JANKI RAM BAHADUR RAM v.

COMMISSIONER OF INCOME TAX, CALCUTTA

March 31, 1965

[K. SUBBA RAO, J. c. SHAH AND s. M. Suau, JJ.J In<iian Income-tax Act, 1922 (11 of 1922), s. 10-Purcluise of a different business-Sale-Profit-If taxable.

The assessee who was dealing in <iron scrap and hardware had purchased a jute press and sold it at a profit. The Income-t!IX Officer

brought to tax in the hands of the assessee, the profit arising out of this sale. The Appellate Tribunal modified the order and reduced the total income. At the instance of assessee the Tribunal referred to the High Court, the question, whether the surplus received by the assessee as a result of the sale of the jute press arose out of an adventure in the nature of trade and was, therefore, liable tc tax. The High Court answered the question In affirmative. In appeal; HELD: The question must be answered in the negative.

Granting that the assessee made a profitable bargain when he purchased the property and granting further that the assessee had, when he purchased it, a desire to sell the property, if a favourable offer was forthcoming, these could not without other circumstances, justify an inference that the assessee intended by purchasing the property to start a venture in the nature of trade. {609H-610A]

A profit motive in entering a transaction is nQ decisive, for, an accretion to capital does not become taxable income, merely because an asset was acquired in the expectation that it may be sold at a profit. [608F]

Purchase of the property by the assessee was an isolated transaction not related to the business of the assessee. [608G]

Case law referred to.

. CIVIL APPELLATE JURISDICTION: Civil Appeal No. 308 of 1964.

Appeal by special leave from the judgment and order dated September 10, 1962 of the Calcutta High Court in Income-tax Reference No. 115 of 1957.

A. V. Viswanatha Sastri, B. Sen Gupta and P. K. Ghosh, for the appellant.

N. D. Karkhanis and R. N. Sachthey, for the respondent.

The Judgment of the C, ourt was delivered by Shah, J. The appellant .is a Hindu undivided family and carries on business as a dealer in "iron scrap and hardware".

Messrs. Hoare Miller and Company Ltd.-hereinafter called 'the Company'-were owners of a jute pressing factory installed on a piece of land belonging to the Company. Adjacent to that land were two pieces of land: one was leasehold, and the other held by the Company as a licensee from the Government of West

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• F

JANKI 11AM: v. c. I. T. (Shah, J.)

Bengal. On January 21, 1941 the Company leased out to one Ramnath Bajoria the jute pressing factory together with the machinery standing on the land owned by the Company for ten months commencing from January 10, 1941. Ramnath Bajoria failed to vacate and deliver up possession of the premises demised to him, after the expiry of the period of the lease, and the Company instituted a suit in ejectment against him.

By an agreement dated October 31, 1942 the appellant agreed to purchase all the rights of the Company in the factory and the appurtenant premises for Rs. 2,45,000. On November 14, 1942 the Company delivered to the appellant possession of the property agreed to be sold, save and except the factory demised under the lease to Ramnath Bajoria and the machinery included in the lease. On February 26, 1943 the Company executed a conveyance in favour of the appellant conveying the factory and the appurtenant premises.

On June 12, 1943 the appellant agreed to sell to one Ranada Prasad Saha the property purchased from the Company for Rs. 4, 73,364 I 3 I 6 free from all encumbrances. On August 10, 1943 the appellant was substituted as a plaintiff in the suit filed by the Company against Ramnath Bajoria, and obtained possession of the factory premises. By a deed of conveyance dated September 30, 1943 the appellant conveyed to Ranada Prasad Saha the factory and the appurtenant premises and delivered possession thereof. In the deed of conveyance the property sold was described in three separate Schedules. Schedule I; Press House, bffice, residential buildings and three warehouses on land owned by the Company: Schedule II; leasehold land together with a warehouse known as Kalibari godown: Schedule III; two warehouses on land held as licensee by the Company from the Government of West Bengal.

The Income-tax Officer, District II(!), Calcutta, brought to tax in the hands of the appellant Rs. 2,24,864 being the profit arising out of the sale of the property to Ranada Prasad Saha.

The Income-tax Appellate Tribunal partially modifiej the order and reduced the total income. by Rs. 7 ,000. The Tribunal then drew up a statement of case and referred the following question to the High Court of Judicature at Calcutta:

"Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the surplus of Rs. 2,35,211 received by the assessee as a result of the sale of the jute press referred to in the Appellate order arose out of an adventure in the nature of trade and was therefore rightly assessed to tax?" The High Court answered the question in the affirmative. With special leave granted by this Court, the appellant has appealed to this Court.

L/P(N)4SCI 12

SUPREME COURT BEPOBTS (1965} 3 s.c.R.

At the material time, capital gains were not taxable, and the only question falling to be determined is whether profit made by the appellant by sale of the property to Ranada Prasad Saha was taxable under s. 10 of the Indian Income-tax, Act. The Tribunal found the following facts proved: The appellant was carrying on business in iron scrap and hardware, and never carried on any business in jute or in pressing jute. At the material time when the purchase of the Jute .P!ess was made, the appellant had, because of abnormal cond1tlons prevailing in the town of Calcutta, closed its business in iron scrap and hardware. The appellant purchased the jute press and the premises appurtenant thereto subject to litigation pending in the High Court, effected certain repairs and kept the factory in running condition, but made no attempt to start or organise the business of pressing jute, and his plea that he was not able to secure labour for working the press was not , true. Soon alter he bought the factory, the appellant received an offer from Ranada Prasad Saha to buy the factory and he immediately accepted the offer to sell it to him.

These facts in the view of the Tribunal indicated that the appellant purchased the jute press, subject to litigation, with the sole object of reselling at profit at the earliest opportunity, and therefore the tranasction was in the nature of a trading venture.

The High Court substantially agreed with this view.

,, Section 10 of the Indian Income-tax Act, 1922 makes profits and gains of business, profession, or vocation carried on by an assessee taxable. The expression "business'' is defined in s. 2(4) as inclusive of. "any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufact11re". It is common ground that the transaction of purchase and sale of the factory and appurtenant premises was an isolated venture. To reiterate the sequence , of material events: the appellant agreed to purchase the Jute Press from the Company on October 1, 1942 subject to litigation pending in the High Court of Calcutta: possession of the property except the premises in the occupation of the tenant was obtained on November 14, 1942 'and the sale' deed was obtained on February 26, 1943: on June 12, 1943 the appellant agreed to sell the press to Ranada Prasad Saha: on Auust 10, 1943 tlJe appellant was substituted as plaintiff in the smt filed by the' Company against Ramnath Bajoria, and after obtaining possession of the demised premises the appellant executed on September 30, 1943 a sale deed conveying the property and delivered possession to Ranada Prasad Saha.

Do these facts make out the case that th" transaction was an adventure in the nature of trade?

It is for the revenue to establish that the profit earned in a transaction is within the taxing provision and is on that account liable to be taxed as income. The nature of the transaction must

JANK! RAM v. C. 1. 'l'. (Shult, J.)

6D7

be determined on a consideration of all the faots and circumstances which are brought on the reoord of the income-tax authorities. It has consistently been held by this Court that the question whether profit in a transction h.as arisen out of an adventure in the nature of trade 1s a mixed questJon of law and fact: see G. Venkataswami Naidu & Company v. The Commissioner of Income-tax(') in which case this Court held that the expression "adventure in the nature of trade" in sub-s. (4) of s. 2 of the Act postulates the existence of certain elements in the adventure which in law would invest it with the c11araoter of trade or business and that a tribunal while considering a question whether a transaction is or is not an adventure in the nature of trade, before arriving at its final conclusion on facts, has to address itself to the legal requirements associated with the concept of trade or business. Such a question is one of mixed law and fact and the decision of the tribunal thereon is open' to consideration under s .. 66(1) of the Act.

See also Saroj Kumar Majumdar v. Commissioner of Income-tax, West Bengal(').

A large number of cases were cited at the Bar in support of the respective contentions of the Commissioner and the assessee.

Passages from judgments in the same case were often cited claiming support for the respective contentions.

No useful purpose would be served by entering upon a detailed analysis and review of the observations made in the light of the relevant facts. for no single fact has decisive significance, and the question whether a transaction is an adventure in the nature of trade must depend upon the collective effect of all the relevant materials brought on the record. But general criteria indicating that certain facts have dominant significance in the context of other facts have been adopted in the decided cases. If, for instance,, a transaction is related to the business which is normally carried on by the assessee, though not directly part of it. an intention to launch upon an adventure in the nature of trade may readily be inierred.

A similar inference would arise where a commodity is purchased and sub-divided, altered, treated or repaired and sold, or is converted into a different commodity and then sold. Magnitude of the transaction of purchase, the nature of the commodity, subsequent dealings and the manner of disposal may be such that the transaction may be stamped with the character of a trading venture: for instance, a man who purchases a large quantity of aeroplane linen and sells it in different lots, and fOF the purpose of selling starts an advertising campaign, rents offices, engages an advertising manager, a linen expert and a staff of clerks, maintains account books normally used by a trader, and passes receipts and payments in connection with the linen through a separate banking account: Martin v. Lowry('): a person who carries on a money-lending business purchases very cheaply a

('I [1959] Supp. 1 S.C.R. 646.

(') 11 T.C. 297.

(') 37 I, T.R. 242.

608 SUPBEllE COURT BEPOBTS

[1965] 3 8.C.B.

• vast quantity of toilet paper and within a short time thereafter sells the whole consigrunent at a considerable profit: Rutledge v.

The Commissioner of Inland Revenue('); a person even though he has no special knowledge of the trade in wines and spirits, purchases a large quantity of whisky sells it without taking deli

very of it at a considerable profit: Commissioners of Inland Revenue v. Fraser('), may be presumed having regard to the nature of the commodity and extent of the transaction coupled with the other circumstances, to be carrying on an adventure in the nature of trade. These are cases of commercial commodities.

But a transaction of purchase of land cannot be assumed without more to be a venture in the nature of trade. A director of a company carrying on the business of warehouseman purchasing a number of houses with a view to resale, and selling them at a profit some years after the purchase: Commissioners of Inland Revenue v. Reinhold('): a person carrying on business in vario.us lines, including an Engineering Works, purchasing land which was under requisition by the Government, negotiating sale thereof before the land was derequisitioned, and selling it after the .Jand was released: Saroj Kumar Mazumdar v. Commissioner of Income-tax, West Bengal('); and a syndicate formed to acquire, an option over a rubber estate with a view to earn profit, and finding the estate acquired too small acquiring another estate and selling the two estates at a profit: Leeming v. Jones(') may not be regarded as commencing a venture in the nature of trade.

These are cases in which the commodity purchased and sold is not ordinarily commercial, and the manner of dealing with the commodity does not stamp the transaction as a trading venture.

It may be emphasized from an analysis of these cases that a profit motive in entering a transaction is not decisive, for, an accretion to capital does not become taxable income, merely because an asset was acquired in the expectation that it may be sold at profit.

Purchase of the property by the appellant was an isolated transaction -not related to the business of the appellant.

The Tribunal and the High Court were, in our judgment, in error in holding that the right of the Company was not sold to the appellant in the lands in Sch. II and Sch. III properties. The land in Sch. II was leasehold, and on it was constructed a warehouse and the land in Sch. III was held as a licensee and two warehouses were standing thereon. The conveyance by the Company to the appellant is not on the record, but the recitals in the deed dated September 30. 1943 definitely indicate that the rights of the Company without any reservation were purchased by the appellant, and the appellant sold its entire rights in the properties in Schs. I,

(') 14 T.C. 490 •.

(') 24 T.C. 498.

(') 34 T.C. 389.

(') II T.C. 297.

(') 16 T.C. 333.

' H

JANK! &All! II. C. I. T. (Shah, J.) 609

II and III without any reservation. It is true that the appellant had put the factory in a working condition, but had not orgized a jute pressing business, had not obtained a licence for working the factory, had not attempted to secure orders for pressing jute, and had not employed l; ll>ourers. The appellant's claim that it was not so done because the appellant could not secure labourers has not been accepted. But that is not a decisive circumstane" The factory was in the occupation of the lessee Ramnath Ba1ona and

pssession was obtained after August 10, 1943. But before t)le 10th of August an agreement of sale was execu!Cd by the appellant in favour of Ranada Praad Saha. In the J1ght of the sequence of events, the inference that the appellant had no intention to commence doing jute pressing business does not necessarily follow. Even if that inference be regarded as binding upon the Court it cannot be presumed that the sole intention of the appellant was to start a venture in. the nature of trade. BaITing the expectation of profit and realization of profit by sale of the property, there is no evidence bearing on the intention with which the property was purchased.

In the deed of conveyance daJted September 30, 1943 there is a reference to delivery of "joists, girders, fabricated steel, C.I. roofs, bolts, nuts, hooks and ceiling planks, being portions of the materials of the godowns and structures" standing OQ the land described in the third schedule. It was submitted that after purchasing the factory and the appurtenant premises the appellant demolished "certain godowns" in Sch. III land and sold the material as scrap. This, it was claimed, was-if not part of the business--a venture similar to the normal business of the appellant. But there is no evidence 1;1n the record as to how many warehouses stood originally on Sch. III land. The sale deed dated September 30, 1943 clearly states that there were two warehouses on steel-frames on the land held as licensee by the Company and possession of these was given to the purchaser Ranada Prasad Saha. Beside these warehouses, there were three warehouses on the land described in Sch. I and one warehouse on the land described in Sch. II. It is not claimed that these warehouses were insufficient for carrying on the business of jute pressing: nor is there any evidence that the warehouse or warehouses whiah were demolished were in a serviceable condition. The only fact which may be taken to be established is that a warehouse or warehouses were demolished by the appellant and the ma1erials were sold as part of the property. sold under the deed dated September 30, 1943. From this circumstance, an inference that the entire property was purchased with intent to demolish and dispose of as scrap cannot be raised.

Granting that the appellant made a profitable bargain when he purchased the property, and granting further that the apoellant had when he purchased it a desire to sell the prooertv, if a favourable offer was forthcoming. these could not Without other

610 SUPREME COUll.'l' REl'OR'J'8 [19u5j 3 8, C, R.

circumstances justify an inference that the appellant intended by purchasing the property to start .<i venture in the nature of trade.

Absence of advertisement inviting offers for purchasing the property, and absence of brokers in the negotiations for s.ale between the appellant and Ranada Prasad Saha, are circum ; tances which lead to no positive inference. There is nothing to show that the appellant desired to convert the property to some other use. No brokers were employed for entering into a transaction of sale.

It appears that Ranada Prasad Saha on coming to learn that the factory was for sale al?proached the Company after the sale deed was executed in favour of the appellant and he was inf01; med that it had already been sold to the appellant. Thereafter Saha contacted the appellant and agreed to purchase the property. The property purchased was not sudh that an inference that a venture in the nature of trade must have been intended by the appellant in respect thereof may be raised. A person purchasing a jute press may intend to start his own business even if he is not already in that busin~, s. or he may let it out on favourable terms.

The property purchased by the appellant was capable of being let out and it had in fact been let out by the Company before the date of sale in favour qf the appellant. It was capable of fetching annual income, and there is no evidence that at the material time it could not be reasonably let out.

We therefore discharge the answer given by the High Court in respect of the question submitted bf the Tribunal and record a negative answer. The appeal is allowed. The Commissioner to pay the costs in this Court and the High Court.

Appeal allowed.

JANKI RAM BAHADUR RAM

COMMISSIONER OF INCOME TAX, CALCUTTA

March 31, 1965

K. SUBBA RAO, J.

c. SHAH

Income-tax Act, 1922

s. 10

Calcutta High Court

A. V. Viswanatha Sastri

B. Sen Gupta

P. K. Ghosh

N. D. Karkhanis

R. N. Sachthey

Shah

Government of West

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• F

JANKI 11AM

January 21, 1941

Ramnath Bajoria

January 10, 1941

October 31, 1942

November 14, 1942

February 26, 1943

June 12, 1943

Ranada Prasad Saha

August 10, 1943

September 30, 1943

Schedule I

Schedule II

Schedule III

Government of West Bengal

Calcutta

High Court of Judicature at Calcutta

s. 10

Section 10

Indian Income-tax Act, 1922

s. 2(4)

October 1, 1942

High Court of Calcutta

Auust 10, 1943

Ramnath Bajoria

s. 2

September 30. 1943

Ramnath Ba1ona

10th of August

Ranada Praad Saha

Saha


COMMISSIONER OF INCOME TAX v.

MUGNEERAM BANGUR & CO.

March 31, 1965

[K. SUBBA RAO, J. C. SHAH AND S'. M. S!KRI, JJ .]

Income-tax Act (11 of 1922)-Sale of going concern-Slump price B -When part attributable to stock-in-trade.

The business of the assessee firm, carrying on land development business was sold as a going concern to a company promoted by the assessee ::; partners. The purchase price included sums for th.e val':1e of land, goodwill, etc. The amount shown as the valuie of th.e goodWlll \?as sought to be aseessed to income-tax on the grounds (1) that the

assessee's business was purely one of buying and selling land and (ii) the amount was profit attributable to the sale of land which was the stock-in-trade of the assessee. In appeal to this Court.

HELD: On the facts of this case it could not be said that the £ssessees were carrying on the business of l)Urely buying and selling land. They were engaged in buying land, developing it and then selling it. The sale was the sale of the whole concern and no part of the slump price was attributable to the cost of the land. If that was so, no part of it was taxoble. [617H-618A, E] Commissioner of Income-tax, Kerala v. We.st Coast Chemical and Industries Ltd. 46 IT.R. 135 and Doughty v. Commissioner of Taxes

(1927) A.C. 327, applied.

In the case of a concern carrying on the business of buying land, developing it a-·! the selLing it, it is easy to distinguish a realisation sale from an ordinarv sale. and it is verv difficult to attribute part of the slump price to the cost of land sold in the realisation sale. The mer~ fact that in the schedule the price of land was stated did not lead to the conclusion that part of the slump price was necessarily attributable to the land sold. There was no evidence that any attempt was made to evaluate the land on the date of sale. As the assessees \Vere transferring the concern to a company, c0nstituted by the assessees themselves, no effort would ordinarily have been made to evaluate the land as on the date of sale. r618B-D]

CIVIL APPELLATE JURISDICTION:' Civil Appeal No. 310of1964.

Appeal by special leave from the judgment and order dated December 13, 1961 of the Calcutta High Court in Income-tax Reference No. 7 4 of 1956.

N. D. K arkhanis, Go pal Singh and R. N. Sachthey, for the appellant.

A. V. Viswanatha Sastri, S. Murthy and B. P. Maheshwari, for the respondent.

B The Judgment of the Court was delivered by

Sikri, J.

This is an aopeal by special leave directed against the judment of the High Court at Calcutta in a reference under

• 611

SUPREME COURT REPORTS

[1965] 3 S.C.R,

s. 66 of the Income Tax Act. The four questions referred to the High Court by the Income Tax Appellate Tribunal are:

"(!) Whether on the facts and circumstances of this case the Income-tax Officer, Centra:l Circle XIV, Calcutta, was competent to file the appeal before the Tribunal against the order of the Appellate Assistant Commissioner of Income Tax, Range-A, Calcutta?

(2) Whether on the facts and circumstances of this case the sum of Rs. 2,50,000 represented the surplus on the sale of lands which was the stock in trade of the assessee company or was the value of goodwill alleged to have been transferred?

(3) Whether on the fac.ts and circumstances of this case by the sale of the whole business concern it could be held. that there was taxable profit in the sum of Rs. 2,50,000?

(4) Whether on the facts and circumstances of this case and fo view of the findings of the Tribunal that the entire share capital of the vendee company (excepting seven ordinalry shares) was taken over by the vendOF firm in lieu of the sale price of the business as a whole, there was any profit in the amount of Rs. 2,50,000 the same being taxable undr the Indian Income Tax Act?

The relevant facts and circumstances are these. The respondent, MI s Mugneeram Bangur & Co. (Land Department) Calcutta (hereinafter referred to as the vendors) were a firm carrying on the business of land development in Calcutta. By an agreement dated July 7, 1948, the partners of the firm agreed to sen all the business of the said firm to the Amalgamated Development Limited, hereinafter called the vendee, which company was promoted by the partners of the firm. The relevant paragraphs of the said agreement are as fonows :

"And Whereas the Vendors have agreed to sen and the company has agreed to purchase an the said business on the basis hereinafter set out.

Now it is hereby agreed and declared between the parties as fonows: - I. The Vendors do )Jereby agree to sen and the company doth hereby agree to purchase All That the said . business with effect from the eighth day of July

One thousand nine hundred and forty, eight. Togethet with the goodwin of the said business And all stock ii) trade, fixtures, tools, implements, furniture, fittings and an other articles and things belonging to the said business or in any way used in the same including the benefit and advantages of all contracts.

2. The purchase price shall be Rupees thirtyfour lakhs nintynine thousand and three hundred paid and satisfied by the Company allotting to the Vendors or their nominees seventeen thousand five hundred Redeemable Preference shares of Rupees one hundred each and seventeen thousa<nd four hundred and ninetythree Ordinary shares of Rupees one hundred each in the capital of the Company which will be accepted by the Vendors in full satisfaction of the said purchase price.

3. The Company shall undertake and discharge all debts and liabilities of the Vendors including development expenses such as opening out roads, laying out drains and sanitary arrangements providing electricity in the areas and providing a School in Tollygunge for educaJtion of Children for which the Vendors have given an undertaking to the Tvllygunge Municipality and also the liability of the Vendors in respect of the deposits made with them by various intending purchasers of lands but excluding the liabilities of the Vendors for Income-tax, Super-tax or any other tax or duty on income or revenue in respect of the profits of the business".

The sum of Rs. 34,99 ,300 was arrived at in the Schedule thus: •

1. Land

2. Goodwill

3. Motor Car & Lorries

4. Furniture, Fixture etc.

5. Mortgage secured

6. Deposits for purchase of land

(In rupees) 12,68,628 7 7

2,50,000 0 0

25,866 8 6

5,244 5 6

. . 71,62,367 6 0

53,500 0 0

7. Advance paid to pleaders solicitors, contractors' staff and other

outstandini; s 1,83,622 3 6

8. Cash in Bank 71,800 I 8

36,21,029 0 g

Less liabilities 1,21,729 0 9

34,99,300 0 0

SU PKJ!ME CO IJRT REPORTS

[!965) 3 S.CR.

The consideration of Rs. 34,99 ,300 was paid by allotment of 17,500 Redeemable Preference shares of Rs. 100 each and .17,493 Ordinary shares of Rs. 100 each, the allotmnt being to the vendors-partners or their nominees. Thus. the vendors received shares of the face value of Rs. 34,99 ,300 for the aJSsets transferred to the company.

The Income Tax Officer held that the sum of Rs. 2,50,000 was actually charged by the vendors as a lump sum amount of profits on sale of valuable stock in trade and not goodwill as alleged. The Appellate Assistant Commissioner, on appeal, held that the said sum of Rs. 2,50,000 was the value of the goodwill.

He further held that .since the transfer was a transfer of business as a going concern, the profit was the capital gain and therefore not liable to tax. Relying on Doughty v. Commissioner of Taxes,(') he held that as "the transfer is a transfer of all assets of the firm to a company the transfer is a capital sales".

The Income Tax Officer filed an appeal before the Appellate Tribunal. The Appellate Tribunal held that although the sale was the sale of a business as a going concern,. the value of the stock could be traced, and, therefore, the profits arising out of the sale was taxable income. Regarding the goodwill, the Tribuna.I observed:

"We do not think. that there was much value of the goodwill of the business that was transferred. Mugneeram Bangur & Co. was a firm constituting ofseveral partners and Mugneeram Bangur & Co.

Land Department was a seprurate firm consisting of the same partners with. however. different shares in the firm Mugneeram Bangur & Co. were also carrying on business in lands and buildings along with its activities in other businesses. our attention was drawn by the Department Representative to the fact that in .. the case of transfer of lands and buildins of the assessee firm the cm1veyances were as a rule executed in the name of Mugneeram Bangur & Co.

The assessee's learned Counsel did not object to this fact.

We are therefore accepting it as oorrect. If so, there was nothing in the nalme of Mugneeram Bangur & Co. Land Department. The conversion of the said firm into a Company in an entirelv different name would also indicate that not much of imoortance was attached to the name of Mugneeram Bangur & Co.

Land Deparln)ent. In the circumstances, in our opinion, the orice paid bv the ourcbase Comoanv was not on the consideration of the goodwill of the

~) [1927J'A.C. 327.

C. I. 1'. V. MUGNEERAM & UO. (f3.ikri, J,) 615

vendors but upon taking over the entire going concern and paying the consideration not in money but by allotment of shares. In such circumstances, the surplus was out of the sale of the business as a whole, including the stock in trade of the assessee firm. Since the other assets transferred had definite yalue which would not increase in value by the process of transfer, the only value that could increase was the value of the stock in hand, that being the land in the present case.

In our opinion, therefore, the amount of Rs. 2,50,000 was really the excess value of the lands sold along with the other assets".

But the Tribunal dismissed the appal on the ground that although the vendors were a different entity from the vendee, the first being a partnership and the second being a limited company, the transaction was mere adjustment of the business position of the pa'tners. It further observed that the Income Tax Department was not entitled to take mere book-keeping entries as the evidence of any profit in the matter.

The High Court first answered question No. 4, thus:

"There was no profit in the transaction by which the entire stock in trade and the business of the firm were transferred to the lirnited company. Again the fact that two outsiders were brought in as directors with seven shares allotted to them out of 39 ,300 shares makes no difference. In Sir Homi Mehta's case 400 shares out of 6,000 shares were allotted to Sir Homi Mehta's sons. Nor again cam I see any difference in principle between the case of conversion of business into a private limited company and one in which it is converted into a public limited company if in the latter company outsiders are not allotted any sizeable proportion of the shares issued".

The High Court felt that this answer was enough to dispose of the matter, but as questions 2 and 3 had been referred, they answered them. Regarding question No. 2, the High Court held that "as the assets of the firm transferred to the company have been itemised and as there can be no question of variation of the figares given in items 3 to 8 in the agreement for sale, it must be held that Rs. 2,50,000 shown as the value of the goodwill must be represented by surplus on the sale of lands which was the stock-in-trade of the assessee company". Regarding question No. 3, the High Court held that even if the value of the stock in trade taken over by the assessee was greater . than the figure shown therefor in the i1greement for sale in view of the answer to question 4, there ·, vas no profit which could he taxed.

'(i 'Ii

:o.;1'l'HJ:~1•: ('Olllt'I' H.g1'1Ht'l'H I I 9fi!i l !l s.c.a.

We may mention that it is not necessary to deal with question A No. I because it was given up before the High Court. Mr.

Karkhanis. learned counsel for the appellant. urges that the Doughty's case(') was wrongly decided in one respect and that the vendors and the vendee being different entities. it is not permissible to tear the corporate veil to see whether the partners of th~· vendors were the same persons as the shareholders of the vendee. He says that if the veil is not torn, then there was a sale by the vendors to the vendee and profits arose out of the sale.

Learned counsel for the respondent, Mr. Viswanatha Sastri, says that if the third question is answered in his favour. it would not be necessary to deal with the other questions. As we are inclined to answer the third question in the favour of the vendors, it is not necessary to deal with the other questions and the arguments addressed in respect of them.

The Appellate Tribunal held in this case that the sale .was a sale of business as a going concern. This is also apparent from clause 1 of the agreement set out above. If this is so Doughty's case(') <jpplies. The facts in Doughty's case may be conveniently taken from the headnote in that case. "In 1920, two partners carrying Off business in New Zealand as general merchants and drapers sold the partnership business to a limited company in which they beca, me the only shareholders. The sale was of the entire assets, including goodwill, the consideration being fully paid shares, and an agreement by the company to discharge all the liabilities. The. nominal value of the shares being more than the sum to the credit of the capital a1ccouni of the partnership, in its last balance sheet. a new balance sheet was prepared showing a larger value for the stock in trade. The Commissioner of Taxes treated the increase in value so shown as a profit on the sale of the stock in trade, and assessed the appellant upon it for income tax under the Land and Inoome Tix Act, 1916, of New Zealand, which imposes the tax on all .profits or gains derived from any business"

The Privy Council decided the case in favour of the appellant on two grou.nds, the first being that "if the transaction is to be treated as a sale, there was no separate sale of the stock, and no valuation of the stock as an item forming part of the aggregate wh.ich was sold". In connection with this ground, Lord Phillimore observed that "income-tax being a tax upon income, it is well established that the sale of a whole concern which cal'l be shown to be a sale at a profit as compared with the price given for the business, or at which it stands in the books does not give rise to a profit taxable to income-tax". He further observed that "where, however, the business consists, as in the present case, entirely in buying and selling, it is more difficult to distinguish between an ordinary and a realization sale, the

(') (1927] A.O. 327.

object in either case being to dispose of goods at a higher price than that given for them, and thus to make a profit out of the business. The fact that large blocks of stock are sold does not render the profit obtained anything different in kind from the profit obtained by a series of gradual and smaller sales.

This might even be the case if the whole stock waJS sold out in one sale. Even in the case of a realization sale, if there were an item which could be traced as representing the stock sold, the profit obtainej by that sale, though made in conjunction with a sale of the whole concern, might conceivably be treated .a:s taxable income". Lord Phillimore concluded with the following observations:

"If a business be one of purely buying and selling, like the present, a profit made by the sale of the whole of the stock, if it stood by itself, might well be assess' ab1e to incoinc tax; but their view of the facts (if it be open to them to consider the facts) is the same as that of Stout C.J.-that is, that this was a slump transaction''.

This Court, in Commissioner of Income-tax, Kerala v. West Coast Chemicals and Industries Ltd.(') understood the Doughty's

case(') thus:

"This case shows that where a slump price is paid and no portion is attributable to the stock-in-trade, it may not be possible to hold that there is a profit other than what results from the appreciation of capital. The essence of the matter, however, is not that an extra amount has been gained by the selling out or the exchange but whether it can fairly be said that there was a trading from which alone profits can arise in business".

It follows from the above that once it is accepted that there was a slump transaction in this case, i.e. that the business was sold as a. ping concern, the only question that remains is whether any portion of the slump price is attributable to the stock in trade

The learned counsel for the appellant relies on two grounds to support the contention that there is profit attributable to the so1Ie of land which was stock-in-trade of the vendors. He says first that in the schedule to the agreement the value of hmd and the value of goodwill and other items is specified. He says that

althogh the amount of Rs. 2,50.000 was shown as price of goodw11l, 1t .was really excess value of the land sold along with other assets. Secondly. he says, relying on the passage already cited above from Daughty's case(') that the vendors' l:iusiness was a business of purely buying and selling land. In our opinion, on the facts of this case it cannot be said that the vendors were carrying on the business of purely buying and selling land. In

(') 46 I.T.R. 135.

(') [1927] A.C. 327.

SUPREMB COURT REMRTS [1965] 3 s.a.a.

this case the vendors were engaged in buying land, developing it and then selling it. The agreement itself shows that the venaors had already i:lcurred debts and liabilities for development expenses such as opening out roads, laying out drains and sanitary arrangements, providing electricity and providing for a school.

It seems to us that in the case of a concern carrying on the business of buying land, developing it and then selling it, it is easy to distinguish a realisation sale from an ordinary sale, and it is very difficult to attribute part of the slump price to the cost of land sold in the realisation sale. The mere fact that in the schedule the price of land is stated does not lead to the conclusion that part of the slump price is necessarily attributable to the land sold.

There is no evidence that any attem.Pt was made to evaluate the land on the date of sale. As the vendors were transferring the concern to a compny, constituted by the vendors themselves, no effort would ordinarily have been made to evaluate the land as on the date of sale. What was put in the schedule was the cost price, as it stood in the books of the vendors. Even if the sum of Rs. 2,50,000. attributed to goodwill is added to the cost of land, it is nobody's case that this represented the market value , of the land.

In our view the sale was the sale of the whole concern and no part of the slump price is attributable to the cost of land.

If this is so, .it is clear from the decision of tpis Court in Commissioner of Income-tax, Kera/a v. West Coast Chemicals and

Inus11:ies Ltd.(') and Doughty's case(') that no part of the slump pnce 1s taxable. We, therefore, answer question No. 3 in the negative. As stated before, in view of this answer, it is not neces-'

sary to a1.1Swer questions Nos. 2 and 4.

The appeal is accordingly dismised with costs.

(') 46 I.T.R. 135.

(') (1927) A.C. 327.

Appeal dismissed.

" ,

COMMISSIONER OF INCOME TAX

MUGNEERAM BANGUR & CO

March 31, 1965

K. SUBBA RAO, J.

C. SHAH

Income-tax Act

CIVIL APPELLATE JURISDICTION

Calcutta High Court

N. D. K arkhanis

Go pal Singh

R. N. Sachthey

A. V. Viswanatha Sastri

S. Murthy

B. P. Maheshwari

Sikri

s. 66

Calcutta

July 7, 1948

Amalgamated Development Limited

Tollygunge

Tvllygunge Municipality

s 1

Mugneeram Bangur & Co.

V. MUGNEERAM

Sir Homi Mehta

Homi Mehta

Karkhanis

Viswanatha Sastri

clause 1

Doughty

New Zealand

Land and Inoome Tix Act, 1916

Phillimore

Daughty

SUPREMB COURT REMRTS [1965] 3 s.a.a


COMMISSIONER OF INCOMETAX, ANDHRA PRADESH

THE COCANADA BANK LTD. KAKINADA April 2; 1965 [K. SUBllA RAO, J.C. SHAH ANDS. M. SIKRI, JJ.]

Indian Income-tax Act, 1922 (11 of 1922), s. 24(2)-Carry-forward of loss-Loss under one head of income whether can be set-off against income under other heads in succeeding years-Heads of income whether mutually exclusive.

The respondent bank had income from banking business and interest on securities. For the assessment year 1949-50 its loss from banking business was set-off against the income from interest on securities but for the succeeding three years the income-tax officer st:. t• off the said loss which had been carried forward, only against the income from banking business and disallowed it against the income under the head 'interest on securities'. The view of the Income Tax Officer was upheld by the Appellate Assistant Commissioner and on further appeal by the Appellate Tribunal. The Tribunal however referred to the High Court, at the instance of the assessee, the question whether the assessee was entitled to set-off business loss brought forward from the preceding assessment y-ear against the entire incomt: including interest on securities. The High Court remitted '.:he case to the Tribunal for a finding whether the .securities in question formed part of the trading assets held by the assessee. The Tribunal held that the receipt of interest from securities was as much the assessee's business as its other banking activities. On receipt of the supplementary statement 0f case the High Court answered the reference in favour of the assessee. The Revenue appealed to this Court.

It was urged for the Revenue that the income from business and securities fell under different heads, namely s. 10 and s. 8 of the Act respectively, that they were mutually exclusive and, therefore, the losses under the head ''business" could not be carried forward from the preceding year to the succeeding year and set-off under s. 24(2) of the Act against the income from securities held by the assessee.

HELD: (i) While sui>-s. (1) of s. 24 provides for setting-off of the loss in a particular year untler one of the heads in s. 6 against the profit under a different head in the same year, sub-s. (2) provides for the carrying forward of the loss of one year and setting off the same against the profit or gains of the assessee from the same business in subsequent years. This cl. (2) of s. 24 in contradistinction to cl. (1) thereof is concerned only with the business and not with its heads under s. 6 of the Act. This designed disti.nction brings out the intention of the legislature to give further relief to an assessee carrying on business and incurring loss in the business though the income therefrom falls under different heads under s. 6 of the Act. [622E; 623E-F)

(ii) The scheme of the Act is that income-tax is one tax. Section 6 only classifies the income under different heads for the purpose of computation of the net income of the assessee. Though for the purpose of romputation of the inome, interest on. securities is separately classified, income by way. of interest on securities does not cease to be part of the income from business if the securities are part of the 619

620 SUPllJl)(E COURT REPORTS (1965] 3 s.c.11.

trading assets. Whether a Particular income is part of the income A from a business falls to d<c; ded not on the basis of the provisions of s. 6 but on commercial principles. [622G-H]

(iii) In the present case the Tribunal and the High Court found that the secur'.ties were the assesseo's trading assets and the jncome

therefrom was, therefore, the income of the business. If it was income of the business, s. 24(2) of the Act was immediately attracted. If the income from the securities was the income from its business, the loss B could, in terms of that section, be set-off against that income. [622H-

623A] The Punjab Co-operative Bank Ltd. v. Commissioner of Income. tax, Punjab, (194-0) B I.T.R. 635 and C&inmissioner of Incometax Bombay City I v. Chugandas & Co. (1965) 55 I.T.R. 17, relied on.

United Commercial Bank Vd. v. Commissioner of Income tax West Bengal, (1958) S.C.R 79, East India Housing and Land Deve- c lopment Trust Ltd. v. Commissioner of Income-tax, West Bengal

(1961) 42 I.T.R. 49, and Commissioner of Income-tax. Madras v. Express Newspapers Ltd. (1964) 53 I.T.R. 250, distinguished.

C!v1L APPELLATE JURISDICTION: Civil Appeals Nos. 155--157 of 1964.

Appeals by special leave from the judgment and order dated August 8, 1961 of the Andhra Pradesh High Court in Case Refer red No. 25 of 1957.

V. Gupte. Solicitor-General, N.

Karkhanis and R. N. Sachthey, for the appellant (in all the appeals).

G. S. Pathak. B. Datta and T. Satyanarayan, for the respondent (in all the appeals).

The Judgment of the Court was delivered by Sobba Rao, J. These appeals by special leave raise the ques tion of construct:on of s. 24(2) of the Indian Income-tax Act, 1922, hereinafter called the Act.

The material facts may briefly be stated. The Cocanada Bank Ltd. Kakinada. hereinafter called the assessee. is a private limited company carrying on banking business with its head office at Kakinada and a branch at Dayal Bagh. The assessee's sources of inctJme are banking business and interest from government secrities. For the assessment year 1949-50 its income was asse>sed as follows: Interest on securities Rs. 84,880 Other banking activities Rs. 64,400 Ooss) Net loss Rs. 55,912 The following tabular form shows at a glance. the factual positon in regard to the income of the assessee under different heads dunng the said three years :

BusinesB year of assessment Interest on incomP..or securities luss as finally T-1tE1l decided b, v the A.A.C. 2 3 4 Rs.

Rs.

RS. 5,191 886 6.077 2.174 1,177 3,3/il 1,885

9,12I n.oos

J. 1950-51

2. 1951-52

3. 1952-53

r. r. T. t>. COCAS-AD.\ RA'.'IK (811hba Rao .• l.) 621

For the three succeeding years the department showed the income under the sa 'd two separate heads but allowed the said loss to be set off against the income under the head "business" and disallowed it against the income under the head "interest on securit'e>''. The view of the Income-tax Officer was confirmed, on appeal, by the Appellate Assistant Commissioner and, on further appeal, by the Income-tax Appellate Tr'bunal. The following question was referred by the Tribunal to the High Court for its opinion:

"Whether on the facts and in the circumstances of the case, the assessee was entitled to set off the business loss of Rs. 55.912 brought forward from the preceding year against the entire income including interest on securities held by the assessee."

' The High Court. hav; ng regard to the decision of this Court in United Commercial Bank Ltd., Calcutta v. Ccmmissioner of Inrnme-tax. West Banga!(') rem; tted the case to the Income-tax Tribunal, Hyderabad Bench. for making a fuller statement of case on the question whether these secur'ties in question formed part of the trading assets held by the assessee in the course of its business as a banker and whether its dealing with the securit'es from which it received interest was as much the assessee's business as receiving deposits from clients and withdrawals by them. 'The Income-tax Tribunal. on a further hearing, held that the receipt of interest from securities was as much the assessee's business as its other banking activities like receiving deposits from the clients and withdrawals hy them. On receipt of the supplementary statement of case from the Tribunal the High Court answered the reference in favour of the assessee. Hence the present appeals.

Learned counsel for the Revenue argued that the income from business and securities fell under different heads, namely, s. 10 and s. 8 of the Act respect'vely. that they were mutually exclusive and, therefore, the losses under the head "business" could not be carried forward from the preceding year to the succeeding year and set off under s. 22(4) of the Act against the income from securities held by the assessee.

Learned counsel for the assessee, on the other hand, contended that though for the purpose of computation of income, the income from securities and the income from business were calculated separately, in a case where the securities were part of the trading assets of the bus'ness, the income therefrom was part of the income of the business and, therefore. the losses incurred under the head "business" could be.set off during the succeeding years against the total income of the bt•siness, i.e., income from the business including the income from the securities.

The relevant section of the Act which deals with the matter of set off of losses in computing the aggregate income is s,. 24. The

(') [1958] S.C.R. 79.

SUP.RE)(~: COURT RE.PORTS fl965] S 1.0.a.

relevant part of it, before the Finance Act, 1955, read:

"(!) Where any assessee sustains a loss of profits or gains in any years under any of the heads mentioned in section 6, he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year."

(2) Where any assessee sustains a loss of profits or gains in any year, being a previous year not earlier than the previous year for the assessment for the year ending on the. 31st day of March, 1940, in any bus; ness, profession or vocation, and the loss cannot be wholly set off under subsection (!), so mueh of the loss as is not so set off or the whole loss where the assessee had no other head of income shall be carried forward to the following year and set off against the profits and gains, if any, of the assessee from the same business, profession or vocation for that year; and if it cannot be wholly set off, the amount of loss not so set off shall be carried forward to the following year ...

While sub-s. (I) of s. 24 provides for setting off of the loss in a particular year under one of the heads mentioned in s. 6 against the profit under a different head in the same year, sub-s. (2) provides for B the carrying forward of the los£ of one year and setting off of the same against the profit or gains of the assessee from the same business in the subsequent year or years. The cruc; al words, therefore, are "profits and gains of the assessee from the same business", i.e., the business in regard to which he sustained loss in the previous year. The question, therefore, is whether the securities formed part r of the trading assets of the business and the income therefrom was income from the business. The answer to this question depends upon the scope of s. 6 of the Act. Section 6 of the Act classified taxable income under the following several heads: (i) salaries; (ii) interest on securities; (iii) income from property; (iv) profits and gains of business, profession or vocation; (v) income from other G sources; and (vi) capital gains. The scheme of the Act is that income-tax is one tax. Section 6 only classifies the taxable income under different heads for the purpose of computation of the net income of the assessee. Though for the purpose of computation of the income, interest on securities is separately classified, income by way of interest from securities does not cease to be part of the income B from business if the securities are part of the trading assets. Whether a particular income is part of the income from a business falls to be decided not on the basis of the provisions of s. 6 but on commercial principles. To put it in other words; did the securities in the present case wh'ch yielded the income form part of the trading assets of the assessee? The Tribunal and the High Court found that they were the assessee's trading assets and the income therefrom

C. I. T. II. COCillADA BANK (8-ubba RM, J.) 623

was, therefore, the income of the business. If it was the income of the business, s. 24(2) of the Act was immediately attracted. If the income from the securities was the income from its business, the loss could, in terms of that section, be set off against that income.

A comparative study of sub-ss. (I) and (2) of s. 24 yields the same result. While in sub-s.(I) the expression "head" is used in sub-s. (2) the said expression is conspicuously omitted. This design ed distinction brings out the intention of the Legislature. The Act provides for the setting off of loss against profits in four ways. To illustrate, take the head "profits and gains of business, profession or vocation". An assessee may have two businesses. In ascertaining the income in each of the two businesses, he is entitled to deduct the losses incurred in respect of each of the said businesses. So •calculated, if he has loss in one business and profit in the other both falling under the same head, he can set off the loss in one against the profit in the other in arriving at the income under that head. Even so, he may still sustain loss under the same head. He can then set off the loss under the head "business" against profits under another head, say "income from investments", even if investments are not part of the trading assets of the business. Notwithstanding this process he may still incur loss in his business. Section 24(2) says that in that event he can carry forward the loss to the subsequent year or years and set off the said loss against the profit in the business. Be it noted that clause (2) of s. 24, in contradistinction to cl. (1) thereof, is concerned only with the business and not with its heads under s. 6 of the Act. Sect; on 24, therefore, is enacted to give further relief to an assessee carrying on a business and incurring loss in the business though the income therefrom falls under different heads under s. 6 of the Act.

Some of the decisions cited at the Bar may conveniently be referred to at this stago. The Judicial Committee in The Punjab Cooperative Banlf Ltd. v. Commissioner of Income-tax, Punjab(') has clearly brought out the business connection between the securities of a bank and its business, thus:

"In the ordinary case of a bank, the business consists in -its essence of dealing with money and credit. Numerous depositors place their money with the bank often receiving a.small rate of interest on it. A number of borrowers receive loans of a large part of these deposited funds at somewhat higher rates of interest. But the banker has always to keep enough cash or easily realisable securities to meet any probable demand by the depositors. . ........... " In the present. ca'e the Tribunal held, on the evidence, and that was accepted by the High Court, that the assessee was investing its amounts in easily realisable securities and, therefore, the said secu rities were part of the trading assets of the assessee's banking business. The decision of this Court in United Commercial Bank Ltd.,

(') [19'0] 8 LT.B. 636, 6'5.

SUPREME COURT REPORTS

(1965] 3 8.C.R.

Calcutta v. Commissioner of Income-tax, West Bengal(') does not lay down any different proposition. It held, after an exhaustive review of the authorities, that under the scheme of the Income-tax Act, 1922, the head of income, profits and gains enumerated in the different clauses of s. 6 were mutually exclusive, each spec!fic head covering items of income arising from a particular source. On that reasoning this Court held that even though the securities were part of the trading assets of the company doing business, the income therefrom had to be assessed under s. 8 of the Act. This decision does not say that the income from securities is not income from the business. Nor does the decis'on of this Court in East India Housing and Land Develcpment. Trust Ltd., v. Commissioner of Incometax, West Bengal(') support the contention of the Revenue. There, a company, which was incorporated with the objects of buying and developing landed properties and promoting and developing markets, purchased I 0 bighas of land in the town of Calcutta and set up a market therein. The question was whether the income realised from the tenants of the shops and stalls was liable to be taxed as "business income" under s. 10 of the Income-tax Act or as income from property under s. 9 thereof. This Court held that the said income fell under the specific head mentioned in s. 9 of the Act.

This case also does not lay down that the income from the shops is not the income in the business. In Commissioner of Income-tax, Madras v. Express Newspapers Ltd.,('), this Court held that both

s. 26(2) and the proviso thereto dealt only with profits and gains of B a business, profession or vocation and they did not provide for the assessment of income under any other head, e.g., capital gains. The reason for that conclusion is stated thus:

"It (the deeming clause in s. 12B) only introduces a limited fiction, namely, that capital gains accrued will be deemed to be income of the previous year in which the sale was effected. The fiction does not make thorn the profits or gains of the business. It is well settled that a legal fiction is limited to the purpose for which it is created and should not be extended beyond its legitimate field . . '.: ......

The profits and ga'ns of business an.d capital gains are two distinct concepts in the Income-tax 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 assessee. They arc 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 th.e profit of the business. They are only deemed to be in come of the previous year and not the profits or gams arising from the business during that year."

(') [1961.J 42 I.T.B. •9.

I') fI958) S.C.R. 79.

(') [1964] 53 I.T.R. 250, 260

c. I. T. v. COCANA.DA. BANK (SubbJ Rao, J.) 625

It will be seen that the reason for the conclusion was that capital gains were not income from the business. Though some observations divorced from content may appear to be wide, the said decision was ma 'nly based upon the character of the capital gains and not upon their non-inclusion under the heading "business". The limited scope of the earlier decis; on was explained by this Court iii Commissioner of Income-tax, Bombay City Iv. Chugandas & Co.(').

Therein this Court held that interest from securities formed part of the assessee's business income for the purpose of exemption under s. 25(3). Shah, J., speaking for the Court, observed:

"The heads described in s. 6 and further elaborated for the purpose of computation of income in sections 7 to IO and 12, 12A, 12AA and 128 are intended merely to indicate the classes of income: the heads do not exhaustively delimit sources from which income arises. This is made clear in the judgment of this Court in the United Commer cia/ Bank Ltd.'s case('). that business income is broken up under different heads only for the purposes of computation of the total income: by that break up the income does not cease to be income of the business, the different heads of income be'ng only the classification prescribed by the Indian Income-tax Act for computation of inc.ome." The same principle applies to the present case.

We, therefore, hold that under s. 24(2) of the Act the income from the securities whkh formed part of the assessee's trading assets was part of its income in the business and, therefore, the loss incurred in the business in the earlier year could be set off against that income also in the succeeding years.

Tn the re, Jlt. we hold that the High Court was right in answer- ; ng the question referred to it in the affirmative. The appeals are dismissed with costs. One hearing fee.

Appeals dismissed.

(1) [196, j] 55 1.T.R, 17, 24. (I) [HlJS]S.C.R. 79 L!P(Xj4SCI-14

THE COCANADA BANK LTD. KAKINADA

April 2; 1965

K. SUBllA RAO, J

C. SHAH ANDS. M. SIKRI, JJ.

Indian Income-tax Act, 1922

s. 24(2)

s. 10

s. 8

s. 24(2)

s. 24

s. 6

s. 24

s. 6

s. 6

Section 6

s. 6

s. 24(2)

V. Gupte

R. N. Sachthey

G. S. Pathak

B. Datta

T. Satyanarayan

Sobba Rao

s. 24(2)

Indian Income-tax Act, 1922

Cocanada Bank Ltd. Kakinada

Dayal Bagh

Income-tax Tribunal, Hyderabad Bench

s. 10

s. 8

s. 22(4)

S 1

Finance Act, 1955

section 6

31st day of March, 1940

s. 24

s. 6

s. 6

Section 6

Section 6

s. 6

COCillADA BANK

s. 24(2)

s. 24

Section 24(2)

s. 24

s. 6

s. 6

United Commercial Bank Ltd.

Income-tax Act, 1922

s. 6

s. 8

Calcutta

s. 10

Income-tax Act

s. 9

s. 9

s. 26(2)

s. 12B

Income-tax Act

SubbJ Rao

Bombay

s. 25(3)

Shah

s. 6

sections 7

United Commer cia/ Bank Ltd.

Income-tax Act

s. 24(2)


KEDARNATH ; JUTE MANUFACTURING CO.

A v.

COMMERCIAL TAX OFFICER, CALCUTTA AND ORS.

A pri/ 2, 1965 [K. SUBBA RAO, J. c. SHAH AND s. M, SIKRI, JJ.J B Bengal Finance (Sales Tax) Act, 1941 (Bengal Act 6 of 1941}-S. 5(2)(a) (ii) proviso. Effect of-Production of declaration forms required under proviso whether mandatory or directory-Exemption under substantive clause whether can be claimed on the basis of other et, idence.

The appellant a public limited company sought exemption under C s. 5(2) (a) (ii) of the Bengal Finance (Sales Tax) Act, 1941 in respect of certain sales. However, it could not produce before the commercial tax officer the declaration forms from the purchasing dealers required to be produced under the proviso to that sub-clause because the said• forms were lost. The appellant tried to

set duplicate forms from the purchasing dealers but without success.

His application under s. 21A to summon the dealers with the relevant documents was rejected by the Commercial Tax Officer and the D higher authorities also refused to issue directions for the issue. of duplicate declaration forms. The Commercial Tax Officer thereafter passed an assessment order without allowing the said exemption.

Against that order the appellant filed a writ petition under Art. 226 and thereafter a Letters Patent appeal but failed to get redress. It then appealed to this Court with certificate.

It was contended on behalf of the appellant that the exemption E granted under the subst2ntive sub-clause (ii) could be claimed by the production of other relevant evidence if the declaration forms could not be produced; the proviso to that sub-clause requiring the production of the said forms was only directory as was also proved by the use of the words "on demand" in s. 27 A.

HELD: The exemption could be claimed only by the production F of the declaration forms as laid down in the proviso.

(i) The effect of an exceptlpg proviso is to except from the main clause something which but for the proviso would be within it.

Croies on Statute Law quoted: If the intention of the Legislature wa• to give exemption if the terms of the subs1'ahtive part of sub-clause (ii) above are complied with, the proviso becomes redundant and otiose. I~ . the oroviso is treated as merely directory it will lead to the pos!tlon that i! the G declaration form is furnished well and good; but if not furnished other evidence can be produced. That is to re; vrite the clause an~ to omit the proviso. That will defeat the express mtenbon of the legislature. f622H-630A]

There is an understandable reason for the stringency of the provisions. The object of s. 5(2)(a)(ii) of the Act nd the mies made the; e- B under is self-evident. While they are obv10usly mtended to give exemption to a dealer in respect of sales to registered dealrs. of .,1Jecified classes of goods, it seeks also to prevent fraud and collusion in an attempt to evade tax, [630G]

-026

KEDARNATH JUTE MFG. CO. V. C. T. 0, CALCUT1"- (8ub/Ja fU10, .J.) 627

A State of Orissa v. M.A. Tulloch & Co. Ltd, (1964) 15 S.T.C. 641, distinguished.

(ii) The words "on demand" in r. 27A only fix the time when the declaration forms are to be produced; they do not mean that their production is not obligatory. [630A-B]

(iii) Section 21A only empowers the Co1nmissioner or any person appointed by him to take evidence on oath etc. It can be invoked only in a case where the authbrity concerned is empowered t() take evidence in respect of a particular matter, but that does not enable him to ignore a statutory condition to claim exemption. [630C-D]

(iv} Sub-rules (3) and (4) of s. 27A do not enable the selling dealer to either directly apply or to compel the purchasing dealers to apply for duplicate forms; nor do they enjoin on the appropriate authority to give the selling dealer a duplicate form to replace the lost one.

This may cause hardship but the remedy lies with the Legislature only. [630E, F]

Crv1L APPELLATE JURISDICTION: Civil Appeal No. 94 of 1964.

Appeal from the judgment and order dated August 17, 1961 of the Calcutta High Court in Appeal from Original Order No. 81 of 1959.

A. V. Viswanatha Sastri and P.K. Ghosh, for the appellant.

P. K. Chatterjee and P. K. Bose, for the respondents.

The Judgment of the Court was delivered by

E Subba Rao, J. This appeal on a certificate granted by the High Court of Calcutta raises the question of the interpretation of s. 5(2)(a) (ii) of the Bengal Finance (Sales Tax) Act, 194 l (Bengal Act VI of 194!), hereinafter called the Act.

The material facts are as follows: The appellant is a public F l; mited company registered as a dealer under the Act, having its registered place of business at Calcutta. In respect of the accounting year ending with 31st December l 954, in the return for the year the assessee had shown its gross turnover at Rs. 70.99,928-10-0 and claimed exemption under two heads, namely, (i) under s. 5(2)(a)(i) of the Act Rs. 1,33,730-6-6; and (ii) under s. 5(2)(a)(ii) thereof G Rs. 69 ,65 ,979-9-6. After deducting the said amounts from the gross turnover the assessee showed its taxable turnover at Rs. 218-9-0 and deposited the tax of Rs. 9-12-6 on the said amount in the treasury.

The Commercial Tax Officer by notice dated April 22, 1955, fixed August 4, 1955, for hearing the assessee in respect of its return.

Under s. 5(2)(a)(ii), the appellant in order to claim exemption S: thereunder had to furnish declaration forms duly filled in and signed by registered dealers to whom the "goods were sold by it.

After taking some adjournments of the enquiry it appears that in the second week of January 1957 the assessee found that its file containing 147 declaration forms received from its de.alers in respect of the goods received from it was missing. The assessee, it is said, made various attempts to get duplicate forms of declaration from the dealers, but, on account of circun; stances over which it had no

SUPRI<~ME COURT REPORTS [1965] 3 s.c.R

control and because of the unhelpful and hostile attitude of the Commerc; al Tax Officer within whose jurisdiction the said dealers functioned, it was not able to furnish the duplicate forms for all the declarations that were lost. On August 8, 1957, the assessee applied to the Commercial Tax Officer under s. 21 A of the Act for summoning the dealers to produce the necessary documents in order to prove that they had issued the declaration forms to it, but the said officer did not issue the requisite summons to the parties concerned. The assessee then filed an application to the Commissioner of Commercial Taxes, West Bengal, for directions to issue duplicate declaration forms, but that application was rejected. The revision filed to the Revenue Board was also dismissed. On November 21, 1957, the Commercial Tax Officer made an order of assessment disallowing the assessee's claim for exemption in respect of the said sales made to the purchasing registered dealers amountjng to Rs. 22,46,006-0-6 and levied on it additional tax of Rs. 1.49.778-4-6. The assessee thereafter filed a petition under Art. 226 of the Constitution in the High Court of Calcutta for issuing an order directing the respondents, i.e., the Commercial Tax Officer and the Commissioner of Commercial Taxes. West Bengal, not to implement the said assessment order. The said application came up, at the first instance, before Sinha, J .. who dismissed the same.

On appeal, a Division Bench of the said High Court confirmed the order of Sinha, J. Hence the present appeal.

At the outset we must make it clear that in the view we are tak; ng on the construction of s. 5 of the Act we do not propose to go into the question whether the department was responsible for preventing the assessee from furnishing duplicate forms of the declarations alleged to have been lost or on the question whether the department went wrong in not summoning the dealers to produce the relevant documents to establish that the declaration forms alleged to have been lost were in fact issued by them.

The bnly question, therefore, that arises is whether under s. 5(2)(a)(ii) of the Act the furnishing of the declaration forms issued by the purchasing dealers was a condition for claiming the exemption thereunder.

In substance s. 5(2)(a)(ii) exempts from taxable turnover all sales to a registered dealer of goods of the class or classes specified in the certificate of registration of the dealer as being intended for the purposes mentioned therein. But the said exemption is made subject to a proviso. Under that proviso, in the case of such sales a declaration form duly filled up and signed by the registered dealer to whom the goods are sold and containing the prescribed particulars on a prescribed form obtainable from the prescribed authority has to be furnished in the prescribed manner by the dealer who sells the goods. Under r. 27A of the Bengal Sales Tax Rules, 1941, hereinafter called the Rules, a dealer who wishes to claim the said exemption shall on demand produce such a declaration in writing

REDARNATl! JUTE MFG. co. v. c. T. o. CAWUTTA(Subba Rao, J.) 629

signed by the purchasing dealer. Sub-r. (2) thereof enjoins on a dealer not to accept and on the purchasing dealer not to give a declaration except in the form prescribed. The other rules make stringent provisions to prevent the misuse of the said forms.

The argument of Mr. A. V. Viswanatha Sastri, learned counsel for the appellant, may be briefly stated thus: The substantive part of s. 5(2)(a)(ii) of the Act provides for the e/(emption in respect of certain sales to a dealer if the sales are made to a registered dealer for the purposes mentioned thereunder. The proviso to the said subclause prescribes in effect that the declaration form in the manner prescribed is the best evidence to prove that the sales were for the said purposes. The proviso cannot be construed as laying down a condition for giving the exemption, but only as a directory provision to subserve the substantive provision in a reasonable way. If so construed, a dealer is not precluded in a case where the proviso cannot be strictly complied with from producing other relevant evidence to prove that the sales to the registered dealers were for the purposes mentioned in the said sub-clause. This conclusion is sought to be supported on the basis of the expression "on demand" in r. 27 A which, according to the learned counsel, indicates that the production of the prescribed declaration is not obligatory but only to be made if a demand is made by the authority concerned.

The learned Solicitor General, on the other hand, contends on behalf of the respondents that a dealer can claim exemption under the said sub-clause,, but if he seeks exemption he must comply strictly with the conditions under which the exemption can be granted. He argues that the clear terms of the clause, read w; th the proviso, impose a condition on a dealer for claiming exemption.

Section 5(2)(a)(ii) of the Act in effect exempts a specified turnover of a dealer from sales tax. The provision prescribing the exemption shall, therefore, be strictly construed. The substantive clause gives the exemption and the proviso qualifies the substantive clause. In effect the proviso says that part of the turnover of the selling dealer covered by the terms of sub-cl. (ii) will be exempted provided a declaration in the form prescribed is furnished. To put it in other words, a dealer cannot get the exemption unless he furnishes the declaration in the prescribed form. It is well settled that "the effect of an excepting or qualifying proviso, according to the ordinary rules of construction, is to except out of the preceding portion of the enactment, or to qualify something enacted therein, which but for the proviso would be within it": see "Craies on Statute Law", 6th Edn,, p. 217. If the intention of the Legislature was to give exemption if the terms of the substantive part of sub-cl.

(ii) alone are complied with, the proviso becomes redundant and otiose. To accept the argument of the learned couTisel for the appellant is to ignore_ the proviso altogether, for if his contention be correct it will lead to tht position that if the declaration form is furnished, well and good; but, if not furnished. other evidence can be

630 SUPREME COUR'l' REPORTS

(1965] 3 S.C.B.

produced. That is to rewrite the clause and to omit the proviso. That will defeat the express intention of the Legislature. Nor does r. 27 A support the contrary construction. The expression "on demaud" only fixes the point of t; me when the declaration forms are to be produced; otherwise the rule would be inconsistent with the sectibn.

Section 5(2)(a)(ii) says that the declaration form is to be furnished by tl\e dealer and r. 27 A says that it shall be furnished on demand, that is to say it fixes the time when the form is to be furn'shed. This reconciles the provisions of r. 27 A with those of s. 5 (2)(a)(ii) of the Act, whereas the construct'.on suggested by the learned counsel introduces an incongruity which shall be avoided. Section 21A on which reliance is placed has no bearing on the question to be dec; ded. It only empowers the Commissioner or any person appointed to assist him under sub-s (!) of s. 3 to take ev; dence on oath etc. It can be invoked only in a case where the authority concerned is empowered to take evidence in respect of any particular matter; but that does not enable him to ignore a statutory condifon to claim exemption.

Sub-rules (3) and (4) of r. 27 A are not helpful lo the appellant. They prov'ide only safeguards against abuse of the declaration forms by the purchasing dealers; they do not enable the selling dealer to either directly apply or to compel the purchasing dealers to apply for dupl'cate forms; nor do they enjoin on the ar'.'ropriate authority to give the selling dealer a duplicate form to replace ik lost one. We realise that the section and the rules as they stand may conceivably cause unmerited hardship to an honct dealer. He n'ay have lost the declaration forms by a pure acc; dent. such as tire, theft etc., and yet he will be penalised for something fo:· which he is not responsible. But it is for the Legislature or for the rule-making authority to intervene to soften the rigour of the provisions and it is not for this Court lo do so where the provision's are clear and unambiguous.

There 's an understandable reason for the stringency of the provisions. The object of s. 5(2)(a)(ii) of the Act and the rules made thereunder is self-evident. While they are obviomly iDtended to give exempt'on to a dealer in respect of sales to registered dealers of specified classes of goods, it seeks also to prevent fraud and collusion in an attempt to evade tax. In the nature of things, in view of innumerable transactions that may be entered into between dealers, it will wellnigh be impossible for the taxing authorities to ascerta'n in each case whether a dealer has sold the specified goods to another for the purposes mentioned in the section. Therefore, presumably to achieve the twofold object, namely, prevention of fraud and facilitating administrative efficiency, the exemption given is made subject to a condition that the person claiming the exempt; on shall furnish a declaration form in the manner prescribed under the section. The liberal construction suggested will facilitate the commission of fraud and introduce admin'strative inconveniences, both of which the provisions of the said clause sek to avoid.

KEDARNATH JUTE MFG. CO. V. C. T. O. CALCUTTA• (Subba Rao, J.) 631

The decision of this Court in The Stat~ of Orissa v. M.A.

Tulloch and Co. Ltd.(') does not help the appellant. That decisioa was concerned with s. 5(2)(a)(ii) of the Orissa Sales Tax Act, 1947.

That section was similar in terms to s. 5(2)(a)(ii) of the Act in question, but there was no proviso to that section in the Orissa Act similar to the one found in the present section. That makes all the difference, for it is the proviso that imposes the condition. But under r. 27(2) made under the Orissa Act "a dealer shall prodnce a true declaration in writing by the purchasing dealer or by such responsible person as may be authorized in writing in this behalf by such dealer that the goods in question are specified in the purchasing dealer's certificate of registration as being required for res:lle by him or in the execution of any contract." This Court held that the said mandatory provision was inconsistent with s. 5(2)(a)- (i i) of the Orissa Sales Tax Act; and to avoid that conflict it reconciled both the provisions by holding that the rule was only direct iry and, therefore, it would be enough and if it was substantially compiled with. The said provisions may afford a guide for amending the relevant provisions of the Act and the rules made thereunder, but do not furnish any help for construing them.

Before parting with the case we must make it clear that we are not expressing any opinion on the bona {ides of the appellant or the appropriate sales tax authorities, for we have not scrutinized the evidence in that regard.

E In the result, the appeal fails and is dismissed with costs.

Appeal dismissed.

-------· (') [IS64] 7 S.O.R. w:.

KEDARNATH ; JUTE MANUFACTURING CO

K. SUBBA RAO, J.

c. SHAH

SIKRI, JJ

S. 5(2)(a)

s. 5(2)

s. 21A

Art. 226

s. 27

s. 5(2)(a)(ii)

Section 21A

s. 27A

Calcutta High Court

A. V. Viswanatha Sastri

P.K. Ghosh

P. K. Chatterjee

P. K. Bose

E Subba Rao

High Court of Calcutta

s. 5(2)(a)

Calcutta

31st December l 954

s. 5(2)(a)(i)

s. 5(2)(a)(ii)

April 22, 1955

August 4, 1955

s. 5(2)(a)(ii)

August 8, 1957

s. 21

West Bengal

November 21, 1957

Art. 226

Sinha

s. 5

s. 5(2)(a)(ii)

s. 5(2)(a)(ii)

Bengal Sales Tax Rules, 1941

A. V. Viswanatha Sastri

s. 5(2)(a)(ii)

Section 5(2)(a)(ii)

Section 5(2)(a)(ii)

s. 5

Section 21A

s. 3

s. 5(2)(a)(ii)

Subba Rao

s. 5(2)(a)(ii)

Orissa Sales Tax Act, 1947

s. 5(2)(a)(ii)

s. 5(2)(a)