RAM GOPAL REDDY v.

ADDITIONAL ClJ~'TODIAN EVACUEE PROPERTY,

HYDERABAD

January 6, 1966

[P. B. GAJENDRAGADKAR, C.J., K. N. WANCHOO,

M. HIDAYATULLAH, V. RAMASWAMI, AND P. SATYANARAYANA Ruu, JJ.]

Administration of Evacuee Propmi Act (31 of 1950) s. 46, and Transfer of Propeiy Act (4 of 18.~2) ,. ;.1 A- Lund purchused in l94f>-- Vendor declared evacuee in 1949 c~1d lt1nd chc/c.red evacuee property- C suit b1 purchaser for declara:ion oj owntisl11p n:h~.-her lies.

The appellant purchased certilin land from one A in 1946.

Allbough the land was valued at more lhan R-,. 100 no reghtcred deed of sale was

cxecued. In 1949, A was de"; ared an evacuee and the appellant wa~ given notice by the Deputy Custodian of Evacuee Property to sltow cause why the land should not be declared evacuee property.

No appearance was put ; n by the appellant in answer to the notice and the land was declared D evacuee property.

The appellant represented to the departmental authorities that he had become ,,., vncr of the kind before the Evacuee Propcny law came into force. rhe Cu::.1odian did not accept the plea and obscrv~ ed that if the appellant was aggrieved by the dc..-cision he could obtain a declaration of his rights from a compztent court.

The appellant ther.:· fore filed a suit which was con1ested by the de'!1artment on the ground that s. 46 of the Administration of Evacuee Property Act was a bar. The subordinate Judge held that the court had jurisdiction because of s. 53A E of Transfer of Properry Act.

In appeal by the Custodian the High Court disagreed with the Subo, dinate Judge and reversed his decision.

The appellant then came to this Court by special leave.

HELD : The ,.chcme of the Evacuee Property Act clearly IS that when the property admittedly belongs to the evacuee any person claim:ng the property or any interest or ri!_ht trein has, on receip: of a notice under s. 7(1), to appear before the authorities cnti1led to deal w:th the maltcr •. under the Act.

Any person aggrieved by an order of such an au1hority made under s. 7 has the right to appeal under s. 24 arul if necessary to go in revision under s. 27.

The Act thus provides a complete machinery for a person interested in any properly to put forward his claims before the competent authorities.

Having provided this machinery the Act by s. 46 bars the jurisdiction of c'vil ; ind revenue coun-; to entertain or adjud:cate upon any question whether any property or any right or interest in any property is or is not evacuee property.

Any transfeec from an evacuee G claiming the property or any right or interct therein has to avail of the remedies under the Act and cannot go to a civil court. The fa<:t that in the present C..!SC the Custodk1n in his order said that the. appellant could go to a competent court couht not confer jurisdiction on 1he Court.

Nor could it be said on the facts found that the appellant had become the owner of the proper:y before 1947, for, admittedly the property was worth more than R~. 100 and \\'ithout a registered sale deed it \\as not II poasible for the title to paSi.

It may be that ':! A tried to get back the property s. 53-A of the Transfer of Property Act would come to the aid of the appellant in de-

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RAM GOPAL v. CUSTODIAN (Wanchoo, !.) 215

fence But the present suit had been filed to establish tho right of the appeliant as owner of the property and in such a suit the appellant could not take the benefit of s. 53-A. [217 B-218 BJ CIVIL APPELLATE JURISDICTION : Civil Appeal No. 885 of 1963.

Appeal from the judgment and decree, dated April 8, 1960 of the Andhra Pradesh High Court in Appeal No. 21/1of1956.

T. V. R. Tatacharl, for the appellant.

N. S. Bindra and R. N. Sachthey, for the respondent.

The Judgment of the Court was delivered by c Wanchoo, J.

The only question raised in this appeal on a

certificate granted by the Andhra Pradesh High Court is whether the suit brought by the appellant is barred under s. 46 of the Administration of Evacuee Property Act, No. 31 of 1950, (hereinafter referred to as the Act).

The facts are not in dispute and may be briefly narrated.

On November 15, 1946, the appellant claimed to have purchased certain patta lands from one Abdul Aziz Khan and paid him Rs. 6,127 /8/- in Osmania Sicca. The appellant got possession of the land and thereafter in June 1949 Abdul Aziz Khan applied in the Tahsil office for the transfer of the patta in the name of the appellant. Before, however, any transfer was made, Abdul Aziz Khan seemed to have migrated to Pakistan.

Consequently, the Deputy Custodian took steps to declare Abdul Aziz Khan an evacuee.

In that connection the appellant received notice from the Deputy Custodian in December 1950 under s. 7 of the Act asking him to sl.iow cause why the land should not be declared evacuee property. Though the appellant's case was that he engaged a counsel to appear on his behalf before the Deputy Custodian, no one seems to have appeared on his behalf, and in consequence, the Deputy Custodian declared the property to be evacuee property.

Thereafter the appellant was given a notice requiring him to surrender possession. of the land to the Tahsildar.

The appellant then made representation before the Deputy Custodian that he had purchased the property from Abdul Aziz Khan in 1946 and was the owner thereof from before the Evacuee Property Law came into force.

The Deputy Custodian called upon him to produce evidence and thereafter recommended to the Custodian that the property might be declared not to be H evacuee property.

The Custodian did not accept this recommendation on the ground that there was no registered sale deed duly executed by Abdul Aziz Khan in favour of the appellant and

SUPREME COURT

REPORTS

(1966) 3 S.C.R.

no transfer of property could therefore be said to have taken place in 1946, and ordered that the declaration of the property as evacuee property should stand and further said that if the appellant was aggrieved by this decision he could obtain a declaration of his rights from a competent court.

In consequence, the appellant filed the suit out of which the present appeal has arisen in the court of the Subordinate Judge, Nizamabad and prayed that a declaration be made that he was the owner of the property and in possession thereof and that the Custodian be ordered to execute and register a sale deed thereof in his favour.

The suit was resisted by the Custodian and the main contention raised on his behalf was that the suit was barred under s. 46 of the Act.

The Subordinate Judge however held that the appellant was entitled to the benefit of s. 53-A of the Transfer of Property Act (No. 4 of 1882) and that the civil court had jurisdiction inasmuch as the sale had taken place before 1947.

The Custodian then went in appeal to the High Court, and the only question raised there was that the suit was barred under s. 46 of the Act.

The High Court reversed the decision of the Subordinate Judge and held that the appellant had been given notice under s. 7 of the Act in December 1950 and did not appear before the Deputy Custodian with the result that the property was declared as evacuee property. The High Court further held that after this declaration the appellant's remedy was to proceed by way of appeal or revision under the Act and that a suit was barred in view of s. 46 thereof.

The appellant's contention that as he was a third party he was entitled to maintain the suit was negatived by the High Court.

In consequence the High Court dismissed the suit but directed the parties to bear their own costs.

The appellant then obtained a certificate from the High Court to appeal to this Court, and that is how the matter has come up before us.

We are of opinion that there is no force in this appeal.

It is unnecessary to consider the cases cited at the bar on behalf of the appellant for whatever may be the position of law where the title of the evacuee himself is in dispute, as to which we express no opinion, there can be no doubt that where the property admittedly belonged to the evacuee and the person filing the suit claims to be a transferee from the evacuee, the suit would certainly be barred in view of s. 46 of the Act.

Section 46 inter a/ia lays down that "save as otherwise expressly provided in this Act, no civil or revenue court shall have jurisdiction to entertain or adjudicate upon any question whether any property or any right to or

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RAM C.vPAL v. CUSTODIAN (Wanchoo, l.) 217

A interest in any property is or is not evacuee property." It is admitted that the appellant had received notice from the Deputy Custodian under s. 7 ( 1) of thC' Act but had neglected to appear before him and it was in those circumstances that the Deputy Custodian declared the property to be evacuee property.

That

order of the Deputy Custodian could be taken in appeal under s. 24 by the appellant to the authorities provided under the Act, and if necessary the appellant could also go in revision to the Custodian General under s. 27.

The scheme of the Act clearly is that where the property admittedly belongs to the evacuee any person claiming the property or any interest or right therein has on receipt of a notice under s. 7 ( 1) to appear before the authorities entitled to deal with the matter under the Act.

Any person aggrieved by an order of such an authority made under s. 7 has the right to appeal under s. 24 and if necessary to go in revision under s. 27. 'f]le Act thus provides a complete machinery for a person interested in any property to put forward his claims before the authorities competent to deal with the question and to go in appeal and in revision if the person interested feels aggrieved .

Having provided this complete machinery for adjudication of all claims with respect to evacuee property, the Act, by s. 46, bars the jurisdiction of civil or revenue courts to entertain or adjudicate upon any question whether any property or any right to or interest E in any property is or is not evacuee property. Where therefore

the property or any right to or interest in any property undoubtedly belonged to the evacuee and any transferee from the evacuee claims the property or any right to or interest therein he has to avail of the remedies provided under the Act. If he fails to do

F so he cannot file a suit in the civil or revenue court to have the question whether any property or any right to or any interest therein is or is not evacuee property decided in view of the clear provision of s. 46 (a) of the Act.

The fact that the Custodian in his order said that the appellant could go and establish his right in a competent court is of no assistance to the appellant, for if the law bars the jurisdiction of civil and revenue courts the G Custodian's observation that the party before him could go to a competent court to establish his right will not confer jurisdiction on a civil or revenue court.

Nor can it be said on the facts found in the present case that the appellant had become tho owner of the property before 194 7, for, admittedly the property was worth H more than Rs. 100 and it is not disputed that a registered sale deed was necessary to pass title from Abdul Aziz Khan to the appellant. No registered sale deed was executed in this case and therefore the property did not pass from Abdul Aziz Khan to

RAM GOPAL REDDY

ADDITIONAL CUSTODIAN EVACUEE PROPERTY, HYDERABAD

January 6, 1966

P. B. GAJENDRAGADKAR, C.J.

K. N. WANCHOO

M. HIDAYATULLAH

V. RAMASWAMI

Administration of Evacuee Propmi Act

s. 46

Transfer of Propeiy Act

s. 46

s. 53A

Transfer of Properry Act

s. 7(1)

s. 7

s. 24

s. 27

s. 46

s. 53

Transfer of Property Act

s. 53

Andhra Pradesh High Court

T. V. R. Tatacharl

N. S. Bindra

R. N. Sachthey

c Wanchoo

s. 46

November 15, 1946

Abdul Aziz Khan

Osmania Sicca

Pakistan

s. 7

Subordinate Judge, Nizamabad

s. 46

s. 53

Transfer of Property Act

s. 46

s. 7

s. 46

s. 46

Section 46

s. 7

s. 24

s. 27

s. 7

s. 7

s. 24

s. 27

s. 46

s. 46


220 SUPREME COURT RBPOllTS

[1966] 3 S.C.R.

Appeal from the judgment and order, dated July 4, 1962 of A the Bombay High Court in IJicome-tax Reference No. 46 of 1960.

A. V. Viswanatha Sastri, N. D. Karkhanis, R.H. Dhebar and R. N. Saclzthey, for the appellant.

Bishan Narain, B. R. L. Iyengar, S. K. Mehta and K. L.

B Mehta, for the respondent.

The Judgment of the Court was delivered by

Shah, J. In the account year ending November 6, 1953 Murlidhar Jhawar, Pannalal Lahoti and Govindbai carried on business in groundnut, cotton and cotton-seed.

In the year C of assessment 1954-55 the Income-tax Officer, Nanded, brought

10 tax a third share in Rs. 51,280 computed as profits from the business in the hands of each of the three parties, and thereafter he called upon Murlidhar to submit a return of the "income of the joint venture" on the footing that the parties thereto con- D stiluled an unregistered firm.

Murlidhar complied with the requisition and submitted in November 1957 a return, 1 but later applied 10 withdraw it by application dated December 18, 1957.

The Income-tax Officer rejected the application for withdrawal of return and completed the assessment of the three parties to the join I venture under s. 23 (3) of the Income-tax Act, t 922 in E !he status of an unregistered firm and computed the income of tl1e join! venture at Rs. 80,925. In appeal to the Appellate Assistant Commissioner the order passed by the Income-tax Officer was confirmed.

In second appeal, the Income-tax Appellate Tribunal set aside the order of the Appellate Assistant Commissioner. The Tribunal held that the Income-tax Officer had the option to F assess the individual parties to the joint venture, and he having exercised that option it was not open to him there!tfter to reassess the same income colleclively in the hands of the three parties to the joint venture in the status of an unregistered firm.

Bui on a concession made by counsel for the three parties, the Tribunal directed that the assessment be "rectified so as to restore the status G quo ante."

The Tribunal submiued a statement of the case and referred 1he following question to the High Court of Judicature at Bombay:

"Whether on the facts and in the circumstances of the case the assessment of the unregistered firm was proper and legal, the two partners of this partnefship

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C. I. T. V. M. J.P. FACTORY (Shah,],) 221

having been assessed in respect of their shares of income from this partnership business ? "

The High Court recorded an answer in the negative. With certificate granted by the High Court, this appeal has been preferred.

Under s. 3 of the Indian Income-tax Act, income-tax is charged in respect of the total income of the previous year of every individual, Hindu undivided family, company and local authority, and of every firm and other association of persons or the partners of the firm or the members of the association individually.

This Court in Commissioner of Income-tax, U.P. v.

Kanpur Coal Syndicate(') observed at p. 228 :

"The section ( s. 3) expressly treats an association of persons and the individual members of an association as two distinct and different assessable entities. On the terms of the section the tax can be levied on either of the said two entities according to the provisions of the Act." The same principle would apply to the cases of assessment of partners individually of an unregistered firm.

The partners may be assessed individually or they may be assessed collectively in the status of an unregistered firm : the Income-tax Officer cannot E however seek to assess the one income twice--once in the hands of the partners and again in the hands of the unregistered firm.

Mr. Viswanatha Sastri for the Department contends that the Income-tax Officer making the first assessment of the three parties to the joint venture was not informed that the three parties con- F stituted an unregistered firm and therefore the Income-tax Officer was in law competent to assess the entity which was in truth liable to be assessed to tax, and in making the earlier order of assessment he cannot be deemed to have exercised an option which precluded him from assessing the income of the three parties as an unregistered firm.

It is true as pointed out by this Court in a G recent judgment: Income-tax Officer, A-Ward, Lucknow v.

Bachulal Kapoor( 2 ) : that in dealiug with a claim made by the Income-tax Officer to assess income into the hand~ of a Hindu undivided family, after assessing it in the hands of the members on the footing that the family was severed, the "exercise of the option to do one or other of the two alternatives open to an officer H assumes knowledge on his part of the existence of two alternatives". But on the materials before the Court we are unable

(I) '3 I.T.R. 225 : [1964] 8 S.C.R 85.

222 SUPRl!ME COURT REPORTS

to accept the plea that the Income-tax Officer wlis not in posses sion of infonnation relying on which, if he desired, he could have assessed the three parties collectively as an unregistered firm.

There is no warrant for the assumption which counsel for the Department asks us to make, that information about the true state of affairs was not with the Income-tax Officer when. the first assessment was made by him.

The transactions in various commodities were carried on by Pannalal and Govindbai who were partners of Messrs.

Purna Ginning & Pressing Factory and by Murlidhar. The Income-iax Officer had assessed the income of the three parties separately and added to the individual income of each party his or her share in the profits of the joint venture.

The Income-tax Officer had information that the three parties, two of whom were members of a registered trading firm had effected transactions in groundnut, couon and cotton-seed.

Apparently returns in respect of these trading transactions were separately made and a third share was included in the individual assessment of each of the three parties.

Apart from an association of individuals or a firm, the Income-tax Act does not recognize a collection of individuals as an entity capable of being assessed to tax.

The three patties were not a registered fim1, and they could be assessed to tax collectively as an association of individuals or as an unregistered firm if the relation between them was of partners.

When the Income-tax Officer assessed the three parries separately he unquestionably exercised an option knowing that they had entered into a trading transaction in which they were jointly interested.

The depart mental authorities have not chosen to place before the Court the returns made by the three parties, and even the orders of assessment individually made agaiJist the three parties by the Income; tax Officer are not before this Court.

Only the final order of the Income-tax Officer which directs : "Add : Joint venture income

with Messrs. Puma Ginning and Pressing Factory taken pmvi sionally subject to rectification after the assessment of the joint venture" is incorporated in the order of the Appellate Assistant (!,) Commissioner.

It is common ground that the assessment made by the IncometaK Officer was not a "provisional assessment" within the meaning of s. 23B.

It would be reasonable to hold that the income of the three parties was assessed under s. 23 ( 3) of the Income-tax Act, for the income was earned in commercial transactions in different commodities.

The Income-tax Officer in assessing the income of the joint venture could not have proceeded

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C. I. T. v. M J. P. FACTOllY (Shah, }.) 223

without scrutinizing the accounts and other relevant documentary evidence and without determining the shares of the three parties to the joint venture. In determining the shares of the three parties, he had also to determine the contractual relation which gave rise to the right to a share in the profit.

Again the order of the Income-tax Officer clearly indicates that he was cognizant of the fact that the income of he joint venture was taxable collectively, but he thought that he could in law in the first instance make an "assessment provisionally" of the three parties separately and then rectify the assessments later. In so holding the Incometax Officer may have committed an error of law, but he does not appear to have laboured under an ignorance of facts. A survey of the contentions raised before the departmental authorities, the Tribunal and the High Court makes that inference irresistible. The Income-tax Officer who made the assessment under challenge did not state that when the first assessment was made, the facts which had a bearing on the true relationship between the three parties were not placed, and it was not even argued before the Appellate Assistant Commissioner and the Tribunal that those facts were not placed before the Income-tax Officer. The Tribunal held, relying upon 1. C. Thakkar v. Commissioner of Income-tax(') and }oti Prasad Agarwal & Others v. Income-tax Officer, B-Ward Mathura(2), that once the option is exercised for assessing the individual partner and including his share of profits in the firm in his assessment, it is not open to the Department to assess the same income as income of the unregistered firm.

The appeal therefore fails and is dismissed with costs.

(I) "J:1 I.T.R. 658.

(2) 37 I.T.R. 107.

Appeal dismissed.

A. V. Viswanatha Sastri

N. D. Karkhanis

R.H. Dhebar

R. N. Saclzthey

Bishan Narain

B. R. L. Iyengar

S. K. Mehta

K. L.

B Mehta

Shah, J.

Murlidhar Jhawar

Pannalal Lahoti

Govindbai

Nanded

Murlidhar

December 18, 1957

s. 23

Income-tax Act

High Court of Judicature at Bombay

s. 3

Income-tax Act

s. 3

Viswanatha Sastri

[1964] 8 S.C.R 85

Pannalal

Purna Ginning & Pressing Factory

Income-tax Act

Puma Ginning and Pressing Factory

s. 23B

s. 23

Income-tax Act


GOWLIBUDDANNA A v.

COMMISSIONER OF INCOME-TAX, MYSORE, ,

BANGALORE .. .

January 10, 1966 B

[K. SUDDA RAO, J. C. SHAH AND S. M. SIER!, JJ.]

lnc<nne Tax Act, 1922 (II o/ 1922), 1. 3-Hlndu undivid1d fom//y- Whether includes ; oint family with one surviving male mtmber and /nna/e member-1. '

B, hill wife, his two unmarried daughters and the appellant who was c B's adop!cd son, were members of a Hindu undi\'ided family. In respect of the income from dealings of the family, B was assessed during his JifjH, jmc in tho status of a manager of the Hindu undivided family. After ru. death for the ent year 1951-52, the Incom<rtax Ofllcer UICllCd

the appellant on the basis that tho income waa that of a Hindu undivided family and rejected the latter's contention that he should be assessed as an indhidual. The order of assessment was confirmed by the Appellate Aaalotant Commissioner, the Tribunal and on a reference, by tbo Hi&h D Coun.

It was contended on behalf of the appellant that tbe expression 'Hindu • undivided family' used in s. 3 of the Income Tax Act, 1922, means a ' Hindu coparcenary and when on the death of one out of two carcCllll'3 the enfjre property devolve.c; upon a single co-parcener, assessment cannot be made of the surviving co-parcener, in the status of a Hindu undivided

f•mily.

Alternatively it wa.• contended that even if the entity 'Hindll E undivided family' in s. 3 is intende<.I to mean a Hindu joint family, a sole survivin~ male member of the family, even if there be widows in

the family entitled to maintenance, may only be assessed as an indivi dual.

HELD : Propeny of a Joint family does not cease to belong to the family merely because the family is represented by a single co-parcener who poslCS'lCS rights similar to those of an owner of property.

In the Ji' present case the propeny which yielded the income origmally belonged to a Hindu undivided family. On the cleath of B although the family which included & widow and females born in the family was represented by the appellant alone, the property continued to belong to the undivided family and income received therefrom was taxable as income of the Hindu undivided family.

(234 DI

Under s. 3 of the Act, it is not a Hindu coparcenary but a Hintlu G undivided family which one of the ass....., ble entities.

A Hindu joiat family consists of all persons lineally descended from a common ancestor , and includeo their wives and unmarried daughters.

A Hindu coparcenary ~- is a much narrower body and includes only those persons who :'itiuire - by binh a status In the joint or co-parcenary propeny.

Therefore I ere may be a Joint Hindu family conaistin2 of & single male member and wido""' of deceased of co-parceners. [227 Al

There was no force in the alternative plea that there must be at least H two male members to form a Hindu undivided family aa a taxablo entity.

The expression 'Hindu undivided family' in the Act is used in the aeoae in which a Hindu joint family is understood in Hindu law.

Under the

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A Hindu system of law a joint family consist of a single male member and widows of deceasecl male membeG and there is nothing in the Act to indicate that a Hindu undivided family as an assessable entity must consist of at least two male members. (231 El

Kalyanji Vithaldas & Others v. C.l.T., Bengal, 5 I.T.R. 90 (64 I.A. 28) C.J.T., Bombay v. Gomedal/i Lakshminarayan, 3 LT.R. 367; In re Mooljl Slcka & others, 3 I.T.R. 123; C.I.T. v. A. P. Swamy Gomeda/ll, 5 B I.T.R. 416; Attorney-General of Ceylon v. A. R. Arunachalam Chettiar and others, L.R. [1957] A.C. 540; 34 l.T.R. Supp. 42, discussed.

Civ11. APPELLATE JURISDICTION : Civil Appeal No. 328 of 1965.

Appeal from the judgment and order dated June 20, 1962 of the Mysore High Court in Income-tax Reference Case No. 15 of c 1961.

K. Srinivasan and R. Gopalakrishnan, for the appellant.

A. V. Viswanatha Sastri, R. Ganapathy Iyer and R. N. Sachthey, for the respondent.

D S. T. Desai, R. P. Kapur for I. N. Shroff, for the intervener.

The Judgment of the <'.:ourt was delivered by Saali, J. One Buddappa, his wife, his two unmarried daughters and his adopted son Buddanna were members of a Hindu undivided family.

Buddappa died on July 9, 1952. In respect of the E business dealings of the family, Buddappa was assessed during his life-time in the status of a manager of the Hindu undivided family.

For the assessment year 1951-52 the Additional Income-tax Officer, Raichur assessed Buddanna in respect of the income of the previous year which ended on November 8, 1950 as a Hindu undivided family under the title "Sri Gowli Buddappa (deceased) F represented by his legal successor Sri Gowli Buddanna, Oil Mills

Owner, Raichur". The order of assessment was confirmed in appeal by the Appellate Assistant Commissioner, subject to the variation that the assessment was made under the title "Buddanna -a Hindu undivided family".

The Income-tax Appellate Tri- G bunal confirmed the order of the Appellate Assistant Commissioner.

The Tribunal then referred the following questions of law t() High Court of Mysore for opinion under s. 66 ( 1) of the Indian Income-tax Act :

"(i) Whether the sole male surviving coparcener of the Hindu joint family, his w'dowed mother and sisters constitute a Hindu undivided family within the meaning of the Income-tax Act ?

SUPREME COUllT llEPOl.TS

(1966) 3 S.C.I..

(ii) Whether the assessment of the income in the hands of the Hindu undivided family was correct?

(iii) Whether the Appellate Assistant Commissioner was entitled to correct the status ?"

The High Court recorded answers in the affirmative on all the B ( questions.

With certificate granted by the High Court undu s. 66-A of the Indian Income-tax Act, Buddanna has appealed to this Court.

Before the Appellate Assistant Commissioner it was contended by Buddanna that he could in law have only been assessed as C an individual and that the Income-tax Officer was precluded by virtue of the proviso to s. 26(2} to pass the order for assessment for the year 1951-52 against him.

The Appellate Assistant Commissioner and the Appellate Tribunal rejected that contention.

Buddappa was a resident of and carried on business at Raichur which before January 26, 1950, formed part of the territory

-Of H.E.H. the Nizam.

The joint family of Buddappa and Buddanna was governed by the Mlrakshara School of Hindu law, and there was at the material time no legislation in force in the territory by which on the death of a male member in a joint Hindu E family interest in the family estate devolved upon his widow.

Such a widow had therefore only a right to receive maintenance from the estate.

Counsel for the appellant urged that the expression "Hindu undivided family" used in s. 3 of the Income-tax Act means a F Hindu coparcenary and when on the death of one out of two

t'lparccners the entire property devolves upon a single coparcener, assessment cannot be made on the surviving coparcener in the status of a Hindu undivided family.

Alternatively, it waa contended that even if the entity Hindu undivided family in the charging section of the Income-tax Act is intended to mean a G Hindu joint family, there must be at least two male membm in the family, and where there are not two such members the sole surviving male member of the family, even if there be widows entitled to maintenance out of the estate, mav be assessed in the status of an individual, and not of a Hindu undivided family, unlea the widows of deceased male members are entitled to the benefit H cl the Hindu Women's Rights to Property Act, 1937, or the IDndu Succession Act, 1956.

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A The first contention is plainly unsustainable. Under s. 3 of the Income-tax Act not a Hindu coparcenary but a Hindu undivided family is one of the assessable entities. A Hindu joint family consists of all persons lineally descended from a common ancestor, and includes their wives and unmarried daughters. A Hindu coparcenary is a much narrower body than the joint B family : it includes only those persons who acquire by birth an interest fo the joint or coparcenary property, these being the sons, grandsons and great-grandsons of the holder of the joint property for the time being. Therefore there may be a joint Hindu family consisting of a single male member and widows of deceased copar- . ceners.

In Kalyanji Vithaldas & Others v. Commissioner of C Income-tax, Bengal(1 ), delivering the judgment of the Judicial

Committee, Sir George Rankin observed :

"The phrase "Hindu undivided family" is used in the statute with reference not to one school only of Hindu law but to all schools; and their Lordships think it a mistake in method to begin by pasting over the wider phrase of the Act the words "Hindu coparcenary", all the more that it is not possible to say on the face of the Act that no female can be a member."

E The plea that there must be at least two male members to form a Hindu undivided family as a taxable entity alro has no force. The expression "Hindu undivided family" in the Income-tax Act is used in the sense in which a Hindu joint family is understood under the personal law of Hindus. Under the Hindu system of law a joint family may consist of a single male member and F widows of deceased male. members, and apparently the Incometax Act does not indicate that a Hindu undivided family as an assessable entity must consist of at least two male members.

Counsel for the appellant said that there are certain intrinsic indications in the annual Finance Acts which support the contea- G tion that the income received or arising from property in the hands of a sole surviving male member in a joint Hindu family, even if there be females having a right to maintenance out of that property, is taxable as income of an individual, and not of the family.

He relied by way of illustration upon the Finance Act, 1951, which in the First Schedule sets out the rates of income-tax H payable by individuals, Hindu undivided family, unregistered firm

(I) 5 1.T.R. 90=L.R. 64 I.A. 28.

228 SUPREME COURT REPOllTS

[1966) 3 S.C.R.

and other association of per5ons. The relevant part of the Schedule prescribing rates of tax is as follows :

"Provided that- ( i) no income-tax shall be payable on a total income

which, before deduction of the allowance, if any, for earned income, does not exceed the limit specified below;

The limit referred to in the above proviso shall be-

( i) Rs. 7,200 in the case of every Hindu undividH

family which satisfies as at the end of the previous year either of the following conditions, nam•ly:

(a) that it has at least two members entitled to claim partition who are not less than I 8 yea rs of age; or ( b) that it has at least two members entitled to claim partition neither of whom is a lineal descendant of the other and both of whom are not lineally descended from any otller living member of the family; and

(ii) Rs. 3,600 in every other case."

Fif5t

But the Schedule sets out the limits of exempted income: it lk>es net state or imply that a Hindu undivided family must consist of at least tw• 111cmbcrs entitled to claim partition. The text Qf the cla11s11 furni51!es a clear indication to the contrary.

Reliance was also places upon the form of "Rwturn" prescrib- F ell u1tiu the lfoles, whicil. by s. 5'!1 of the Income-tax Act, l '22 have 11ffect as if enacted in the Act. Part IIIA of the Form prescribes certain particulars to be incorporated in the case ef a Hinti11 untlividce family, viz. names of members of the family at the end of the previous year who were entitled to claim partition, relatienship, age at the end of the previous year and remarks, wt G thereby it is not intended that a Hindu undivided family as an ass.ssable entity does not exist so long as there are not at least twe or more members entitled to claim partition. The information is required to be given in Part illA of the Form merely to enable the Income-tax Officer to consider which of the two parts of the proviso in the First Schedule to the relevant Finance Act II prescribing the limit of exemption in respect of the Hindu undivided family applies.

"' ....

/ 4:

. _, •

A Sub-section ( 1) of s. 25-A on which reliance was placed also does not imply that a Hindu undivided family must consist of more male members than ene. The sub-section only prescribes the procedure wher.::by the memb6rs of a family which has llitherto looen assessed in the status of a Hindu undivided family may obtain an ordtr that they may, because of partition of the joint B status, be assesstd as stparated members. The clause is purely procedural: it dees not en.act either expressly or by implicatfom that a Hindu undivided family assessed as a unit must consist of at least two male members who are capable of demanding a partition. c Counsel for the appellant placed strong reliance upon certain observations of the Judieial Committee in the judgment in Kalyanji Vlthaldas's case(') in which they disapproved of the view expressed by the Bern.bay High Court in Commissioner 0f lncumetax, Bombay v. Gomedalli Lakshminarayan('). In the case D decided by the l'l0mbay High Court a joint family c0nsisted of a father and a son and their respective wives. The father died, and in the year of assessment th.~ joint family consisted of the son, his mother and his wife.

In dealing with the question referred by the Commissioner of Income-tax whether the income received by the son should be regarded as his individual income or as the E income of a Hindu undivided family for the purpose of assessment

to super-tax under the Indian Incom-e-tax Act, the B0mbay High Court held that the expression "Hindu undivided family" as used in the Income-tax Act includes families consisting of a sole surviving male member and female members emtitled to mainten&nce, and the ineome of the assessee should therefore be treated u the F income of a Hindu undivided family.

In Kalyanji Vithaldas's case(') which dealt with a group of appeals from the judgment of the Calcutta High C"iurt in In re Mlji Sicka & Others(•) the Judicial Committee o9served :

"Tile High Cowrt ( ef Calcutta) approached the cases by considering first whether the assessee's famiiy was a Hindu uadivialei family, and in the end left unanswered the questil'>n whetlter the inc0me under assessment was the inc•me of that family.

This is due no doubt to the way iu. which the Commissio11er haci stated

the questions. But, after all if the relevant Hindu law had been that the income belonged, not to the assessee

(I)~ I.T.R. 90=L.R. 64 I.A. 28.

(2) 3 I.T.R. 367.

(3) 3 I.T.R. 123.

230 SUPllBME COU.T REPORTS

(1966)3 S.C.R.

himself, but to the assessce, his wife and daughter joint ly, it is difficult to sec how that association of indivi

duals could have been refused the description "Hindu joint family".

Tho Bombay High Court, on the other hand, in Laxmi naraya11°s case having held that the assesscc, his wife and mother were a Hindu undivided family, arrived too readily at the conclusion that the income was the income of the family."'

The Judicial Committee further observed :

"Under Section 3 or Section 55 income is not to be attributed to any one of the five classes of persons mentioned by any loose or extended interpretation of the words, but only where the application of the words is warranted by their ordinary legal meaning . . . • In an extra legal sense, and even for sonic purposes of legal theory, ancestral property may perhaps be described, and usefully described, as family property; but it does not follow that in the eye of th.e Hindu law it belongs, save in cel1ain circumstances, to the family as distinct from the individual. By reason of its origin a man's property may be liable to be divested wholly or in part on the happening of a particular event, or may be answerable for particular obligations, or may pass at his death in a particular way; but if, in spite of all such facts, his personal law regards him as the owner, t'ie propel1y as his prope11y and the income therefrom as his income, it is chargeable to income-tax as his, i.e. as the income of an individual. In their Lordships' view it would not be in consonance with ordinary notions or with a correct interpretation of the law of the Mitakshara, to hold that property which a man has obtained from his father belongs to a Hindu undivided family by reason of his having a wife and daughters."

The facts of the cases which were decided by the Judicial Committee need to be scrutinized carefully. Before the Judicial Committee there were six appeals by six partners of the firm Moolji Sicka: they were Moolji, Purshottam, Kalyanji, Chaturbhuj, Kanji and Sewdas. Moolji, Purshottam and Kalyanji had H each a son or sons from whom he was not divided. But the income of the firm, which had to be a!sessed to super-tax was the separate

t . ,

-•

...... •

A income. of each of these partners. Chaturbhuj had a wife and daughter but no son, and the income was bis separate property.

Kanji and Sewdas, sons of Moolji, were marrie~ me~, but neier had a son : they received by gift from Mool11 their respective interests in the firm, and for the purpose of the case it was ass\Jmed that the interest of each was ancestral property in which if he Il had a son the son would have taken an interest by birth. But no son having been born, the interest of Kanji and Sewdas in the property was not diminished or qualified. The Judicial Committee held that the wife and the daughters of a Hindu had right to maintenance out of his separate property as well as out of his c coparcenary interest, but the mere existence of a wife or daughter did not make ancestral property in his hands joint. They observed:

" 'Interest' is a word of wide and vague significance, and no doubt it might be used of a wife's or daughter's right to be maintained which right accrues in the D daughter's case on birth; but if the father's obligations are increased, his ownership is not divested, divided or impaired by marriage or the birth of a daughter. This is equally true of ancestral property belonging to himself alone as of self-acquired property."

E The Judicial Committee accordingly held that in none of the six appeals before them could the income falling to the shares of the partners of a registered firm be treated as income of a Hindu undivided family and assessed on that footing.

In the view of the Judicial Committee, income received by four out of the six partners was their separate income: in the case of the remaining F two partners the income was from sources which were ancestral.

But merely because the source was held by a member who had received it from his father and was on that account ancestral, the income could not be deemed for purposes of assessment to be income of a Hindu undivided family, even though Kanji had a wife and a daughter, and Sewdas had a wife who had rights to be G maintained under the Hindu law .

In Gomeda/li Lakshminarayan's cas.e(') the property was ancestral in the hands of the father, and the son had acquired by birth an interest therein.

There was a subsisting Hindu undivided family during the life-time of the father and that family did H not come to an end on bis death. On these facts the High Court of Bombay held that the income received from the property wa<>

(I) 5 I.T.R. :167.

Lt OSupCJ /66-2

SUP.REME

COURT REPORTS

[1966] 3 S.C.R.

liable to super-tax in the hands of the son who was the surviving A male member of the Hindu undivided family in the year of assess- ment. This distinction in the facts in the case then under discussion and the facts in Gomedalli Lakshminarayan's case(') was

not adverted to and the Board observed in Kalyanji Vithaldas's case( 2 ) that the Bombay High Coun "arrived too readily at the conclusion that the income was the income of the family." When 8 Gomeda//i Lakshminarayan's case(') was carried in appeal to the Judicial Committee, the Board regarded themselves as bound by the interpretation of the words "Hindu undivided family" employed in the Indian Income-tax Act in the case of Ka/yanji Vithaldas(Z), and observed that since the facts of the case were not in any material respect different from the facts in the car!i.cr case, C the answer to the question referred should be that "th.e income received by right of survivorship by the sole surviving male member of a Hindu undivided family can be taxed in the hands of such male member as his own individual income for the purpose of assessment to super-tax under s. 55 of the Indian Income-tax D Act, 1922.": Commissioner of Income-tax v. A. P. Swamy G<>- medalli(').

It may however be recalled that in Kalyanji Vithaldas's case(') income assessed to tax belonged separately to four out of six partners : of the remaining two it was from an ancestral source but the fact that each such partner had a wife or daughter did J: not make that income from an ancestral source income of the undivided family of the panner, his wife and daughter. In Gomedalli Lakshminarayan's case(') the propeny from which income accrued belonged to a Hindu undivided family and the effect of the death of the father who was a manager was merely to invest the rights of a manager upon the son. The income from the pro- ¥ perty was and continued to remain the income of the undivided family. This distinction which had a vital bearing on the issue falling to be determined was not given effect to by the Judicial Committee in A. P. Swamy Gomedal/i's case(').

A recent judgment of the Judicial Committee in a ca5e aris- G ing from Ceylon-Attorney-General of Ceylon v. A. R. Arunachalam Chetiar and Others(') is in point. One Arunachalam -a Nattukottai Chettiar-and his son constituted a joint family governed by the Mitakshara School of Hindu law. The father aad the son were domiciled in India and had trading and other interests

in India, Ceylon and Far Eastern Countries [Vide Attorney- H

5 l.T.ll. 367.

(3) ! l.T.R. 416.

(2) S 1.T.R. 90-L.R. 641.A. 28.

(4) L.R. [19$7) A.C. 540 : 341.T.R. Suppl. 42.

- >

' •

A General v. A. R. Arunachalam Chettiar (No. 1)-(L.R.[1957] A. C. 513). The undivided son died in 1934 and Arunachalam became the sole surviving coparcener in a Hindu undivided family to which a number of female members belonged.

Arunachalam died in 1938 shortly after the Estate Duty Ordinance No. 1 of 1938 came into operation in Ceylon. By s. 73 of the Ordi- B nance it was provided that property passing on the death of a member of a Hindu undivided family was exempt from payment of estate duty. At all material times, the female members of the family had the right of maintenance and other rights which belonged to them as such members. The widows in the family including the widow of the predeceased son had also the power c to introduce coparceners in the family by adoption, and that power

was exercised after the death of Arunachalam. On a claim to estate duty in respect of Arunachalam's estate in Ceylon, it was held that Arunachalam was at his death a member of a Hindu undivi(oJed family, the same undivided family of which his son, D when alive was a member, and of which the continuity was preserved after Arunachalam's death by adoptions by the widows of the family. The Judicial Committee observed at p. 543 :

" ...... though it may be correct to speak of him (the sole surviving coparcener) as the "owner", yet it is still correct to describe that which he owns as the joint family property. For his ownership is such that upon the adoption of a son it assumes a different quality : it is such too, that femule members of the family (whose members may increase) have a right to maintenance out of it and in some circumstances to a charge for maintenance upon it.

And these are incidents which arise, notwithstanding his so-called ownership, just because the property has been and has not ceased to be joint family property . . it would not appear reasonable to impart to the legislature the intention to discriminate, so long as the family itself subsists, between property in the hands of a single coparcener and that in the hands of two or more coparceners."

Dealing with the question whether a single coparcener can alienate the property in a manner not open to one of several coparceners, they observed that it was,

"an irrelevant consideration.

Let it be assumed that his power of alienation is unassailable: that means no more than that he has in the circumstances the power to alienate joint family property.

That is what it is

2J4

SUPREME COURT

REPORTS

[1966] .1 S.C.R.

•mtil he alienates it, and, if he does not alienate it, that is what it remains.

The fatal flaw in the argument of the appellant appeared to be that, having labelled the ;•1rviving coparcener "owner", he then attributed to his ownership such a congeries of rights that the property could no longer be called "joint family property". 1be family, a body fluctuating in numbers and comprised of male and female members, may equally well be said to be owners of the property, but owners whose ownership is qualified by the powers of the coparceners.

There is in fact nothing to be gained by the use of the word "owner" in this connexion. It is only by analysing the nature of the rights of the members of the undivided family, both those in being and those yet to be born, that it can be determined whether the family prope11y can properly be described as "joint property" of the undivided family."

Property of a joint family therefore dlles not cease to belong to the family merely because the family is represented by a single coparcener who possesses rights which an owner of property may possess.

In the case in hand the property which yielded the income originally belonged to a Hindu undivided family.

On the death of Buddappa the family which included a widow and females born in the family was represented by Buddanna alone but the property still conlinucd to belong to that undivided family and income received therefrom was taxable as income of the Hindu undivided family.

The Hi!!h Coll"t was therefore right in recording their

an., wers referred for opinion.

We may observe that in this case we ellpress no opinion on the question whether a Hindu undivided family may for the purpose of the Indian Income-tax Act be treated as a taxable entity when it consists of a single member-male or female.

The appeal is dismissed with costs.

Appeal dismissed.

' ,

GOWLIBUDDANNA

COMMISSIONER OF INCOME-TAX, MYSORE, BANGALORE

January 10, 1966

K. SUDDA RAO, J.

C. SHAH

Tax Act, 1922

s. 3

Income Tax Act, 1922

s. 3

s. 3

K. Srinivasan

R. Gopalakrishnan

A. V. Viswanatha Sastri

R. Ganapathy Iyer

R. N. Sachthey

D S. T. Desai

R. P. Kapur

I. N. Shroff

Saali

Buddappa

Buddanna

Buddappa

Raichur

s. 66

Income-tax Act

s. 66

Income-tax Act

Buddappa

Buddappa was a resident of and carried on business at Raichur which before January 26, 1950, formed part of the territory
Of H.E.H. the Nizam.

January 26, 1950

Income-tax Act

Income-tax Act

Income-tax Act

George Rankin

Income-tax Act

First Schedule

L.R. 64 I.A. 28

s. 5

Income-tax Act

First Schedule

s. 25

Kalyanji Vlthaldas

Bern.bay High Court

B0mbay High Court

Income-tax Act

Kalyanji Vithaldas

Calcutta High C"iurt

Mlji Sicka

L.R. 64 I.A. 28

Bombay High Court

Laxmi naraya11

Section 3

Section 55

Moolji Sicka

Purshottam

Kalyanji

Chaturbhuj

Kanji

Sewdas

Purshottam

Kanji

Sewdas

Gomeda

Lakshminarayan

High Court of Bombay

Gomedalli Lakshminarayan

Bombay High Coun

Gomeda//i Lakshminarayan

Income-tax Act

Ka/yanji Vithaldas(Z

s. 55

Indian Income-tax D Act, 1922

A. P. Swamy Gomedal

Arunachalam

India

S 1

Arunachalam

s. 73

Ceylon

Income-tax Act


\ H

COMMISSIONER OF lNCOME-TAtX, BOMBAY CITY v.

TATA LOCOMOTIVE & ENGINEERING CO., LTD.

Jqnuary 13, 1966

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

Income Tux-Conimission received in U.S.A.-Kept in U.S.A. for buying capital goods with sanction of Reserve Bank-Amount later repacr; attd-Surplus in rupees due to devaluation-If capital or rtv,, nue receipt.

The assessee was a limited company with its registered office _at Bombay.

Its main business was the manufacture of locomotive boilers and locomotives, and for that purpose the assessee had to make purchases of plant and machinery, in various countries including the U.S.A.

The .. sessee appointed M/s. Tata Inc., New York, as its purchasing agent in the U.S.A.

The assessee was also the selling agent of Baldwin Locomotive Works, U.S.A., for the sale of their products in India, and the commission payable to the assessee as their sole selling agent was made over to the assessee's purchasing agent in Now York with the sanction of the Reserve Bank and for the purchase of capital goods. This amount was taxed in the relevant assessment years on the accrual basis and the tax was paid. On 16th September 1949, the pound &terlinJI waa devalued and the rate of exchange between rupee and dollar which was Rs. 3.33 per dollar before devaluation, became Rs. 4.775 per dollar thereafter.

On that date, there was in the as.sessee's account with the purchasing agent a sum of $ 36,123.02 representing the commission received from Baldwin Locomotive Works. With the permission of the Reserve Bank this sum Vias repatriated to India in 1950 and the change in the exchange rate gave rise to a surplus in rupees. The Income-tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal held that this surplus amount was liable to tax.

The High Court, on a reference, held that the sum was not taxable in the hands of the assessee.

In appeal to this Court, it was contended that the assessee was liable to tax because; (i) if the commission had been ano, ved to remain in the U.S.A. up to 16th September 1949 anc1 had been repatriated on 17th September, the assessee would have been Hable to tax and therefore the permission of the Reserve Bank and the decision of the assessee to hold it to buy capital goods did not make any difference; and (ii) the fact that the assessee credited the rupee equivalent of the sum in his books and pa:id tax on the basis of accrual did not also make any difference to the

assesee's liabi1ity.

HELD : The High Court was right in deciding in favour of the

assesee. !

The assessee's liability to tax would depend on whether the act of keeping the money for capital purposes after obtaining the sanction of the Reserve Bank was part of or a trading transaction. The amount no doubt. was a revenue receipt in the assessee's business of commission agency.

But instead of repatriating it immediately, the assessee obtained the sanction of the Reserve Bank to utilize the commission for buying capital good<;, and that was an independent transaction.

It was not a

SUP.REMB COURT REPORTS

(1966] 3 S.C . .R.

trading transaction but was a transaction of accumulating dollars to pay A. for capital goods, the first step to the acquisition of capital goods. If tho assessee had repatriated the amount and then, after obtaining the sanction of the Reserve Bank, remitted it to the U.S.A. any profit made on devaluation would only be a capital profit.

Therefore, the fact that the assesscc kept the money in the U.S.A. did not make any difference under !be circumstances. [241 B-F]

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 236 of - B 1965.

Appeal from the judgment and order dated August 30, 1961 of the Bombay High Court in Income-tax Reference No. 12 of 1959.

A. V. Viswanatha Sastri, N. D. Karkhanis, R. H. Dhebar and C R. N. Sachthey, for the appellant.

N. A. Palkiva/a, T. A. Ramaclzandran, J. B. Dadachanji,

0. C. Mathur and Ravinder Narain, for the respondent.

The Judgment of the Court was delivered by Sikri, J, This appeal hy certificate granted by the High Court of Judicature at Bombay under s. 66-A ( 2) of the Indian Income Tax Act, 1922, hereinafter referred to as the Act, is directed against its judgment in a reference made to it by the Income-Tax Appellate Tribunal. The following two questions were referred :

( l ) Whether on the facts and in the circumstances • of the case, the surplus or difference arising as a result of devaluation in the process of converting dollar currency in regard to the sum of $36,123/02 repatriated to India was profit which was taxable in the hands of the assessee ?

(2) Whether the said sum of $36,123/02 having been taxed in the relevant earlier years, the surplus or difference in dollar exchange account arising by reason of the repatriation thereof as a result of devaluation was rightly taken as profit taxable ?

The relevant facts and circumstances, as stated in the Statement G

h ' . ,

of the Case, are as follows : The respondent, Tata Locomotive , • and Engineering Co. Ltd., hereinafter referred to as the assessee, is a limited company registered under the Indian Companies Act (VII of 1913), and has it' registered office at Bombay. The main business of the assessee is the manufacture of locomotive. boilers and locomotives. For the purpose of this manufacturing H activity the assessee had to make purchases of plant and machinery, etc., in various countries including the U.S.A.

The assessee

A appointed M/s Tata Inc., New York, as its purchasing agent in the U.S.A. With the sanction of the Exchange Control Authorities a remittance of $33,830 was made in 1949 to Messrs. Tata Inc., New York for the purpose of purchasing capital goods from the U.S.A. and meeting other expenses connected therewith.

B The assessee was also the selling agent of Baldwin Locomotive Works, for the sale of their products in India, and in connection with the sale of the products of Baldwin Locomotive Works in India the assessee had to incur expenses on their behalf in India. These expenses were re-irnbursed to the assessee by Baldwin Locomotive Works in the U.S.A. by paying the amount c due to Messrs. Tata Inc., New York. The amount so paid to Tata Inc. was retained in the assessee's account with Messrs. Tata Inc. for purchase of capital goods.

As the sole selling agent the assessee was entitled to commission from Baldwin Locomotive Works. The commission payable to the assessee in dollars was not actually sent from. the D U.S.A. to India, but with the sanction of the Exchange Control Authorities was made over to the assessee's purchasing agents, Messrs. Tata Inc., New York. The reason why this was done was explained in the assessee's letter dated October 26, 1948, to the

. Reserve Bank of India.

In it the assessee stated, inter alia, as follows:

"It would be more convenient if the amount of commission payable to us periodically be deposited into our account with our representative, Messrs. Tata Ii.c .. New York, opened with reference to your letter PC.BY. 7031/74/46 dated 2nd October, 1946, as the same would go to reduce the amount of remittance to be made from here in recoupment of that amount from time to time.

These amounts will be utilised solely for the purposes detailed in our letter to you TC-679 dated 15th August, 1946." G The purposes referred to in the said letter of August 15, 1946, were purchase of capital goods.

The amount received as commission was taxed in the relevant assessment years on the accrual basis and tax has been paid,

On September 16, 1949, there was a balance of $48,572/30 in the assessee's account with Messrs. Tata Inc. made up as under :

H (I) Remittances from Bombay $33,850·00 Less : Dollars spent in the U.S.A. for capital $30,282 96 purposes

$ 3,567·04

SUPREME COURT

REPORTS

(2) Amount reimbursed by Baldwin Lc:ieo..

motive Works against funds made ava:Ja. blc to its representatives in India

(3) Commission actually received fron1 Baldwin Locomotive.~ Works and retai.D.-

<d in the U.S.A.

TOTAL

[1966] 3 S €R

$8,882 l4

136,123 02

$48, S12 30

On September 16, 1949, the pound sterling was devalued. Prior to the devaluation the rate of exchange between rupee and dollar was Rs. 3.330 per dollar and on devaluation the rate became Rs. 4.775 per dollar.

The result was that the assessee found it more expensive to buy American goods and as the Government of India also imposed some restrictions on imports from the U.S.A., the assessee decided to repatriate the dollars and for the purpose applied to the Reserve Bank of India on December 17,

1949. The Reserve Bank of India gave permission and a sum of $4-0,000 was repatriated to India. Under similar circullllltanccs in October, 1950, a sum of $9,500 was repatriated to India. Though the two remittances from the U.S.A. to India of $40,000 and $9,500 fell into different accounting years, the case proceeded before the Income-tax authorities as well as before the Tribunal on the footing that the two remittances be considered as falling in the accounting year ended March 31, 1950 for the purpose of the appeal before the Tribunal.

The remittances of $49,500 includes the sum of $48,572/30 that was held by the assessee on September 16, I 949. 11tis repatriation of the sum of $48,572/30 gave rise to a sum of Rs. 70,147 as surplus in the process of converting dollar currency into rupee currency.

The Income-tax Officer assessed the amount of Rs. 70,147 on the ground that it represented profits that arose to the asseilliec

"incidentally to its carrying on the business".

The Income-tax Officer observed :

"°\Wiether the funds were sent to America with the object pf purchasing of capital equipment or for the purchase of stores, or for reimbursement of revenue expenditure there need not be distinction that only such portion of the profits arising on funds remitted for revenue expenditure only has to be treated as revenue and the balance should be treated as capital."

The Appellate Assistant Commissioner substantially affirmed the odrer of the Income-tax Officer except that he reduced

' B

D r

• ••

I H

C. I. T. v. TATA 1.0COMOTIVE CO. (Sikri, J.) 239

A the amount by Rs. 6,894. He was of the view that the permission of the Reserve Bank by itself did not convert the true nature of the amount lying there. He was further of the view that the amounts available for remittance consisting of the commission and the reimbursement of expenses by Baldwin Locomotive Works were acquired in the ordinary course of business of the B sole selling agency of Baldwin Locomotive Works, and, therefore, any exchange profit on such amounts which formed part of the assets employed as circulating capital in trade did arise directly in the course of business and formed part of the trading receipts.

The Tribunal held that the sums of $3,567 /04 and $8,882/24 C included in the sum of $48,572/30 were held by the assessee for capital purposes and hence any profit that arose to it as a result of its conversion into rupee currency on account of appreciation of the dollar, in relation to the rupee, must be held on capital account and, accordingly, the Tribunal excluded profits attribut- D able to these amounts. But regarding the sum of $36,123/02 the Tribunal held that it would not be justified in coming to the conclusion that there was any constructive remittance, first in the direction the U.S.A. to India and then of an equivalent sum from India to the U.S.A. It further held that "the amount wrui earned as commission. It was received in dollars and was retained E in that form for the changed purpose under the authority of the Reserve Bank of India. When the Company found that the purpose for which it was to be used failed, viz .• acquisition of capital equipment etc., it requested the Reserve Bank of India to permit it to bring to India, vide assessee's letter dated 17-12-1949 where it sought Reserve Bank's permission to bring $40,000 to India F and referred to in paragraph above. This permission was granted by the Reserve Bank. Dollars were changed into rupees and money received here. Hence before there was actual remittance of $40,000 from the U.S.A. to India, there was reconversion, the purpose having failed, of the sum if there was initial conversion as contended by Mr. Chokshi." In the alternative, the Tribunal G held that "as and when the commission was earned in dollars, the Company did bring it into its account books in the rupee currency at the then prevailing rate of exchange but the commission amount physically remained in the U.S.A. and when occasion arose to bring it physically to India it had to be converted into rupee H currency and this conversion was necessarily incidental to the assessee's business as selling agents of the foreign entity the Baldwins.

Hence whatever the profit the Company made on such exchange of the commission earned by it in the course of il•

SUPREME

COURT REPOllH

[1966] 3 S.C.R.

selling agency bu, iness must be brought to tax as a trading profit A made by it incidentally in the course of that business."

The High Court answered the two questions in the negative.

It held that although the character of the commission earned was at the inception that of income, but when the assesee appropriated that sum for the specific purpose of purchasing capital goods B with the pem1ission of the Reserve Bank of India, the initial character of this sum underwent a change and it assumed the character of fixed capital of the Company. This character was retained right up to September 16, 1949 when the pound sterling was devalued, and it did not undergo any change till the benefit accrued on this amount to the asscssee company as a result of C change in the exchange rate.

The High Court further held that "there is no evidence in this case nor a finding recorded by the Tribunal that the assessee-company had at any time decided not to utilise these amounts for the purpose of purchasing capital goods, and, therefore, repatriated these amounts to India." The High Court further held that the sum of $36, 123.02 was "part of D its fixed capital and remained so till the date it was repatriated to India.

The surplus or difference arising as a result of dovaluation in the process of converting these dollars into rupee currency in repatriating them to India was an accretion to its fixed capital and was not. therefore, liable to tax." The High Court felt that E the ratio of the decision in Davies v. The Shell Company of China(') supported the view it had taken.

The learned counsel for the revenue, Mr. A. V. Viswanatha Sastri, contends that if the commission had been allowed to remain in the U.S.A. up to September 16, 1949, and it had been F repatriated on September 17, 1949. the assessee would have been liable to tax on the profits received as a result of devaluation.

He says that if this is so, the permission of the Reserve Bank and the decision of the Company to hold it to buy capital goods does not make any difference.

He further says that the fact that the assessee credited the rupee equivalent of this sum in his books G and paid tax on the basis of accrual does not also make any difference. The learned counsel for t!t.e assesee, Mr. Palkhiwala, on the other hand contends that the assesseo is not a dealer in foreign exchange and it had not acquired or held foreign exchange for revenue purposes or for purposes incidental to trading operations.

He says that "when foreign currency is kept or used. on H capital account e.g. to acquire capital assets, and not as circulat

(I) 221.T.R. Sup. t.

A ing capital, the profit made on realisation is capital appreciation, even though the foreign currency may have been originally acquired as a revenue receipt."

A number of cases have been cited before us, but it seems to us that the answer to the questions depends on whether the act of B keeping the money, i.e. $36,123.02 for capital purposes after @btaining the sanction of the Reserve Bank was part of or a trading transaction. If it was part of or a trading transaction then an)' profit that would accrue would be revenue receipt; if it was not part of or a trading transaction then the profit made would be a capital profit and not taxable. There is no doubt that C the amount of $36,123.02 was a revenue receipt in the assessee's business of commission agency. Instead of repatriating it immediately the assessee obtained the sanction of the Reserve Bank to utilise the commission in its business of manufacture of locomotive boilers and locomotives for buying capital goods.

That wits quite an independent transaction and it is the nature of this D tra_nsaction which has to be determined. In our view it was not a trading transaction in the business of manufacture of locomotive boilers and locomotives; it was clearly a transaction of accumulating dollars to pay for capital goods, the first step to the acquisition of capital goods. If the assessee had repatriated $36,123.02 E and then after obtaining the sanction of the Reserve Bank remitted $36,123.02 to the U.S.A., Mr. Sastri does not contest that any profit made on devaluation would have been a capital profit.

But, in our opinion, the fact that the assessee kept the money there does not make any difference especially, as we have pointed out, that it was a new transaction which the assessee entered into, F the transaction being the first step to acquisition of capital goods.

In the view we have taken it is really not necessary to discuss cases cited at the Bar because none of the cases are exactly in point. In our view the High Court was right in answering the questions in the negative. In the result the appeal fails and is G dismissed with costs.

Appeal dismissed.

TATA LOCOMOTIVE & ENGINEERING CO., LTD

K. SUBBA RAO, J

C. SHAH ANDS. M. SIKRI, JJ

Bombay

U.S.A.

Tata Inc., New York

Baldwin Locomotive Works, U.S.A.

India

Now York

16th September 1949

Baldwin Locomotive Works

assesee

U.S.A.

Bombay High Court

A. V. Viswanatha Sastri

N. D. Karkhanis

R. H. Dhebar

C R. N. Sachthey

N. A. Palkiva

T. A. Ramaclzandran

B. Dadachanji

C. Mathur

Ravinder Narain

Sikri

High Court of Judicature at Bombay

s. 66

Indian Income Tax Act, 1922

Companies Act

Tata Inc.

New York

October 26, 1948

Reserve Bank of India

Tata Ii.c .. New York

2nd October, 1946

15th August, 1946

August 15, 1946

September 16, 1949

Government of India

December 17,

1949

March 31, 1950

September 16, I 949

America

Reserve Bank

Chokshi

A. V. Viswanatha Sastri

September 17, 1949

Palkhiwala

Sastri