assesse) laid out or expended wholly and exclusively for the purpose of plantation; ..................................

(k) any interest paid in the previous year on any amount borrowed and actually spent on the

SI S. C.-5

Stal• of Madra

C. 1. Coo/ho

Sikri 1.

State of Madras v.

C. J. Coelho

Sikri 1.

plantation from which the agricultural income is derived.

Provided that the need for borrowin.g was. genuine having due regard to the assets of the assessee at the time; Provided further that the interest allowed under this clause shall be limited to six per cent on an amount equivalent to twenty-five per cent of the agricultural income from the plantation in that year."

The learned counsel for the State contends that the interest paid by the assessee is not deductible under s. 5 ( e) of the Act on three grounds: First, it is in the nature of capital expenditure; secondly, it is a personal expense of the assessee; and thirdly, it is not laid out or expended wholly and exclusively for the purpose of the plantation.

Before adverting to the above grounds, it will be noticed thats. 5(e) is word for word a reproduction of s. 10(2) (xv) of the Income Tax Act, 1928, and as this Court and the High Court have on various occasions considered the said c1ause, these decisions would be relevant for deciding the present case, which arises under the Act.

Is the payment of the said interest in the nature of capital expenditure or not? -Mr. Chetty urges that the assessee bad bought the plantation with borrowed money and that was undoubtedly capital expenditure.

He says that it follows logically from this that interest paid on the amount spent on the purchase of the plantation must also be capital expenditure. He invited our attention to a number of cases, with which we will shortly deal.

In order to determine whether an expenditure is revenue or capital expenditure, certain broad principles have to be borne in mind.

This Court formulated these principles in Assam Bengal Cement Co. Ltd. y, 'The Commissioner of Income Tax,(') in the following words:

" ( 1) Outlay is deemed to be capital when it is made for the initiation of a business, for extension of

(I [I9SSl I s.c.R. 972

a business, or for a substantial replacement of equipment: vide Lord Sands in Commissioners of Inland Revenue v.

Granite City Steamship Company [(1927) 13 T.C. 1] and City of London Contract Corporation v. Styles

[(1887) 2 T.C. 239).

( 2) Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade: vide Viscount Cave, L. C., in Atherton v. British Insulated and Helsby Cables Ltd., [(1926) 10 T.C. 155].

If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether.

Thus, if labour saving machinery was acquired, the cost of such acquisition cannot be deducted out of pmfits by claiming that it relieves the annual labour bill, the business has acq•1ired a new asset, that is, machinery.

TI1e expressions 'enduring benefit' or 'of a permament character' were introduced to make it clear that the asset or the right acquired must have enough durability to justify its beini; treated as a capital asset.

(3) ether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring. the expenditure was to employ what was taken in as capital of the business.

A~1in, it is to be seen whether the expenditure incurred was part of the fixed

capital of the business or part of its circulating capital.

Fixed capital is what the owner turns to profit by keeping it in his own possession.

Circulating or floating capital is what he makes

State of Madl'06

Sikri I.

JH4

Stou of Madras v, C. J. Coelho

Sikrl J.

profit of by parting with it or letting it change masters.

Circulat41g capital is capital which is turned over and in the process of being turned over yields profit or loss. Fixed capital, on the other hand, is not involved directly in that process and remains unaffected by it."

This Court further held that 'one has got to apply these criteria, one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure in which latter event only it would be a deductable allowance under section 10(2) (xv) of the Indian Income Tax Act, 1922'.

If we apply these principles to the facts of this case, the answer seems clear that the payment of interest is revenue expenditure.

No new asset is acquired with it; no enduring benefit is obtained. Expenditure incurred was part of circulating or floating capital of the assessee.

In ordinary coml!ll)rcial practice, payment of interest would not be termed as capital expenditure.

The cases relied on by Mr. Chetty do not bear on the precise problem.

We may, however, notice them in brief.

In S. Kuppuswami v. The Commissioner of Income Tax, Madras ( 1), the assessee was held to have acquired the goodwill by paying a certain share of profits.

This was held to be capital expenditure.

In Commissioner of Income-Tax, Madras, v.

Siddareddy Venkatasubba Reddy(2 ), the a>sessees had under certain agreements obtained mining rights in different plots of land for periods varying from five to nine years, and claimed deduction of the amounts paid by them under the said agreements.

The High Court held the money expended for the acquisition of mining rights to be capital expenditure.

In The European Investment Trust Company Limited v.

Jackson(') the Court of Appeal was concerned with the inter-

(1) l.L.R. (!954) Mad. 977

(2) (1949) 17 .I.T.R. 15

(3) IS T.C. I

pretation of Rules 3 of the Rules applicable to Cases I and II of Schedule D of the Income Tax Act, 1918 (8 & 9 Geo.

V. c. 40). In the English Act there are a series of prohibitions; among other things prohibited to be deducted are any capital withdrawn from or any sum employed or intended to be employed as capital in such trade, profession or employment or vocation, and any annual interest or any annuity or annual payment payable out of profits.

The English cases like The European Investment Trust Company case(') are distinguishable because in England there existed the prohibition enumerated above.

There are no such prohibitions in the Act with which we are concerned. But apart from these prohibitions, Lord Herschall observed in Gresham Life Assurance Society v. Styles( 2 ) as follows:

"I think the fourth rule was primarily designed to meet such a case as that in which a trader had contracted to make an annual payment out of his profits, as for example, when he had agreed to make such a payment to a former partner or to a person who had made a loan on the terms of receiving such a payment.

But for the rule it might plausibly have been contended that i11 such a case a trader was only to return as his profits what remained after such payment".

(emphasis supplied).

Accordingly we hold that there is no force in the contention that the payment of interest was capital expenditure

within s. 5 ( e) of the Act.

'The next point, namely, that the payment of interest was a personal expense is equally without substance.

We are unable to appreciate that any_ expense to discharge a personal obligation becomes a personal expense within s. 5 ( e). Personal expenses would include expenses on the person of the assessee or to satisfy his personal needs such as clothes, food, etc., or purposes not related to the busineS"! for which the deduction is claimed.

(I) 18 T.C. I.

(2) 3 T.C. I85.

State of Mad,.

C. J. Coe!M

Sikri J.

SUPREME COURT REPOH.TS

Stale of Madras v.

The third ground raised by Mr. Chetty needs careful scrutiny. 1bis Court, after reviewing English and Indian cases, summarised the position in Commissioner of Income- Tax, Kerala v. Malayalam Plantation Ltd.(1) as follows: C. J. Coelho

Sikri J. "The aforesaid discussion leads to the foliowing result : The expression "for the purpose of the business" is wider in scope than the expression

"for the purpose of earning profits".

Its range is wide : it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and ta.'l:es imposed as a pre-condition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of. a business.

However wide the meaning of the expression may be, its limits are implicit in it.

The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for carrying on of the hl)Siness and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory; in that event, he pays the amount on behalf of another and for a purpose unconnected with the business."

Before oeciding the question, it is necessary to mention three other decisions of this Court. In Eastern Investments Ltd. v. Commissioner of Income Tax, West Bengal(') this Court held that interest on debentures issued by an investment con; ipany was to be allowed as business cxpen-

-·(1) C.A. Nos. 3S4 and 3$5/65 decided on April lO, 1964.

(2) tr961J s.c.R s94.

diture under s. 12(2) of the Indian Income Tax Act. lt observed that 'this being an investment company, if it borrowed and utilised the same for its investments on which it earned income, Jhe interest paid by it on the loans will clearly be a permissible deduction under s. 12 ( 2) of the Act'.

Earlier, it had observed that Scottish North American Trust v. Farmer(') was a somewhat similar case.

In Dharamvir Dlzir v. The Commissioner of Income Tax('), this Court held that a payment of 11/16 of the net profits of the assessee's business was an expenditure wholly and exclusively laid out for the purposes of the business as the assessee had arranged financing of the business on the best terms that he could manage.

In the Commissioner of Income Tax, Bombay v.

J agannarh Kissonlal (') this Court upheld the claim of the

assessee to deduct the amount it had to pay the bank on a joint promissory note.

The only case cited by Mr. Chetty, which has some resemblance to the present case is the decision of the Bombay High Court in Metro Theatre Bombay Ltd. v.

Commissioner of Income Tax(').

But this case is distinguishable for the interest claimed to be deducted, and which was disallowed. was in respect of the amount borrowed for acquiring land on 999 years lease, on which a cinema was subsequently built.

There was no immediate connection between the interest paid and . the cinema business.

As Kania J., as he then was, put it, 'if the interest was not paid, the result would be not necessarily the >toppage of showing films, but the assessee will not acquire the lease of this property'.

Applying the above principles to the facts of this case, it seems to us that it is impossible to dissociate the character of the assessee as the owner of the plantation and as a person working the plantation.

The assessee had bought the plantation for working it as a plantation, i.e., for growing tea, coffee and rubber. The payment of interest on the

(i) S.T.C. 693.

(3~ [r96rl 2 s.c.R. 645.

(2) [196rJ 3 s.c.R. 359.

(4) 14 I.T.R. 638.

State of Madra-

Sikri J.

State of Madra1

C. 1. Coelho

Sikri 1.

April, 30.

amount borrowed for the purchase of the plantation when the whole transaction of purchase and the working of the plantation is viewed as an integrated whole, is so closely related to the plantation that the expenditure can be said to be laid out or expended wholly and exclusively for the purpose of the plantation. In this connection, it is pertinent to note that what the Act purports to .tax is agricultural income and not agricultural receipts. from the agricultural receipts must be deducted all expenses which in ordinary conunercial accounting must. be debited against the receipts.

There is nothing in the Act which prohibits such expenses from being deducted.

No farmer would treat interest paid on capital borrowed for the purchase of the plantation as anything but expenses, and as long as the deductions he claims, apart from any statutory prohibition, can be fairly said to lead to the determination of the true net agricultural income, these must be allowed under the Act.

In principle, we do not. see any distinction between interest paid on. capital borrowed for the acquisition of a plantation and that between interest paid on capital borrowed for the purpose of running an existing plantation; both are for the purposes of the plantation.

In the result, we agree with the High Court that the deduction claimed by the assessee fell within the scope of s. 5 ( e) of the Act, and that the whole of Rs. 22,628-9-8 and not merely Rs 1,570-10-7 sho_uld have been deducted from his assessable income. The appeal fails and is dismissed with costs.

Appeal dismissed.

S. S. GADGIL, INCOME-TAX OFFICER, BOMBAY

LAL AND COMPANY

(K. SUBBA RAo, J. c. SHAH AND s. M. S!KRr, JJ.)

Jnconu Tax-Assessment as agent of non-resident party-Time limit

for issuing notice-Scope of amending statute extending time

s. 69

s. 8(2)

STATE OF MADRAS

C. J. COELHO

K. SUBBA RAo, J.

C. SHAH

S. M. SIKRI J.J.

Ssessee

s. 5

s. 5(e)

s. 5(e)

State of Modttu

Commissioner. of Income-tax. Kerala

[1961] 2 S.C.R. 645

A. Ranganadham Chetty

A. V. Rangam

C. P. Lal

SIK.RI

s. 5(k)

Income-Tax Act

Madras Act V of 1955

section 5

section 5

s. 54

section 5

s. 5

article 133(l)(c)

S. 2( a)

s. 2

Section 3

Part I of the Schedule to this Act

1st April, 1955

Section 4

Section 5

s. 5

s. 10(2)

Income Tax Act, 1928

Chetty

Assam Bengal Cement Co. Ltd.

section 10(2)

Indian Income Tax Act, 1922

England

Herschall

s. 5

s. 5

State of Mad

C. J. Coe!M

C. J. Coelho

s. 12(2)

s. 12

Bombay High Court

Kania

State of Madra-

Coelho

s. 5

S. S. GADGIL

s. M. S!KRr


State of Madra1

C. 1. Coelho

Sikri 1.

April, 30.

SUPREME COURT REPORTS [1964]

amount borrowed for the purchase of the plantation when the whole transaction of purchase and the working of the plantation is viewed as an integrated whole, is so closely related to the plantation that the expenditure can be said to be laid out or expended wholly and exclusively for the purpose of the plantation. In this connection, it is pertinent to note that what the Act purports to .tax is agricultural income and not agricultural receipts. from the agricultural receipts must be deducted all expenses which in ordinary conunercial accounting must. be debited against the receipts.

There is nothing in the Act which prohibits such expenses from being deducted.

No farmer would treat interest paid on capital borrowed for the purchase of the plantation as anything but expenses, and as long as the deductions he claims, apart from any statutory prohibition, can be fairly said to lead to the determination of the true net agricultural income, these must be allowed under the Act.

In principle, we do not. see any distinction between interest paid on. capital borrowed for the acquisition of a plantation and that between interest paid on capital borrowed for the purpose of running an existing plantation; both are for the purposes of the plantation.

In the result, we agree with the High Court that the deduction claimed by the assessee fell within the scope of s. 5 ( e) of the Act, and that the whole of Rs. 22,628-9-8 and not merely Rs 1,570-10-7 sho_uld have been deducted from his assessable income. The appeal fails and is dismissed with costs.

Appeal dismissed.

S. S. GADGIL, INCOME-TAX OFFICER, BOMBAY

LAL AND COMPANY

(K. SUBBA RAo, J. c. SHAH AND s. M. S!KRr, JJ.)

Jnconu Tax-Assessment as agent of non-resident party-Time limit

for issuing notice-Scope of amending statute extending time

limit-Validity of notice-Indian Income-tax A.ct 1922 (11 of 1922). 1. 34(1)(b)(iii) proviso.

The appellant company was carrying on business in Bombay as commission agents.

In the course of assessment proceedings for the year 1954-551 the Income-tax Officer noticed from the assessee"s books of account tnat the assessee had business connections with certain nonresident parties and found that the transactions disclosed that through the assessee those non-resident parties were receiving income, profits and gains. He considered that s. 43 of the Indian Income-tax Act, 1922, was applicable to the assessee and issued on March 27, 1957, a notice under s. 34 of the Act for assessment of the assessee as an agent of the said non-resident parties. The assessee pleaded, inter alia, that the proceedings intiated by the Income-tax Officer under s. 34 were barred since the notice issued by him was after the expiry of one year from the end of the assessment year 1954·55, but the Income.tax Officer rejected the contention relyin'g on the amendment made to the proviso to s. 34(1)(b)(iii) by the Finance Act, 1956, under which the period of one year was changed to two years.

The amendment was given retrospective operation upto April 1, 1956, but since the power to issue a notice under the unamended Act had come to an end on Marcil 31,

1956, the question was whether the Incometax Officer could issue a notice of assessment to a person as an agent of a non.resident party under the amended provision when the period prescribed for such a notice had before the amended Act came into force expired.

HELD: The proceedings initiated by the Incometax Officer by the notice dated March 27, 1957, were barred; the authority of the Incometax Ofticer under the Indian Incometax Act before it was amended by the Finance Act of 1956 having come to an end, the amending provision would not entitle him to commence a proceeding even though at the date when he issued the notJce it was within the period provided by the amendment.

Notwithstanding the fa('t that there was no determinable point of time between the expiry of the time provided under the old Act and the commencement of the An1tndn1ent Act, in the absence of an express provision or clear implication, the legislature could not be said to have intended to attribute to the Amending provision a greater retros pectivity than was expressly n1entioned.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 322 of 1963.

Appeal from the Judgment and order dated April l, 1958 of the fonner Bombay High Court in Miscellaneous Application No. 327 of 1957.

K. N. Rajagopala Sastry and R. N. Sachthey, for the appellant.

1964 Bishan Narain, S. P. Mehta, J. B. Dadachanji, 0. C. s. s. Gadgil Mathur and Ravi11der Narain, for the• respondent.

Lal and Co.

Shah J.

April 30, 1964.

The Judgment of the Court was delivered by

SHAH, J .-Ml s Lal and Company hereinafter called the assessee carry on business in Bombay as commission agents.

In the course of assessment proceedings for the year 1954-55 the assessee's books of account were examined by the Income-tax Officer and it was noticed that the assessee had business connections with certain non-resident parties.

On M1rch, 12, 1957, the Income-tax Officer issued a notice calli:Jg upon the assessee to show caus0 why in respect of the assessment year 1954-55 the asscssee should not be treated under s. 43 of the Indian Income-tax Act, 1922, as an agent in respect of twenty-five non-resident parties named in the notice. The assessee denied that he had "direct dealings" with any non-resident party and that in any event the proposed action was barred because the period prescribed for initiation of proceeding had expired, and ' requested the Income-tax Officer to drop the proceeding.

The Income-tax Officer B-III Ward, Bombay issued on March 27, 1957, a notice under s. 34 of the Indian Income-tax Act for assessment of the assessee as .an agent of the twentyfive named non-resident parties.

The assessee submitted a return showing hisincome as "nil''.

The Income-tax Officer held that the transactions disclosed from the books of account -of the assessee clearly showed that the assessee "had regular business connection with'' non-resident parties, that through the assessee those non-resident parties were receiving income, profits and gains, and s. 43 was clearly applicable to the assessee there being definite business connection between the assessee and the named non-residents.

He therefore treated the assessee as agent of the non-resident parties, under s. 43 of the Act.

The Income-tax Officer also rejected the contention of the assessee that action under s. 34 was barred at the date of the notice issued to the assessee.

Relying upon the first proviso to s. 34(l)(b)(iii) inserted by the Finance Act,

1956, the Income-tax Officer held that the Legislature had

by amendment extended the "time-limit in clear and express terms so as to cover" action under s. 34 against a person on whom the assessment or reassessment is to be made as an agent of a non-resident person under s. 43 of the Act for the assessment year 1954-55, and accordingly assessed the income of the assessee at Rs. 60,684, estimating the income of the parties residing outside the tax.1ble territories, in the absence of accounts to be Rs. 50,000.

The assessee then filed a petition under Art. 226 of the Constitution in the High Court of Judicature at Bombay praying that a writ in the nature of mandamus or prohibition do issue restraining and prohibiting the Income-tax Officer from giving effect to or taking any steps or proceedings by way of recovery or otherwise in pursuance of the orders of assessment.

The assessee pleaded, inter alia, that the proceedings for assessment nnder s. 34

of the Act commenced by the Income-tax Officer after the

expiry of one year from the end of the assessment year 1954-55 were without the authority of law.

The High Court of Bombay, following its earlier judgment in S. C. Prashar v.

Vosantsen Dwarkadas(') held that at the date when the notice was issued, by reason of the proviso which was in operation under s. 34 (1) in respect of the assessment year 1954-55 the notice was out of time and that the period provided thereby could not be extended by the Finance Act of 1956 so as to authorise the Income-tax Officer to issue a notice for assessment or reassessment of the assessce as statutory agent of a party, residing outside \he taxable territory.

In the view of the High Court the notice dated March 27, 1957, was invalid, and a valid notice being a condition precedent to the exercise of jurisdiction under s. 34, the proceeding under s. 34 was not maintainable.

Against the order of the High Court issuing writs prayed for by the assessee, with certificate of fitness this appeal is preferred by the Income-tax Officer, Bombay.

In order to appreciate the contention raised by the assessee and which has found favour with the High Court, it is necessary to refer to the relevant provisions of s. 34.

(1) 29 I.T.R. 857

Shah J.

Shah/.

as they stood before the section was amended by the Finance Act, 1956. The clauses relevant prescribing the period within which notice may be issued n:ad as follows:

"(l) (a) If - x x x (b) x x x he may in cases falling under clause (a) at any time within eight years and in cases falling under clause (b) at any time within four years of the end of that year, serve on the assessee, x x x a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 22 and may proceed to assess or re-assess such income, profits or gains or recompute the loss or depreciation allowance; x x x

Provided that- ( i) x x x (ii) x x x

(iii) Where the assessment made or to be made is an .assessment made or to be made on a person deemed to be the agent of non-resident person under section 43, this sub-section shall have effect as if for the periods of eight years and four years a period of one year was substituted."

By s. 18 of the Finance Act, 1956, s. 34 was extensively amended and cl. (iii) of the proviso was substituted by the following proviso:

"Provided further that the Income-tax Officer shall not issue a notice under this sub-section for .any year after the expiry of two years from that year if the person on whom an assessment or re-assessment is to b1i made in pursuance of the notice is a person deemed to be an agent of non-resident person under section 43."

Initially a notice of assessment or re-assessment under s. 34 ( 1) against a person deemed to be an agent of a nonresident person under s. 43 could not be issued after the expiry of one year f!'.Om the end of the year of assessment: under the amended section this period was extended to two years from. the end of the relevant assessment year.

In the course of assessment to income-tax for the year 1954-55 the relevant law applicable prescribed that a notice of assessment or re-assessment .against a person deemed to be an agent under s. 43 could not be issued after the expiry of one year from the .end of the assessment year.

That period expired on March 31, 1956, and after that date no notice could be issued, relying upon the law as it stood before amendment for assessment or re-assessment treating the assessee as an agent of a non-resident under s. 43.

But. the Income-tax Officer sought recourse to the amended provision which gave him a period of two years from the end of the assessment year, for initiating assessment proceedings, and the authority of the Income-tax Officer to so act is challenged by the assessee.

Section 18 of the Finance Act, 1956, is, it is common ground, not given retrospective operation before April 1.

1956. The question then is, whether the Income-tax Officer may issue a notice of .assessment to a person as an agent of a non-resident party under the amended provision when the period prescn'bed for such a notice had before the amended Act came into force expired?

Indisputably the period for serving a notice of re-assessment under the unamendro section had expired, and there was in the Act as it then stood, no provision for extending the period beyond the end of one year from the year of assessment.

The Income-tax Officer -could therefore commence a proceeding under s. 34 on March 27, 1957, only if the amended section applied and not otherwise.

The amending Act came into force after the period provided for the issue of a notice under s. 34 before it was amended had expired.

It is true that there was no determinable point of time between the expiry of the prescribed time within which the n<?tice could have been issued against the assessee under s. 34 proviso (iii) before it was amended.

But there was no overlapping period either. Prima facie, on the expiry of the period prescribed by s. 34 as it originally stood, there was no scope for issuing a notice unless tho

19~ - S. S. Gadgik

Lal and Co.

Shah/.

196-1

Shah J:

Legislature expressly gave power to the Income-tax Officer to issue notice under the amended section notwithstanding the expiry of the period under the unamended provision or unless there was overlapping of the period within which notice could be issued under the old and the amended provision.

But counsel for the Commissioner submitted that at no time was the Income-tax Officer bereft of authority to issu.J a notice under s. 34 of the Indian Income-tax Act, 1922.

He submitted that till the mid-night of March 31, 1956, notice could be issued in exe:rcise of the powers conferred by s. 34 proviso (iii) before it was amended and notice of assessment or re-assessment could also be issued under the amended provision immediately thereafter in exercise of the powers conferred by s. 18 o! the Finance Act, 1956.

Counsel relied upon the rule contained in s. 5 ( 3) of the General Clauses Act that unless the contrary is expressed, a Central Act or Regulation shall be construed as coming into operation immediately on the expiration of the day preceding its commencement. It was submitted that this is merely a statutory recognition of the rule which is well-settled that where a Statute names a date on which it shall come into operation. it shall be deemed to come into force immediately on the expi.ration of the previous day and the law does not take into consideration fractions of a day.

Reliance was placed by counsel upon Tomlinson v.

Bullock(') and English v.

C/iff(2 ).

In Tom/inson's case ( 1) the question was whether an order of affiliation could be made on an .1pplication made in respect of a child born at any time of the day on August 10, 1872 under the Bastardy Act, 35 & 36 Viet. c. 65.

In an application made for an order of affiliation, it was hel'd that the order could competently be made in respect of a child born at any time of the day on the 10th of August. 1872, because the Act in the contemplation of law for this purpose came into effect from the commencement of the day on which it received the royal assent, and that normally an Act which comes into operation becomes Jaw as soon as it commences.

Jn English v. Cliff(') it was held by the Court of Chancery

(t) (1879) 4 Q.B.D. 230

(2) (1914) 2 Ch. D. 37f.

that the trustees under a deed of settlement dated May 13, l 964 1892, who stood possessed of , an estate during the term of s. s. Gadgil twenty-one years from the date of settlement upon trust Lal an/co . . to apply the rents and profits mentioned therein and who - were authorised at the expiration of the said period to sell Shah /. the estate could competently sell it and their action was not liable to be challenged as infringing the rule of perpetuity. It was held in that case that the determination of the term of twenty-one years and the commencement of the trust for sale arising at one and the same tnoment, the trust was not void for remoteness on the gruund that it was limited to take effect at the expiration of the term.

Neither -0f these cases has, in our judgment, any application to the principle applicable in the present case.

The power to issue a notice under the unamended Act came to an end on March 31, 1956. Under that Act no notice could thereafter be issued.

It is true that by the amendment made by s. 18 of the Finance Act, 1956, a notice could be issued within two years from the end of the year of assessment.

But the application of the amended Act is subject to the principle that unless otherwise provided if the right to act under the earlier statute has come to an end, it co.uld no! be revived by the subsequent amendment which extended the period of limitation.

The right to issue a notice under the earlier Act came to an end before the new Act came into force.

There was undoubtedly no determinable point -0f time between the expiry ot the earlier Act and the commencement of the new Act; but that would not, in our judgment, affect the application of this rule.

Reliance was also" placed by counsel for the Commissioner upon the rule which has prevailed in the Supreme Court of the United States of America that "a new statute should be construed as a colliinuation of the old one with the modifications contained in the new one, although it formally repeals the old stat\lte, when it re-enacts its substantial provisions and the two statutes are almost identical." Bear Lake & River Water W arks & Irrigation Company and Jarvis-Conklin .Mortgage Trust Company v.

Wil/an:_ Garland and Corey Brothers & Co. (1). It appears

(I) 164 U.$. I

JH#

Shah J.

to have been recognised in the Supreme Court of the United states of America in Pacific Mail S. S. Co. v. Jolifee( 1) that repeal in terms of a former statute does not necessarily indicate .an intention of the legislature thereby to impair right which had arisen under the act which was repealed.

As the provisions of the new act took effect simultaneously with the repeal of the old one, the Supreme Court held that the new one might more properly be said to be substituted in the place of the old one, and to continue in force, with modifications, the provisions of the old act, instead of abrogating or annulling them and re-en.acting the same as a new and original act.

Apart from the question whether the rule so enunciated is applicable to the interpretation of Indian statutes, in this case we are not concerned with re-enactment of a statute.

The statute abrogates one rule of limitation, and enacts another rule with a limited retrospective operation. To such a case the rule enunciated by the Supreme Court of America, assuming it applies, attributing to the Legislature an intention to continue in force the provisions of the old Act, with a modification, so as to give to the new statute in substance operation retrospectively from the date on which the old statute was enacted, can have no application.

We do not think that any such intention may be attributed to the Legislature in enacting s. 18 of the Finance Act, 1956 so as to make it the basis of a liability to taxation after the expiry of the period prescribed in that behalf by the Legislaturn.

Counsel also submitted that s. 34 lays down a rule of limitation for commencing an action for assessment or re-assessment, and that in the absence of an express provision to the contrary, a statute of limitation in operation at a given time governs all proceedings from the moment of its enactment, even though the cause of action on which the proceeding was based came into existence before the Act was enacted. Equating a proceeding under s. 34 of the Indian Income-tax Act with a suit or a proceeding in a civil court, counsel said that the law of limitation being a law of procedure, assessment proceedings including proceedings for re-assessment are governed hy the law in force

(1) 69 U.S. (2 Wall) 459

at the date on which they are instituted, and that the rule that the repeal of a statute without express words or clear implication in the repealing statute, cannot take away a right vested in a party acquired under the repealed statute when it was in force, is a rule of prescription and not of procedure, and notwithstanding general observations to the contrary in certain decisions, applies only to those actions in which by . the determination of the period prescribed, a right to institute an action for possession of property is extinguished.

Counsel relies in support of the plea on Baleswar v. Latafat('). It is unneces'sary to dilate upon this argument in any detail, or to enter upon an analysis of the numerous cases which were mentioned at the Bar to determine whether the rule that without an express provision, or a clear implication arising from the amending statute rights acquired under the repealed statute by the determination of the period of limitation prescribed thereby cannot be deemed to be revived, applies to suits for possession only.

It may be sufficient to !Dake two comments on the .argument.

The rule has in fact been applied to suits other than suits for possession: e.g. Mahomcd Mehdi Faya v. Sakinabai( 2 ) (a suit for restitution of conjugal rights); M. Krishnaswami Nalcker .v.

A. Thiruven1wda Muddaliar(') (a suit for recovery of a debt); Shambhoonath Saha v. Guruchurn Lahiri(') (an application for execution); and Nepal Chandra Roy Chowdhury • v. Niroda Sundari Ghose(') (an application for setting aside an ex parte decree). Again soon after it was delivered the the authority of Baleswar's case(') was weakened by the judgment in Jagdish v. Saligram (6 ) where the Court doubted the correctness of the earlier view.

A proceeding for assessment is not a suit for adjudication of a civil dispute.

That an income-tax proceeding is in the nature of a judicial proceeding between contesting parties, is a matter which is not cap; tble of even a plausible argument.

The Income-tax authorities who have power to assess and recover tax are not acting as judges decidi!!g a

(1) I.LR. 24 Pat. 249

(2) l.L.R. 37 Born. 383

(3) A.I.R. (1935) Mad. 245

(4) J.L.R. s Cal. 894 (S) I.L.R. 39 Cal. 506

(6) I.L.R. 24 Pat. 391

51 S.C.-6.

Shall J.

Sltllh /.

litigation between the citizen and the States: they are administrative authorities whose proceedings are regulated by statute, but whose function is to estimate the income of the taxpayer and to assess him to tax on the basis of that estimate.

Tax legislation necessitates the setting up of machinery to ascertain the taxable income, and to assess tax on the income, but that does not impress the proceeding with the character of an action between the citizen and the State: The Commissioner of Inland Revenue v. Sneath(');

and Shell Company of Australia Ltd. v. Federal Commissioner of Taxation( 2 ).

Again the period prescribed by s. 34 for assessment or re-assessment is not a period of limitation. The section in terms imposes a fetter upon the power of the Income-tax Officer to bring to tax escaped income.

It prescribes different periods in different classes of cases for enforcement of the right of the State to recover tax.

It was observed by this Court in Ahmedabad Manufacturing and Calico Printing Co. Ltd. v. S. C. Mehta. Income-tax Officer and another('): ·

~···-·---

"It must be remembered that if the Income-tax Act prescribes a period during which tax due in any particular assessment year may be assessed, then on the expiry of that period the department cannot make an assessment.

Where no period is prescribed the assessment can be completed at any time but once completed it is final.

Once a final assessment has been made, it can only be reopened to rectify a mistake apparent from the record (s. 35) or to reassess where there has been an escapement of assessment of income for one reason or another. (s. 34). Both these sections which enable reopening of back assessments provide their own periods of time for action but all these periods of time, whether for the first assessment or for rectification, or for reasaea!- ment, merely create a bar when that time passed

(1) 17 T.C. 149, 164

(2) (1931] A.C. 275

(3) (1963] Supp. 2 S.C.R. 92, u7-n8

against the machinery set up by the Incometax Act for the assessment and levy of the tax.

They do not create an exemption in favour of the assessee or grant an absolution on the expiry of the period.

The liability is not enforceable but the tax may again become exigible if the bar is removed and the taxpayer is brought within the jurisdiction of the said machinery by reason of a new power.

This is, of course, subject to the condition that the law must say that such is the jurisdiction, either expressly or by clear implication. If the language of the law has that clear meaning, it must be given that effect and where the language expressly so declares or clearly implies it, the retrospective operation is not controlled by the commencement clause."

.Counsel for the Commissioner sought to derive some support from Income-tax Officer, Companies District I, Calcutta and another v. Calcutta Discount Company Ltd.( 1) in which Chakravartti C.J., dealing with the effect of the Income-tax and Business Profits Tax (Amendment) Act, 1948, observed:

"The plain effect of the substitution. of the new s: 34 with effect from 30th March, 1948 is ihat from that dat$1 the Income-tax Act is to be re.ad as including the new section as a part thereof and if it is to be so read, the further effect of the express language of the section is that so far as cases coming within cl. (a) of sub-s. ( 1) are concerned all assessment years ending within eight years ftom 3Qth March, 1948 and from subsequent dates, are within its purview and it will apply to them, provided the notice contemplated is given within such eight years.

What is not within the purview of the section is an assessment year which ended before eight years from 30th March, 1948.

(1) a3 I.T.R. 471

Shala J.

8. S. Gu,; l

y, Lol tmll Co.

Shah/.

But it may be recalled that the amending Act of 1948 with which the Court was concerned in Calcutta Discount Company's case(') came into force on September 8, 1948, but s. 1 (2) prescribed that the amendment in s. 34 of the Income-tax Act, 1922, shall be deemed to have come into force on March 30, 1948, and the period under the unamended section within which notice could be issued under

~. 34 ( 3) against the assessee company ended on March 31, 1951.

Before that date the amending Act came into operation, and at no time h.ad the right to re-assess become barred.

In considering whether the amended statute applies, the question is one of interpretation i.e., to ascertain whether it was the intention of the Legislature to deprive a taxpayer of the plea that action for assessment or re-assessment could not be commenced, on the ground th.at before the amending Act became effective, it was barred.

Therefore the view that even when the right to assess or re-assess has lapsed on account of the expiry of the pe'riod of limitation prescribed under the earlier statute, the Income-tax Officer can exercise his powers to assess or re-assess under the amending statute which gives an extended period of limitation, was not accepted in Calcutta Discount Company's case(').

As we have already pointed out, the right to commence a proceeding for assessment against the assessee as an agent of a non-resident party under the Income-tax Act before it was amended, ended on March 31, 1956.

It is true that under the amending Act by s. 18 of the Finance Act, 1956, authority was conferred upon the Income-tax Officer to assess a person as an agent of a foreign party under s. 43 within two years from the end of the year of assessment.

But authoriiy of the Income-tax Officer under the Act before it was amended by, the Finance Act of 1956 having already come to an end, the amending provision will not assist him to commence a proceeding even though at the date when he issued the notice it is within the period provided by that amending Act.

This will be so, notwithstanding the fact that there has been no determinable point of time between the expiry of the time provided under the old Act .and the

(1) 23 I.T.R. 471,

commencement of the amending Act. The Legislature has given to s. 18 of the Finance Act, 1956, only a limited retrospective operation i.e., upto April 1, 1956, only.

That provision must be read subject to the rule that in the absence of an express provision or clear implication, the Legislature does not intend to attribute to the amending provision a greater retrospectivity than is exrressiy mentioned, nor to authorise the Income•tax Officer to commence proceedings which before the new Act came into force had by the expiry of the period provided, become barred.

The appeal fails and is dismissed with costs.

Appeal dismissed.

COMMISSIONER OF INCOME-TAX, U.P., LUCKNOW

KANPUR COAL SYNDICATE

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

Income Tax-Assessment on Association of persons or on members indi

vidually-Option to appropriate authority-Right of appeal, whether such assessee has--Powers of Tribunal and Appellate Assistanl Commissioner in Appeal-Income-tax Act, 1922 (11 of 1922), n. 3, 14(2) (b) 30, 31 and 33.

Income-tax was assessed upon the total income in the hands of tho respondent-assessee, an association of several persons combined together for the purpose of purchase of coal and its supply to customers

for domestic purposes and other small scale industries. The assesseo claimed that it should not be assessed to tax as an association of persons, but the proportion of the income in the hands of each members of the association might be assessed to tax instead. The Income-tax Officer refused this request and an appeal to the Appellate Assistant Commissioner was dismissed. The Income-tax Appellate Tribunal, on a further appeal. held that though the Income-tax Officer had power to assess income of the association of persons as such or in the altematiye on the individual members thereof in respect of their proportionate sharo fn the income, the tribunal had no power under the Act to direct tho Income-tax Officer to exercise his power in one way or other. On a

196'

Lal orul Co.

Y. s. s. Gadill

Sltah J.

April, 30.

State of Madra1

Sikri

s. 5

S. S. GADGIL

LAL AND COMPANY

K. SUBBA RAo

s. M. S!KRr

s. 43

Indian Income-tax Act, 1922

March 27, 1957

s. 34

s. 34

s. 34(1)(b)(iii)

Finance Act, 1956

April 1, 1956

Marcil 31,

1956

K. N. Rajagopala Sastry

R. N. Sachthey

S. P. Mehta

B. Dadachanji

Gadgil Mathur

Ravi11der Narain

SHAH

M1rch, 12, 1957

s. 43

Indian Income-tax Act, 1922

Income-tax Officer B-III Ward, Bombay

s. 34

Income-tax Act

s. 43

s. 43

s. 34

s. 34(l)(b)(iii)

Finance Act

s. 34

s. 43

Art. 226

High Court of Judicature at Bombay

s. 34

High Court of Bombay

s. 34

s. 34

s. 34

Bombay

s. 34

Shah

Finance Act, 1956

section 22

section 43

s. 18

Finance Act, 1956

s. 34

section 43

s. 34

s. 43

s. 43

March 31, 1956

s. 43

Section 18

Finance Act, 1956

April 1.

1956

s. 34

s. 34

s. 34

s. 34

S. S. Gadgik

s. 34

Indian Income-tax Act, 1922

s. 34

s. 18

Finance Act, 1956

s. 5

General Clauses Act

Tom

inson

August 10, 1872

10th of August. 1872

s. 18

Finance Act, 1956

It appears

(I) 164 U.$. I

JHShah J.

to have been recognised in the Supreme Court of the United states of America in Pacific Mail S. S. Co. v. Jolifee( 1) that repeal in terms of a former statute does not necessarily indicate .an intention of the legislature thereby to impair right which had arisen under the act which was repealed.

Supreme Court

Supreme Court of America

s. 18

Finance Act, 1956

s. 34

s. 34

Income-tax Act

Baleswar

Shall

s. 34

Income-tax Act

s. 35

s. 34

Chakravartti

30th March, 1948

Income-tax Act

Shala

S. Gu

Calcutta Discount Company

s. 1

s. 34

Income-tax Act, 1922

March 31, 1951

Income-tax Act

s. 18

Finance Act, 1956

s. 43

s. 18

Finance Act, 1956

COMMISSIONER OF INCOME-TAX, U.P.

K. SUBBA RAO

C. SHAH

S. M. S!KRI