S. V. KANDASKAR v.

V. N. DESHPANDE & ANR.

January 4, 1972

[S. M. S1KR1, C.J., J. M. SHELAT, I. D. DuA, H. R. KHANNA

AND G. K. MITTER, JJ.J

Income Tax-S. 148 and Companies Act-S: 446(1 )-Whether lnconie Tax Officers require leave of the liquidation Court to reopen assessment of a con1pc..ny for escaped income.

A company (in liquidation) was ordered by the High Court to be wound up and the official liquidator was appointed its liquidator. Thereafter the l.T.0. issl>'d notices under s. 148 of I.T. Act proposing to reopen tbe assessment of the Company in respect of the assessment years 1950-51 to 195,5-56. The I.T.O. further notified tbe official liquidator to produce account• and documents specified at the back of the notices.

The offidal liqujdator made an application before the High Court questioning the jurisdiction of the I.T.O. to issue the said notices without the leave of the High Court, as required under S. 446(1) of the Companies Act.

The learned single Judge of the High Court issued an injunction restrainin2 th~ I.T.O. to reassess the said Company. On appeal, the appellate bench gf the High Court reversed the order and set aside the injunction.

On apl)eal to this Court only one question arose for determination as to 'whether it was necessary for the I.T.O. to obtain leave of the liquidation court when he wants to reassess the company for escaped income in resoect of the past years.

Dismissi, ng the appeal,

HELD : The Income Tax Officer need not obtain leave of the winding up court for commencing or continuing assessment or reassessment

proceedings. The Income-tax Act is a complete Code and s. 147 empowers the Income Tax Officer to assess or reassess escaped .income.

Further while holding these assessment proceedings, the Income Tax Offic•r does not oel"form the functions of a Court as contemplated by s. 446(2) of the Act.

The liouidation court cannot perform the functions of Income Tax Officers while assessing the amount of tax oavable bv the assessees even if the assessee be the Companv which is being wound up, by the Court.

It 'von'd le11d to anoma 1ons chnseouencrs if the winrfinI? up Court were to be held empowered to transfer the assessment proceedings to itself and assess the Comoanv to Income tax. [Q78 B-Dl

Gn1•P-,.nnr-rrenerrrf in Cn1rncil v. Sh;,., unani Srtf!'1r Mil's Ltd .• f1946) F.C.R. 40. Shakrmtala v. The Peoples' Bank of Northern India Ltd. (in

liquidation). rtQ41] I.LR. 22 Lah. 760 and M. K. Rnnanathan v. Stai. of Mndms. fl 9551 2 S.C.R. 374, refel"red to and di<cussed,

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1650 of 1970.

Aooeal from the Judgment and order dated January 31, 1970 H of the Bombay High Court in Appeal No. 94 of 1967.

S. T. DPsai. P. C. Bhartnri Aiit MPhta. Kirit MPhfa. J. B.

Dmf,, rhanji. 0. C. Mathur and Ravinder Narain, for the appellant. 14-L73fiS,1pCJl72

B. Sen, S. K. Aiyar and R. N. Sachthey, for the respondents.

The Judgment the Court was delivered by

Dua, J.-The Colaba Land and Mills Co., Ltd., (il}. liquidation) was ordered by the Bombay High Court on Octobe,1)7, 1959 to be wound up under the provisions of the Companies Ac(, 1 of 1956 and tlie Official Liquidator was appointed its liquidator.

Eadierpn May 1, 1959 the Official Liquidator had been appointed by the High Court its provisional liquidator. On August 23, 1966 the Income-tax Officer (Companies Circle) concerned issued six different notices under s. 148 of the Income-tax Act, 1961 proposing to reopen the assessment of the Company and to re-assess it in respect of the assessment years 1950-51 to 1955-56. On December 31, 1966, the Income-tax Officer served further notices under s. 142(1) of the Income-tax Act upon the Official Liquidator calling upon him to produce accounts and documents specified at the back of the notices and to furnish any information called for by the said officer. At the foot of the said notices it was stated that failure on the part of the Official Liquidator to comply with the terms of those notices would not only result in exparte assessment against the Company but might also entail penalty under s. 271 of the Income-tax Act. Certain negotiations followed between the Official Liquidator and the Inspecting Assistant Commissioner of Income-tax but they were infrilctuous. On an application made by the Official Liquidator in the High Court questioning the jurisdiCtion of the Income-tax Officer to issue the said notices or to proceed with the re-assessment of the Company without the leave of the High Court winding up the Company, Vimadlal J., on 28th September, 1967 held that the income-tax authorities were not entitled to commence the assessment or reassessment proceedings contemplated against the Colaba Land and Mills Co., Ltd., or to .continue the same without obtaining leave of the Court under s. 446(1) of the Companies Act, 1956 (Act No. 1 of 1956) (hereinafter called the Act).

The learned Judge on this view granted an injunction restraining the Incometax Officer from assessing or re-assessing the said Company for the assessment years 1950-51 to 1955-56. ·

On !lPpeal by the Inome-tax Officer and the Union of India before the aP, pellate bench of the High Court against the order of injunction, the Division Bench (Modi and Desai, JJ.) reve"sed the order of the learned. single Judge and set aside the in junction issued by him. Before the appellate bench two contentions were raised on behalf of the Income-tax-Officer: (1) ihat notices for reassessment issued under s. 148 were not legal proceedings within the meaning of that phrase as used in s. 446(1) of the Act, and

(2) that, assuming the re-assessment proceedings started under the

H !

said notices to be leg~! proceedings. leave of the Company Court under s. 446(1) of the Act was not necessary because the Income• tax Officer had exclusive jurisdiction to make re-assessment and to determine the tax liability. The proceedings by way of assessment before the Income-tax Officer, according to the contention were outside the pale of jurisdiction of all civil courts including the Cpmpany Court. . The appellate bench did not consider it neces- Sary to decide the first contention because, on the aut:hority of Damji Valji Shah v. Life ln.rurance Corparation of India('), the

second contention deserved to be accepted and that was considered sufficient to conclude the appeal.

The Official Liquidator, after securing a certificate of fitneas from the High Court under Art. 133(1)(c) of the Constitution has appealed to this Court and the only question which requires consi deration here is, if it is necessary for the Income-tax Officer to obtain leave of the liquidation court when he wants to re-aMel!l!I the company for escaped income in respect of past years.

Section 446 of the Act reads :

"(l) When a winding up order has been made or the Official Liquidator has been appointed as provisional liquidator, no suit or other legal proceeding shall be commenced, or if pending at the date of the winding up order, shall be proceeded with, against the company. except by leave of the Court and subject to such terms as the Court may impose.

(2) The Court which is winding up the company shall, notwithstanding anything contained in any other law for the time being in fore~, have jurisdiction to entertain, or dispose of-=- ·

(a) any suit or proceeding by or against the company;

(b) any .claim ade by or aainst the company (inludm~ claims by or agamst any of its branches lil India);

(c) any question of priorities or any other question whatsoever, weter of law or fact, which may relate to or anse m course of the winding up of the company;

hther such suit or roceeding as been institut~ or ismstltuhted, o1 r. suc; h clha1mbeeor quest10n has arisen or arises _or sue app 1cat10n as n made or is made before or

{I) A.I.JI.. 1966 S.C. 135.

SUPREME COUJ.T REPORTS

[1972] 2 S.C.R.

after the order for the winding up of the company, or before or after the commencement of the Companies {Amendment) Act, 1960.

(3) Any suit or proceeding by or against the company which is pending in any Court other than that. in which the winding up of the company is proceedmg may, net'lyithstanding anything contained in any other law for the time being in force. be transferred to and disposed of by that Court.

(4) Nothing in sub-section (1) or sub-section (3) shall apply to any proceeding pending in appeal before the Supreme Court or High Court."

To appreciate and understand the precise scope of this sect:ion so far as it concerns us in the present controversy, we consider it pr().

per to turn to the scheme of the Act on this aspect. Chapter ll of Part VII of the Act beginning with s. 433 deals with winding up by the Court. Section 439 provides for applications for winding up and s. 441 tells us when the winding up of a company is !P be deemed to commence.

Section 442 which confers power oli courts to stay or restrain proceedings against the company reads : ·

"442. At any time after the presentation of a winding up petition and before a winding up order has been made, the compan_y or any creditor or contributory may-·

(a) where any suit or proceeding against the company is pending in the Supretne Court or in any High Court, apply to the Court in which the suit or proceeding is pending for a stay of proceedings therein; and

(b) where any suit er proceeding is vending against the company in any other Court, apply to the Court having jurisdiction to wind. up the com- pany, to restrain further proceedings in the suit or proceeding;

and the <; ourt to , which. ?PPlication is so made may stay or restram the pfoceed1.6gs accordingly, on such terms as it thinks fit." '

Section 444 enjoins the Court making an order for the winding up of a company to cause intimation thereof to be sent forthwith to the Official Liquidator and the Reg; strar appointed, uhder the Companies Act. Official Liquidators attached to the l-Iigh Courts are appointed by the Central Govemment under s. 448 and the Registrars by the Central Government under s. 609 of the Act.

It is the duty of the petitioner in the winding up proeecdings and also of the company to file under s. 445 a certified copy of the order of winding up with the Registrar who has to notify in the Official Gazette that such an order has been made. Such order is to be deemed to be a notice of discharge of the officers and employees of the company except when the buiness of the company

is continued; vi de s. 445 ( 3). Then comes s. 446, which has already been set out. The present sub-s. (2) of this section was substituted for the Clld one in 1960 by Act 65 of 1960 and sub-&.

( 4) was also added by that Act. Sub-section (2) is on the lin~ of s. 7 of the Presidency Towns Insolvency Act, 1909, s. 4 of the Provincial Insolvency Act, 1920 and s. 45B of the Banking Companies Act. The object of this sub-section appears to be to empower "the court as in exercise of insolvency jurisdiction to decide all claims made by or against any company and other questions whatsoever so that winding up proceedings might be expedited" Sub-sections (2) and (3) both seem to have been inserted to give effect to the recommendation of the Company Law Committee Report contained in para 207(c), namely, fb1lt "all suits by or against a company in winding up should, notwithstanding any provisions in any law for the time being in force, be instituted in the court in which the winding up proceedings are pending".

This was considered to ~. to quote the exact words "on balance an advantage to all concerned, including_ -the parties which have a claim against the companies, to institute suits relating to its :iffa!rs in the Cou~ where the. winding up proceedings are pendmg'.

Ln the Indian Companies Act, 1913, s. 171 provided for preventing litigation against a company in the process of being wound up and it read as :

"171. When a winding up order has been made or a provisional liquidator has been appointed no suit or other legal proceeding shall be proceeded with or commenced against the company except by leave of the

ourt, and subject to such terms as the Court may IIllpose."

The words underlined were inserted by the Companies Amend- G ment Act, 193~ which followed the English Act. It is nardl

ecessary to pomt out that company legislation in India has evlr smce th~ first enactment of 1850 (Registration of Joint.'.stock <; ompames Act, No. XLIII of 1850) broadly been followin the lmes of devel.opmet of the company law in England. The otject

of ~· 171 was des1gnd to achieve was to prevent all litigation H aamst the company in the process of being wound up ex t with the consen~ ?f the coui; i. We have reproduced this seciliin as~ the dec1s1ons to which reference has been made by Shri sa1 ID the very beginning of his arguments relate to the construction of this section by the Federal Coui; t of India and by this Court. The Federal Court in The Governor-General in Council v.Shiromani Sugar Mills Ltd. (1) while construing this section held that the words "other legal proceedings" in this section comprise any proceedings by the revenue authorities under s. 46(2) of the Indian Income-tax Act and accordingly, before. forwarding the requisite certificate under s. 46 (2) to the Collector, which would put the machinery for the collection of the arrears of land revenue .into motion, the Income-tax Officer should have applied under s. 171 of the Indian Companies Act for leave of the wi.nding up Court. The passage on which Shri Desai specifically relied is where, disagreeing with the observation~ of a Full Bench of the Lahore High Court in Shakuntla v. The People's Bank of Northern India Ltd. (In Liquidation)(2 ), Spens, C.J. observed that the expression "or other legal proceedings" in s. 171 need not and, therefore, should not be confined to "original proceedings in a court of first instance analogous to a suit initiated by means of a petitiQn similar to a plaint". The learned Chief Justice there went on to observe :

"Section 171 must, in our judgment, be construed with reference to other sections of the Act and the general scheme of administration'of the assets of a company in liquidation laid down by the Act. In particular, we would refer to s. 232. Section 232appears to us to be supplementary to s. 171 by providing that any creditor (other than Government) who goes ahead, notwith standing a winding up order or in ignorance of it with any attachment, distress, execution or sale, without the previous leave of the Court, will find that such steps are void. The reference to 'distress' indicates that leave of the Court is required for more than the initiation of original proceedings in the nature of a suit in an ordinary Court of law. Moreover, the scheme of the application of the company's property in the pari passu satisfaction of its liabilities, envisaged in s. 2.11 and other sections of the A9t, cannot be made to work in coordination, unless all creditors (except such secured creditors as are 'outside the winding up' in the sense indicated by Lord \Vrenbury in his speech in Food Controller v. Cork(") are subjected as to their actions against the property of the company to the control of the Court. Accordingly, in our judgment; no narrow construction should be placed upon the words 'or other legal proceeding' in s.

171. In our judgment, the words can and should be held

(I) (1946[ F.C.R. 40.

(2) [1941] I.LR. 22 Lah. 760.

(3) l192J] A.C. 647.

to cover distress and execution proceedings in the ordinary Courts. In our view, such proceedings are other legal proceedings against the company, as contrasted with ordinary suits against the company."

Jn that case a com?any was ordered to be wound up in April, 1942 and an order of rssessment to income-lax of the profits made by the company in the year ending May 31, 1940 was made in 1943 and the Income-tax Officer, without obtaining leave of the winding up court, commenced proceedings for recovery of tax as if it were an arrear of land revenue.

It was on these facts that it was observed that the words "or other legal proceedings" can and should be held to cover distress and execution proceedings.

This expression was not held to cover assessment proceedings to which apparently no objection was raised by the parties though they were represented by eminent counsel. The decision of this Court to which Shri Desai has next referred is M. K.

Ranganatlzan v. Government of Madras(-1). The head-note which gives a clear idea of the ratio of this decision is in these words :

"The secured creditor is outside the winding up and can realise his security without the leave of the winding up Court, though if he files a suit or takes other legal proceedings for the realisation of his security he is bound under s. 171 of the Indian Companies Act to obtain the leave of the winding up Court before he can do so although such leave would almost automatically be granted.

It is a legitimate rule of construction to construe words in an Act of Parliament with reference to words found in immediate connection with them. It is also a well-recognized rule of construction that the Jeaislature does not intend to make a substantial alteratio~ in the law beyond what it explicitly declares either in express . words or by clear implication and that the general words

o~ the Ac_t are not to be so construed as to alter the previous P?ltcy of the law, unless no sense o~ meaning can be applied to those words consistently with the intention of preserving the existing policy untouched . . Held, therefore, that having regard to the context in which the words 'any sale held without leave of the Court of any of the properties' added in s. 232(1) by

lhe <n.1ndi~~ "\'.:! XXII of 1936 have been used in juxtapos1tton with any attachment, distress or execution put into force without leave of the Court against the estate or effects" it would be a legitimate construction to

( 1)

(1955] 2 S.C.R. 374.

be put upon them that they refer only to sales held through the intervention of the Court and not to sales effected by the secured creditor outside the winding up and without the intervention of the Court, and that the amendment was not intended to bring within the sweep of the general words sales effected by the secured creditor outside the winding up.

Held accordingly that in the present case the sale effected by respondent no. 2 as the receiver of the trustees of the debenture holders in July 1954 was valid and binding on all parties concerned and could not be challenged as it was sought to be done by the Official Receiver."

In this case the observations alreafiy reproduced from the judgment of the Federal Court in Shakuntla's case (supra) were approved. It may also be pointed out that in this decision this Court observed that the winding up c6urt assures pro rata distribution of the assets of the company in the same way in which the court under the Presidency Towns Insolvency Act or the Provincial Insolvency Act ensures such distribution of assets. Section 232 ( 1) of the Act of 1913 which was held supplemental to s. 171 was also stated to have reference to legal proceedings in the same way as such proceedings were envisaged by s. 171. These two decisions in our opinion do not lay down that assessment proceedings under the Income-true Act should be held to be within the contemplation of s. 171 of the Indian Companies Act, 1913. The next decision to which reference has been made by Shri Desai fa Union of India v. India Fisheries (P) Ltd. (1).

In that case the respondents, Fisheries (P) Ltd., had been directed to be wound up by the winding up court and an Official Liquidator had been appointed by an order of the High Court in October, 1950. The head-note in that case gives a clear idea of the facts and the decision. It reads :

"The respondent company was directed to be wound up and an official liquidator appointed by an order of the High Court in October, 1950. In December 1950 the respondent was assessed to tax amounting to Rs. 8737 for the year 1948-49. A claim made for this tax on the official liquidator was adjudged and allowed as an ordinary claim and certified as such in April, 1952.

The Liquidator declared a dividend of 9} annas in the Rupee in August, 1954 and paid a sum of Rs. 5188 to the Department, leaving a balance of Rs. 3549.

---""

(1) (1965] 3 S.C.R. 678.

In June, 1954, the Department made a demand from the respondent and was paid Rs. 2565 as advance tax for the year 1955-56. On a regular assessment being made for that year, only Rs. 1126 was assessed as payable so that a sum of Rs. 1460, inclusive of interest, became refundable to the respondent. However, the Income Tax Officer, purporting to exercise the power available to him under s. 49E of the Income Tax Act, 1922, set off this amount against the balance of Rs. 3549 due for the year 1948-49. A revision petition filed by respondent in respect of this set off was rejected by the Commissioner of Income-tax.

Thereafter, petition under Art. 226 filed by the respondent to set aside the orders of_the Income Tax Officer and Commissioner was allowed by the High Court, on the ground that the demand for Rs. 8737 in respect of 1948-49, being adjudged and certified came to have all the incidents and character of an unsecured debt payable by the liquidator to the Department; it was therefore governed by the provisions of Company Law and no other remedy or method to obtain satisfaction of the claim was available to the creditor.

In the appeal to this Court it was contended on behalf of the appellant that s. 49E gave statutory power

to Income Tax Officer to set off a refundable amount against any tax remaining payable and that this power was not subject to any provision of any other Jaw.

Held the Income Tax Officer was in error in applying s. 49E and setting off the refund due to the respondent.

Th~ eect of ss. 228 and 229 of the Companies Act, 1?J3, 1s, mter alia, that an unsecured creditor must prove his debts and all unsecured debts are to be paid par! passu.

Once the claim of the Department has to be proved and is. roved in .liquidation proceedings, it cannot, by exerc1smg the nght under s. 49E get priority

ovr other unsecured creditors and thus defeat the very obiect of ss. 228 and 229 of the Companies Act. Fur- !herrnore, if there is an apparent conflict between two mdependen.t provisions of law, the special provision must prevail. Section .49E is .a general provision applicable to all assessees m all circumstances; ss. 228 and 229 deal with proof of debts and their payment in liquidation.

Section 49E can be reconciled with ss. 228 and 229 by holding that s. 49E applies when insolvency rules do not apply."

In our opinion this decision is of no greater assistance to the appellant on the narrow point which requires determination by us. On the contrary to some extent it goes against Shri Desai because the assessment made in December, 1950, after the appointment of the Official Liquidator was assumed to be in order. It may be recalled that in Shiromani Sugar Mills case (supra) the assessment made after the winding up order was not challenged though on the argument addressed by Shri Desai before us it could have been challenged.

The ratio decidendi or the principle accepted and applied in none of the decisions cited supports the appellant's contention on the precise point of assessment of tax. Shri Desai has next referred us to a more recent decision of this Court in Ba/want Singh v.

L. C. Bharuma/, Income-tax Officer, New Delhi. (1) In this case the Incometax Officer was held to be a court for the purpose of s. 195(1 )(b), Cr. P. C. though it was added that the Income-tax Officer could not be treated as a revenue court and, therefore, neither s. 476 nor s. 479-A, Cr. P. C. would be applicable. This decision has been cited for the purpoiie of contending that if the expression "other legal proceeding" in s. 446 is to be construed to mean a proceeding in a court, then, the Income-tax Officer must be considered to be a court when holding assessment or re-assessment proceedings.

This contention may be disposed of with the observation that mrely becall.9C the Income-tax Officer is considered to be a court for the purpose of s. 195(l)(b), Cr. P. C. it does not necessarily follow that the said officer must be considered to be a court for the purposes of s. 446 of the Act.

There is no justification for extending the scope of this decision beyond i\s own facts. The decisions which apparently seem to lend more direct support to the appellant's contention are Union of India v. Seth Spinning Mills Ltd., (In Liquidation)( 2 ) and Mysore Spun Silk Mills Ltd., (In Liquidation), In re Official Liquidator v. Commissioner of lncort1¢-tax, Bangalore(•). Both of them are decisions by single Judges, the former by the Punjab High Court and the latter by \he Mysore High Court.

In Seth Spinning Mills case (supra) it was observed "that s. 171 of the Indian Companies Act, 1913 provideii that wben a winding up order has been made no suit or other legal proceeding shall be proceeded with or commenced against the company except by leave of the court and subj; ct to. suc)l tenns as the court mav impose. The language of this sect10n 1s wide en(mgh to include proceedings under the Income-tax Act.

(i)[i968]-7o I.T~R. 89 (Sc.)

(2) [1962] 46 I.T.R. 193.

(3) [1968] 68 J.T.R. 295.

' A

H i

No leave of the court has been obtained.

In view of this the claim of the petitioner for Rs. 4,000 on account of the penalty order passed on 14th April, 1956 cannot be entertained". In this case the Union of India though the Commissioner of IncomC:.:tax

had applied to the learned single Judge, who was apparently fimctioning as a company Judge, praying that the department's claim amounting to Rs. 16,500 should have been admitted by the Official Liquidator and that his refusal to do so was not justified in law.

This amount, it appears, consisted of the penalty imposed by the Income-tax Department.

Part of the penalty was imposed by means of an order passed prior to the company's going into liquidation but a sum of Rs. 4,000 related to the penalty imposed after the date of winding up.

Tjle learned single Judge while dealing with that petition observed :

"Section 171 of the Indian Cunpanies Act, 1913, provides that when a winding up order has been made no suit or other legal proceedings shall be proceeded with or commenced against the company except by leave of the court and subject to such terms as the court may impose.

The language of thi! section is wide enough to include proceedings under the Income-tax Act. . No leave of the court has been obtained. In view of this, the claim of the petitioner for Rs. 4,000 on account of the penalty order passed on 14th April, 1956, cannot be entertained."

In the Mysore case it appears that in the course of winding up of the mills in liquidationJarge sums of money came into the hand' of the liquidator which could not be immediately applied for distribution of dividends to Jhe creditors.

Those moneys were invested pursuant to the relevant provisions of the Companiei; (Court) Rules.

The question arose whether in respect of the receipts of income the liquidator was liable to pay income-tax on those receipts.

The learned single Judge, after discussing the scheme of the Companies Act, observed :

"The liquidator is only an officer of the court. Unlike a receiver in the case of insolvency, properties of the insolvent do not vest in him but come within the control of the court. All his actions arc subject to the control pf the court for which purpose the court issues to him appropriate directions from time to time in the course of winding up.

No court or other authority (subject to the exception contained in sub-section ( 4) of section 446 of the Companies Act) can take any proceedinzs or attach or otherwise reach any of the matters, the winding up court treats the liquidator as its special

officer specially charged with the duty of representing the company and protecting its interests in winding up.

In the light of the above principles, it is the duty of the court to see that all liabilities of a company are properly met in accordance with the provisions of the law and the special provisions in that behalf contained in the Companies Act. Liability to income-tax is also one of the liabilities which the court is expected to provide for in the course of winding up.

Such being the position, the question is whether, because the liquidator does not answer the dcription of the principal officer as defined in the Income-tax Act, the liability, if any, of the company for payment of income-tax itself comes to an end and therefore the winding up court may ignore that liability."

The Court thereafter observed that the corporate existence of l> the company continues even after the winding up order; but after the winding up order the question of payment oi income-tax has to be dealt with or answered on a joint application of the terms or provisions of the Income-tax Act and the Companies Act. After so observing the court proceeded :

"that even after a winding up order is passed, the company continues to be a person within the meaning of section 4 of the Income-tax Act, that therefore any receipt in the course of winding up which would attract liability to income-tax under appropriate provisions of the Income-tax Act would be liable to income-tax or for payment of tax under Income-tax Act, but that before any action can be taken by the appropriate Incometax Officer under the Income-tax Act for the purpose of quantification or collection of the income-tax he should obtain the leave of the winding up court under section 446 of the Companies Act, and further that the collection Of the tax can only be by securing the orders of the winding up court for payment of tax in the light of the appropriate provisions of'the Companies Act."

l n this case so far as collection of the tax assessed is concerned there can scarcely btl any difficulty ip agreei.ng with the view taken there.

But it is only when the court said that for the purpose of quantification of the income-tax also leave under s. 446 of the Act has to be obtained that we have to consider if this view

is correct. It is ocn this observation that Shri Desai has princi pally -relied.

The decisions of the Federal Court and of this Court already cited by Shri Desai, it may be recalled, do not support this view.

Reference by Shri Desai has also 1*:en made to Abdul Aziz Ansari v. The State of Bombay(') in which assessment proceedings under the Bombay Sales. Tax Act, 1946 were considered to be legal proceedings for the purpose of continuance of those proceedings alter repeal of the Bombay Sales Tax Act, 1946 bys. 48(2) of the Bombay Sales Tax Act, 3 of 1953.

We do not think this decision is of any assistance for considering the question whether assessment or re-assessment proceedings can be considered to be legal proceedings as contemplated by s. 446 of the Act.

The learned counsel for the appellant has also drawn our attention to Shiromani Sugar Mi/ls v. Governor General in Council(') where, after referring _to ft. 171 of the Companies Act, 1913 it was held by the Allahabad High Court, that initiation by the Income-tax Officer of steps to recover the amount of assessment under s. 46 of the Income-tax Act of 1922 and the prosecution by the Collector of those steps amounted to "commencement" or "proceeding with" a "suit or other legal proceeding." Needless to point out that this is the view which the Federal Court on appeal upheld in the decision already referred to.

The further submission pressed by Shri Desai that s. 446 of the Act is a special provision and s. 148 of the Income-tax Act a gene•al provision of law was sought to be supported by reference to India Fisheries case(8 ).

It may here be pointed out that 1n that case it was, while dealing with s. 49E of the Income-tax !'.ct, that this Court observed that the revenue could , not, by exercising the right under that section get priority over other unsecured creditors, and it wa; in this context that it was said that there being apparent conflict between two independent provisions of law the special provision must prevail.

In order to understand and aopreciate the binding force of a decision it is always l[}ecessary to see what were. the facts of the case in which the decision was given and wh•t was the point which had to be dcided. Tims considered India Fisheries case(8 ) lends no assistance to Shri Desai and we are unable to constme the observations in that decision to support Shri Desai's contention that s. 446 of the Act is a special provision as against s. 148 of the Income-tax Act under which Income-tax Officers hold nrocedings for assessment or re-assessment of income-tax nd that therefore the former should prevail over tha latter. ---- . -- ··---

(1) A.1.R. 1958 Born. 279.

(2) I.LR. 1945 Allahabad 352,

(3) [1965) 3 S.C.R. 678.

Turning now to the Income-tax Act it is noteworthy that s. 148 occurs in Chapter XIV which beginning with s. ~39 prescribes the procedure for assessment and s. 14 7 provides for assessment or re-assessment ()j' income escaping assessment. This section empowers the Income-tax Officer concerned subject to th~ provisions of ss. 148 to 153 to assess or re-assess escaped income.

While holding these assessment proceedings the Income-tax Officer does not, in our view, perform the functions of a court a~ comtemplated by s. 446 ( 2) of the Act.

Looking at the legislative history and the scheme of the Indian Companies Act, particularly the language of s. 446 read as a whole, it appears to us that the expression "other" legal proceeding" i'u sub-s. ( 1) and the expression "legal proceeding" in sub-s. (2) convey the same sense and the proceedings in both the sub-sections must be such as. can appropriately be dealt with by the winding up court. The Incometax Act is, in our opinion, a complete code and it is particularly so with respect to the assessment and re-assessment of income-tax with which alone we are concerned in the present case.

The fact that after the amount of tax payable by an assessee has been determned or quantified its realisation from a company in liquidation is governed biy the Act because the income-tax payable also being a debt has to rank pari passu with other debts due from the company does not mean that the assessment proceedings for computing the amount of tax must be held to be such other legal proceedings as can only be started or continued with the leave of the liquidation court under s. 446 of the Act.

The liquidation court, in our opinion, cannot perform the functions of Income-tax Officers while assessing the amount of tax payable by the assessees even. if the assessee be the company which is being wound up by the court.

The orders made by the Income-tax Officer i, n the course of assessment or re-assessment proceedings are subject to appeal to the higher hierarchy under the Income-tax Act. There are also provisions for reference to the High Court and for appeals from the decisions of the High Court to the Sunreme Court and then there are provisions for revision by the Commissioner of Income-tax. It would lead to anomalous consequences if the winding up court were to be held empowered to transfer the assessment proceedings to itself and assess the company to income-tax.

The argument on behalf of the appellant by Shri Desai is that the winding up .court is empowerell in its discretion to decline to transfer the assessment proceedings in a given case blut the power on the plain language of s. 446 of the Act must be held to vest in that court to be exercised only if considered expedient.

We are not impressed by this argument.

The lan)nJage of s. 446 must be so construed as to eliminate such startling crmsequences as investing the windin~ up court with the powers of an Income-tax Officer conferred Ojl him by the Incometax Act, because in our view the legislature could not have intended such a result.

The argument that the proceedings for assessment or re assessment of a company \\'hich is being wound up can only be started or continued with the leave of the liquidation court is also, on the scheme both of the Act and of the Income-tax Act, unacceptable.

We have not been shown any principle on which the liquidation court should . be vested with the power to stop assessment proceedings for determining the amount of tax payable by the company which is being wound up.

The liquida tion court would have full power to scrutinise the claim of the' revenue after income-tax has been determined and its payment demanded from the liquidator.

It would be open to the liquida tion court then to decide how far under the law, the amount of Income-tax determined by the department should be accepied as a lawful liability on the funds of the company in liquidation. At

chat stage the winding up court can fully safeguard the interests of the company and its creditors under the Act.

Incidentally, it may be pointed out that at t]le bar no English decision was brought to our notice under which the assessment proceedings were held to be controlled by the winding up court.

On the view that we have taken, the decisions in the case of Seth Spinning Mills Ltd., (In Liquidation )( 1) and the Mysore Spun Silk Mills Ltd., (In Liquidation)(') do not seem to lay down the correct

rnle of law that the Income-tax Officers must obtain leave of the winding up court for commencing or continuing assessment or reassessment proceedings. ·

For tlie f?regoing reaons we have no hesitation in dismissing the iJppeal with costs.

s.c.

(I) 461.T.R. 193.

(2) 68 I.T.R. 695.

Appeal dismissed.

S. V. KANDASKAR

V. N. DESHPANDE & ANR

January 4, 1972

M. SHELAT

I. D. DuA

H. R. KHANNA

G. K. MITTER, JJ

S. 148

Companies Act

s. 148

S. 446(1)

Companies Act

Income-tax Act

s. 147

s. 446(2)

1946) F.C.R. 40

Bombay High Court

Ravinder Narain

B. Sen

S. K. Aiyar

R. N. Sachthey

Dua

Colaba Land and Mills Co., Ltd.

s. 148

Income-tax Act, 1961

December 31, 1966

s. 142(1)

Income-tax Act

s. 271

Income-tax Act

Vimadlal

28th September, 1967

Colaba Land and Mills Co., Ltd.

s. 446(1)

Companies Act, 1956

Modi

Desai

s. 148

s. 446(1)

s. 446(1)

Cpmpany Court

Art. 133(1)(c)

Section 446

India

Supreme Court

Chapter ll of Part VII of the Act

s. 433

Section 439

s. 441

Section 442

Section 444

Companies Act

s. 448

Central Government

s. 609

s. 445

s. 445

s. 446

s. 7

Presidency Towns Insolvency Act, 1909

s. 4

Provincial Insolvency Act, 1920

s. 45B

Companies Act

Ln the Indian Companies Act, 1913

s. 171

England

s. 46(2)

Income-tax Act

s. 46

s. 171

Companies Act

Desai

Lahore High Court

Shakuntla

Spens

s. 171

Section 171

s. 232

Section 232

s. 171

s. 2

\Vrenbury

s.

171

s. 171

Companies Act

Parliament

s. 232(1)

(1955] 2 S.C.R. 374

Shakuntla

Section 232

s. 171

s. 171

s. 171

Indian Companies Act, 1913

Fisheries (P) Ltd.

(1965] 3 S.C.R. 678

s. 49E

Income Tax Act, 1922

Art. 226

s. 49E

s. 49E

ss. 228 and 229

Companies Act

s. 49E

ss. 228 and 229

Companies Act

ss. 228 and 229

Section 49E

ss. 228 and 229

s. 49E

Shiromani Sugar Mills

s. 195(1 )(b)

s. 476

s. 479

s. 446

s. 195(l)(b)

s. 446

Mysore Spun Silk Mills Ltd.

Punjab High Court

Mysore High Court

Seth Spinning Mills

s. 171

Indian Companies Act, 1913

Income-tax Act

Union of India

Section 171

Indian Cunpanies Act, 1913

Income-tax Act

14th April, 1956

Mysore

Companies Act

section 446

Companies Act

Companies Act

Income-tax Act

Income-tax Act

Companies Act

section 4

Income-tax Act

Income-tax Act

Income-tax Act

section 446

Companies Act

Companies Act

s. 446

Tax Act, 1946

Bombay Sales Tax Act, 1946

s. 446

Companies Act, 1913

Allahabad High Court

s. 46

Income-tax Act

s. 446

s. 148

Income-tax Act

s. 49E

s. 446

s. 148

Income-tax Act

[1965) 3 S.C.R. 678

Turning now to the Income-tax Act

s. 148

s. 14

ss. 148 to 153

s. 446

s. 446

s. 446

Income-tax Act

Sunreme Court

s. 446

s. 446

Income-tax Act

Seth Spinning Mills Ltd.

Mysore Spun Silk Mills Ltd.


S. G. MERCANTILE CORPN. (P) L1D. v.

TilE C.I.T., CALCUTI' A

January 4, 1972 .[J. M. SHELAT, I. D. DuA, H. R. KHANNA AND G: K. MITTER, JJ.]

Income Tax Act; 1922, ss. 10, 1ompany formed with the object of acquiring or taking on lease laltds buildings et'C. c:nd dealing with them .commercially-Company taking on lease market place and letting it out-

Income from the leasehold property whether to be assessed unde s. 10 or s. 12-..:.Tests for petermtning. ·

The appellant company was formed with the object, inter alia, to pur- .c:hase, take on lease or otherwise acquire and to hold, cultivate, improve,

lease, sell, exchange, mortgage, or otherwise dispo_e of lands or houses . .and other real and personal property and to deal with the same commercially. The company took on lease a market place on a monthly rent with the right to sub-let the different pOrtions. The company's aCtivity , dl¢ng the period covered by the assessment years 1956-'56, 1957-'5& '3Ild 195p-'59

was that of developing the demised premises and letting out the portions of the same as shops, stalls and ground space. In assessment proceedings, the company claimed that its income from the lease hold property fqr the .assessment years had to be assessed under s. 10 of the Income T!!X Act.

1922 as Jeiting om of properly was its business authorised by the, ¢emorandum of association. The b_lcoroe Tax Officer, and the Appellate A,8sistant Commi sioner in appel, rejected the company's claim and made assessment under s. 12 of the Act as "income from other .source." The .appellate Tribunal held that the income of the appellant company from

sub-letting of the stalls was income from business taxable under s. 10 of the Act.

According to the Tribunal the decision could only tum 1,1pon the object for which the company was formed and upon the activities. of the company during the relevant accounting years.

The High COurt, ·n reference, answered that the income was not assessaole under s.: 10. It observed that by letting out shops and stalls the assessee could not bo said to be carrying on any activity in the nature of trade or was dealing with . them commercially.

In appeal by pecial leave,

HELD: The income was assesSable under s. 10 and not under s. 12 Of the Act.

(i) There is no finding in the prent case that the appellant company is the owner of the property in question or any part thereof. Therefore, s. 9 does not apply. The liability under s. 9 of the Act is of the owner of the buildings or lands appurtenant thereto. In case the assessee is the owner he -would be liable to pay tax under s. 9 even if the object of the assessee in purchasing the landed property was to promote and develop market thereon. It would also make no difference if the assessee was a company which had en incorpdrated with the object of buyi1.1.& and developing landed properties and promoting and setting up market thereon.

The income derived by such a company from_ the tenants .of the shops and stalls constructed on the land for the purposes of settmg .up

market would not be taxed as "business income" under s. 10 of the Act.

.[985 D-G]

East India Housing Esta~ case, [1961] 42 J.T.R. 49, referred to.

; i

H { -

S. G. MERCANTILE CORP. v. C.I.T. (KJumna, /.)

(ii) Section 12 which deals with the residuary head of income can be resorted to only if none of the specific heads is applicable to the income in question. Therefore, s. 12 can be invoked in the present case only if the applicaoility of s. 10 is excluded by holding that the income of the appellant company from the p!'OJX'rty in question is not income from J>usiness. [987 D)

(iii) The dcfinitio:1 of the word "business'' in s. 2(4) embraced within itself dealing in real property as also the activity of taking a property on lease, setting up a market thereon and letting out the shops and stalls in the market. The important question which arises in e latter case is whether the acquisition of the property on leas<! and lettinl! out of the shops and sfalls wa~; in th') course of investm:!nt or whether it was ·sen

tially a part of the business and trading operation of the assssce. The paramount consiri•ration which would weigh is whether the acquisition

of the property was by way of investment and whether the property was let out b->..cause of the a sessee having a title in the same, or whether the acquisition 'lnd letting out of the property constituted business and trading activity of the asses9!e. The question as to whether the activity is being carried on by an individual or il company and in the latter case the further question as to whether carrying on of the said activity was the object of the incorporation of tlw company as given in tm Memorandum of Association would also have some relevance; &987 E-H]

The conclusion of the Tribunal that the activities of the appellant in taking lease and sub-letting demised premises were undertaken with the object of doing business was warranted on the facts of the case.

Lik:ewil>·~ the conclusion of the Tribunal tlnt the a!)t)ellant cdmpany in letting out the lease-hold prooerty was not actin~ a~ owner but as trader was borne out bv the material on record. [990 Bl

Commissioner of Inland Revenul!!· v. Korean Syndicc.'te Ltd., U92t] 12 Tax Cas. 181 and KaranDura Develo, ment Co. Ltd. v. Comml.rrioner of Income-tax, West Bengal [1962) 44 I.T.R. 362, referred to.

Fry v. Salisbury /{014e Estate Ltd .. [1930) A.C. 432 an, d East India

Housin~ Estate cas:, [ 1961)42 I.T.R. 49, distinguished.

{iv) Therefore. where, as in the !)resent case the income can ap'ropriately fall under s. 10 as bein~ busineliS income. no resort an be made to s. 12 of the Act.

CIVIL APPELLATE JURISDICTION: Civil A!)peals Nos. 1748 1750 of 1968.

An?eals by soecial leave from the judgment and orrler dated July 20. 1967 of the Calcutta High Court in Income-tax Reference No. 144 of 1963.

M. C. Chagla and D. N. Mukherjee, for the appelant (in all the a?peals).

S. C. Monchrmd'l, R. N. Sachthey and B. D. Sharma, for the respondent (in all the appeals).

H The Judgment of the Court was delivered by

Khn~ J.-Th.is itdon1ent would disoose of civil apoeals No. 1748 to 1750 o( 1968 filed by special leave against

J.S -L7J(jS .P Cl/7:

982 SUPilEME COURT REPORTS

. }1972] 2 S.C.R.

the judgment of the Calcutta High Court whereby the question referred to that Court under section 66 ( 1 ) of the Indian Incometax Act, 1922, hereinafter referred to as the Act, was answered . in favour of the revenue and against the appellant company.

The appellant, a private limited company, was incorporated

on January 25, 19~5. The objects for which the Company was B established were given in the clauses of paragraph 3 of the Mem(). randum of Association.

A number of business activities were mentionedin thpse clauses.

Clauses 6 and 7 of that paragraph were as under :--:---

"6. To purchase take on lease or otherwise .acquire and to hold, cultivate, improve, lease, sell, exchange, C mortgage, or, otherwise, dispose of land, houses, mines, minerals, mining and other real and personal property and to deal with the same commercially.

7. To develop the resources of the same property by building, reclaiming, clearing, draining, and other- D wise improving framing and planting on any terms or system that may be considered advisable."

With effect from February 5, 1955, the appellant company took on lease a market place known as TaJoUa Bazar in the city of Calcutta from Shrimati Sujata Tagore and her sons on a monthly rent of Rs. 3,000 for a term of 50 years, with option E to the lessee to renew the lea<e for the further period of 40 years.

The deed of lease in this connection was executed on September 5,

1956. Clauses 4, 5 and 13 of the lease deed were as u::der:

"4. The Lessee shall have the option to e;.ect, rebuilt, remodel and reconstruct and repair the existing structures upon the demised premises from time to time during the tenn of these presents at its own costs in a substantial and workmanlike manner whh good material of the several kinds in accordance with the plans elevations sanctions and specifications according to the choice of the Lessee (and whenever necesc; arv to get such plans sanctioned by the Corporation of Calcutta) under the supervic; ion of a first class Engineer to he elected by the Lessee on notice to the Lessors and shall spend upon such works such sum or sumo;; as the Lesc; ee may in its absolute discretion think fit and proper but the entire total sum or sums so to be expended by the Lessee as aforesaid sh::tll not be less than R:upees Five Lacs and the same shaH be spent within the period of five years from date of these presents.

The Lessors shall be at liberty to appoint at their own costs a valuer

B ( .

S. G. MERCANTILE CORP. v. C.I.T. (Khanna, J.) 983

and surveyor to verify such expenditure if required for their satisfaction after the completion of the said work.

5. If the Lessee constructs any new structures and/ or buildings as mentioned in the preceding clauses the said structures and/or buildings or erections together with all alterations renovation remodelling reconstruction thereto shall belong absolutely to the Lessors on the expiration or sooner determination of the term hereby granted and/ or the renewed period thereof as hereinafter mentioned.

13. That the Lessee shall not assign this lease without first obtaining the permission in writing of the Lessors but such consent shall not be unreasonably withheld.

The lessee shall prior to any such assignment of this demise give notice thereof to the Lessors in writing containing the name of the assignee and f'qrnish other necessary particulars concerning sucb assignlllent.

Notwithstanding anything hereinbefore contained the Lessee shall subject to the conditions and convenants herein contained he entitled to sublet or underlet the demised premises or any part or portion thereof and/or grant sublease or sub-leases in respect of the demised premises or any portion or portions thereof for a term not exceeding or beyond the tenn hereby granted including the renewed and/or optional period in case of renewal subject to the terms and conditions of these presents."

The appellant company's activity during the period covered by assessment years 1956-57, 1957-58 and 1958-59 was that of developing the demised premises and letting out portions of the same as shops, stalls and ground spaces to shopkeepers, stallholders and daily casual market vendors.

The appellant claimed that its income from the leasehold property for the above mentioned three assessment years should be asessed under section 10 of the Act as letting out of that property was its business authorised by the Memorandum of Association.

The appellant had shown losses in its return for all the three years and the above claim was made on its behalf obviously for the purpose of carrying forward such losses. The Income-tax O"fficer rejected the appellant's claim and made assessments under section 12 of the Act. The Appellate Assistant Commissioner in appeal by a consolidated order held that the appellant had been rightly assessed under section 12 of the Act.

On further appeal to the Income-tax Appellate Tribunal, the Tribunal referred to clauses 6 and 7 of paragraph 3 of the Memorandum of Association and

SUPREME COURT REPORTS [1972] zs.c.P..

came t.o the conclusion that the activities of the appellant com~ pany in taking the lease and subletting the demised premis~

were undertaken with the object of doing business. The Tribunal observed that normally where the assessee was not the owner of the buildin_g t eavned rent by subletting the same, such income could only be charged under section 12 as income from other sources.

The difficulty, however, arose in cases where letting out of lease hold property was the business of the assessee.

In such cases, according to the Tribunal, the decision could only turn upon the object for which the company was formed and upon the activities of the company during the relevant accounting years. It was held that if the activity of the appellant company amounted to carrying on the business of taking on lease and letting out the leasehold property, the company was not acting as owner but as trader.

The income accruing from such a source, in the opinion of the Tribunal, must be held to be income from business assessable under section 10 of the Act. The Tri- bunal accordingly held that the income of the appellant company from subletting of the stalls in question was income from business taxable under section 10 of the Act.

At the instance of the res,!)ondent, the Tribunal referred the followi..<tg question to the High Court :

"Whether, under the facts and in the circumstances of the case, the income from subletting the stalls of Taltolla Bazar was assessab1e under section 10 or sec

tion 12 of the Income-tax Act, 1922?"

The learned judges of the High Court held that the income from subletting of the stalls in question was not assessable under section 10 of the Act. In arriving at this conclusion, the learned judges 0bserved :

"The assessee had taken lease of a market or Bazar.

After having reconstructed or renovated the buildings, it is letting out shops and stalls to shopkeepers and

stllholders. This is a normal activity of a owner or a lessee of such a _market or Bazar. It could not be said that by letting out the shops and stalls to shopkeepers • and stallholders, the assessee was carrving on any activity in the nature of trade and was utilising or exploit~

ing real estate in the best possible way or in other words was dealing with it commercially. The ratio of

the Supreme Court decision in East India Houfif!t Estate case(!) is fullv af}olicabl~ to the case before us and it must be held that the Tribunal was in error in its conclusion that lhe income of the assessee -fi6m

0) [19tllJ 4:'.1T .R

~C>.

'1 c

ll (

s. G. MERCANTILE CORP. V. C.I.T. (Khanna, J.) 985

subletting the stalls of !altolla Bazar was assessable under section 10 of the ndtan Income-ta~ Act, 1922. In the premises the .questton referred .to thts Court is answered in the followmg manner, that ts to say, that the income from subletting the stalls of Taltolla Bazar was not assessable under section 1 0."

We have heard Mr. Chagla on behalf of the appellant and Mr. Manchanda on behalf ?f the respondent and are of the view that the judgment of the Htgh Court cannot b<! sustained. Section 6 of the Act enumerates the various heads of income, profits and gains chargeable to ic?me-ta~:. Those heads are (i) Salaries;

(ii) Interest on secunttes;

(m) Income from property; (iv) C Profits and gains of business, professions or vocation; ( v) Income from other sources; and (vi) Capital gains.

Section 9 of the Act deals with income from property. According to that section, the tax shall be payable by an assessee under the head "Income from Property" in respect of the hona D fide annual value of property consisting of any buildings or lands

appurtenant thereto of which he is the owner, other than such portions of such property as he may occupy for the purposes of any business, profession or vocation carried on by him the profits of which are assessable to tax, subject to certain allowances which are mentioned in that section but wirh which E we are not concerned. It is noteworthy that the liability to tax

under section 9 of the Act is of the owner of the buildings or lands appurtenant thereto. In case the assessee is the owner of the buildings or lands appurtenant thereto, he woul~ be liable 10 pay t~:t under the above provic; ion even if the object of the assessee m purchasinn the landed property was to promote .md develop market thcrn. It would also make no differenc~ if the f ~~>; essee was .a company which liad been inco; porated wtth be

lect of buysng and developing landed propertrcs and promotrng and_ '\ettinj! uo m:trkets thereon. The income derived by such a COmpany from the tenants of the shops and staUs, contructed n the land for the purooses of setting uo market. would not .be ; x.ed as "business income" under section 10 of th'! Act, to whtch

ktore det1iled reference would be made hereafter, but under td on 9 of the Act.

A concrete ir"'ance of thi<: tvne i<: aff~•d r, Y the cae of ,::,.1 '"'na /frtu•;, v nnd Ln"" Dev,.lnnment

flr( Lt1

W • 8"n1/( I) lhe a., v. Commisri'>ner nf f, cnm~-tax, e~. . the ob l'lcllant comnanv in th:tt cnc:e h'd bce11 incornorated th ll and ~~:~ ·~ of buvi11~ dcvcJ,.,.., i., g larrded prnner•ie~ and ormotm~ . . land i~ l'l~ uo m:rke•~. The comr.>anv. purch1<ed ten h•!tha~ ., f l

qutio th~ own of C<>lcutt'l noel <; et uo a market thereon; The -( • 11 Which aroe for detennination was whether the mcome \} (19 --;:;=-=---- 6lJ4l I.T.R.. 49

SUPREME COURT REPORTS

[1972]. 2 S.C.R.

realised from the tenants of shops and stalls was liable to be taxw as business income under section 10 of the Act or income from property under seclion 9. This Court held that the ln.come derived by tne company from shops and stalls was income recei~ ved from property and fell under the specific head described in sec lion 9. it was observed in this connection :

"Income-tax is urldoubtedly. levied on the total taxable income of the taxpayer and the tax levied is a single tax on the aggregate taxable receipts from all the sources; it is not a collection of taxes separately lev1ed on distinct head$ of income.

But the distinct heads specified in secLion 6 indicating the sources are

muually exclusive and income derived from different sources falling under specific heads has to be computed for the purpose of taxaLion in the manner provided by the appropriate section. If the income from a source falls within a specific head set out in section 6, the fact hat it may indirectly be covered by another head will not make the income taxable under the latter ; head.

The income derived by the company from shops and stalls is income received from property and falls under the specific head described in section 9.

The character of that income is not' altered because it is received bY a company formed with the object of developing and setting up markets."

There is no finding in the present case that the appellant company is the owner of the property in question or any part thereof.

As such, no reference was made to section 9 of the Act in the assessment proceedings. The learned counsel for both the parties agree, and in our opinion rightly, that the question of making the assessment against the appellant, in the circumstances under section 9 of the Act does ; not arise. The stand of Mr. Chagla, on behalf of the appellant, is that the assessment against the appellant in respect of the income from the property in question should be made under section 10, while according to Mr. Manhanda, learned counsel for the respondent, the assessment should be under sedon 12 of the Act.

Section 10 of the Act deals with in com~ from business and the material uortion with which we are concerned is given in sub-section ( i) of that section.

According to that sub-section, the tax shall be payable by an assessee under the head "Profits

. '

S. G, :MERCANTILE COJlP, l': C.LT. (Khanna, ] . .)

8S7

and gains of uness, profsion. Qr vtion". in re&t of he profits and gains of any busmess, professton or vocaton earned on by him. "Business':, according to section 2(4) of the Act, includes any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.

Section 12 of the Act deals with income from other sources.

Sub-section ( 1) of that section reads as under. :

" ( 1) .The tax shall be payable by an assessee under the head "Income from other sources" in respect of income, profit and gains of every kind which may be ipcluded ih his total income (if not included under any Of the preceding heads.),

Section 12 deals with the residuary head of income and applies to all such taxable income, profits and gains as are not covered by preceding specific heads. The residuary head of income can be resorted to only if none of the specific heads is D applicable to the income in question; it comes into operation oruy after the preceding heads are excluded.

It is, therefore, manifest that section 12 of the Act can be invoked in the present case only if we exclude the applicability .of section 10 by holding that the income of the appellant com- E pany from the property in question is not income from business.

The definition of the word "Business", as givn in section 2( 4) and reproduced above shows its wide amplitude and we agree with Mr. Chagla that it can embraee within itself dealing in real property as also the activity of taking a property on lease, setting up a market thereon and letting out the shops and stalls in the I' market.

The important . question which arises in the latter case is whether the :.acqisition of the property on lease and letting out of the shops and stalls was in the course of investment or

whethr it was essentially a part of the businesc; and tra<Jing operation of the assessee.

The paramount consideration which would eigh is whether the acquisition of the property was by G way of mvestment and whe•her the property was let out because o.f the assess~ having a title in the same ?r whether the acquisition and lettmg out of the property constttuted the business and trading activity of the assessee. The question as to whether the above activity is being carried on by an inrlividual or a com., anv and in the latter case, the further Question as to whether th~ H .. carrying on of the said activity wa5 the object of the. incorooratio.n of the company as givn in the Memorandum of Association would also have some relevance. Reference iii thic; context may

be .made to the observations of Lord Stem4a}e, M.R. in~ case

988 [1972] 2 S.c.R.

of Commissioners. of -Inland Reven.ue Ltd.(l) : v.

Korean Syndical~

"If . you once get the individual and the company spending exactly on the same -basisJ then there would be no difference between them at all.

But the fact that the limited company comes into existence in a 'different way is a matter to be considered. An individual comes into existence for many purposesJ or perhaps sometimes for noneJ whereas a limited company comes ito 'existence for the particular purpose of carrying out a t an action by get mg. possessiJn of concessions and turning them to accountJ then that is a matter to be con.>idered when you come to decide whether doing that is carrying on a business or not."

''The abOve observations were quoted with approval 'by this Court in the case of Karanpura Development Co. Ltd. v. Commissioner of Income-tax, West Bengale). The' assessee company in the last mentioned case was formed with the objects, inter alia, of acquiring and disposing of underground coal mining rights in certain cJa. field>.

The Mem::>randum of Association of the company enumerated other objects, such as coal raising, but the assessee restricted is activities to acquiring coal mining leases over large areasJ developing them as coal fields and then subleasing them to collieries and. other companies. The [eases were acquired for a term of 999 years and the coal fields were sublet for the balance of the term of the respective leases minus two days.

The company never wxked the coal fields with a view to raising coal, nor did it acquire or sell coal raised by the sublessees.

As a'!ainst a, salami of Rs. 40 per bigha which. the '

asessee had paid, it realised from the sub-lessees Rs. 400 per bigha as sal-ami.

In ddition, the assessee c)larged certain royal;. ties at rtes higher than those it had aqreed. to pay u.nder the brad , leases.

The question . which arose for determination was whether the amount received bv the assec; see as salami for granting sub-lease constiutd tradng receipts and the profits therefrom was assessable.

It was held that the tran<:actions of, a.cQuir- , ing ]eases anri e:rantinq sub-leao; es were in the nature of trading with; n the objcts of the company and not enjoyment of the property as landowner.

It_was observed in this connection:

"As has been already . oointed out in connection , with the other two cases wnere there is a let•im! out of ' premises and collection of rents the assessment on property, oasis mav be correct but n, ot so, where the letting

. (1) rt92iJ 12 Tax Cas. 181.

(2) [1962] 44 I.T.R. 362.

S. G. MER.CANnLE COR.P. v. c.r.T. (Khanntl. J.) J.l.

or subletti.DJt is part of a trading operation. The divid ing line is difficult to find; but in the case of a company

wtth its professed objects and the manner of its acti vities and the nature of its dealins with its property_ it is possible to say on which side the operations fall and to what head the income is to be assined.

Ownership of property and leasing it out may be done as a part of business, or it may be done as landowner.

Whether it is the one or the other must necessarily depen.d upon the object with which the act is done.

It rs not that no company can own property and enjoy it as property, whther by itself or by giving 1he

use of i'l: to another on rent.

Where this happens, tthe appropriate head to apply is "income from property"

( sec'tion 9), even though the company may be doin~ extensive busine>s othe wise. But a company formed with the specific object oi acquiring properties not with the view to basing them as propety but to selling them or

turning them to account even by way of leasing them ou~ as an integral part of its bushes~, cannot be said to treat them as landowner but as trader."

The above observations have a direct bearing. It is not necessary for the purpose of this case to say anything, bryond what has already been said while dealing with s-ection 9 of the Act, about the view exptessed in the above passage regarding the rental income of an owner bein!Z treated as business income in case it is reooived as :pa"rt of trading activity, because we are concerned in the in<; tant' case with an assessee who is lessee and not the owner of the property in question.

The assessee in the cited case of Karanpura Development Co. Ltd. too was 1essee of the coal fields.

So far as such ac; seo; seeo; aN concerned, who as part of their essential trading activity take le1Se . of p; o"e Jy and sublet parts thereof with a view to make profits, the dictum l<dd down above, in our ooinion, !would hold good and e profits would have to be trearted as business income. .' , .

'lite appellant ccmpa1'1)', as stated earlier was incorp•ratcd on January 25, 1955. Th~ obier.t: for which the comoany was formed, inter alia, was to tak~ on lease or otherw; se acquire and to hold, improve, lease or otherwise dispOse of, la11d, houses and. other real ancl oersonal oropertv and to deal vith the same com mercially.

Within less than two weeks of its incorporation the appellant comoanv took on lease the orooertv in question. and undertook to soend R "· 5 Iakhs for the ouroo-se of remodelling and reoairin!!' the structure on he site.

The appel]ant was also given the right to sublet the different portions.

The appellant's

9.9.0 SUPREME OOVRT RBPOJt, T~

[1972]2 S.C.R.

activit}' during . the period of three years in question consisted of devetopmg, lhe aemised property and letting out ponions of the same as shops, stalls and ground spaces.

All the.; e facts point to the conclusion that the takinj!; of the property on lease and subletting portions of the same was part of the business and tradinj!; activity of the appellant.

The conclu.sion of the Tribunal that the activi1ies of the appellant in takinj!; lease and subletting the demised premises were undertaken with the object of doing . business was warranted on 1he facts of 'the case.

Likewise, the conclusion of the Tribunal that the aooellant company in letting out the leasehold property was not acting as owner but as tl ader was borne out by the material on record.

Reference on behalf of the respondent has been made by Mr. Manchanda to the decision of the H.use of Lords in Frv v. Salisbury House Estate Ltd. (1 ) In that case the assessee company which had been formed to acquire, manage and deal with a block of buildl11gs, let out the rooms as unrurnished offices to tenants.

The company provide1 a staff to operate the lifts and to act as porters and watch and protect the bui ding.

The c-mpany al5o provided certain sevices--such as heating and cleaning-for the tenants if required, at an additional charge. For four years the company was assessed under Schedule A to income-lax on the gross value of the building as appearing in the valuation lic; t. The company admitted its liability to be assessed in respect of profits from the service supplied to the tenants under Schedule D, but he Cron claimed in makin~ the assessment under Schedule D Ito include the rents of the offices as part of the receipts of trade, making allowance for tax assess•.xl under SChedule A. It may be men ioned that the -scheme of the English Income-tax Act is tto povide for the taxation of specific properties under schedules appropriate to them and under a general Schedule D. to provide for taxa ion of income not dealt with specifically. Schedule A provides for the 'taxation of. income derived from proi>ertv. in land; B (or incom.'!s derived from occupation of land, C for irl'come drived from. Government . securities and E for income from employment in the public ser- . vice. The. Ho\lc; e of Lords held in othe above citefl ca"'~ that he

rents were P!Ofits arising from the ownership o~ land in respect of which the assessment under Schedule A was exhaustive and that thev,' therefore/Could not be included in the assessment under

Schedule D as trade 're'ceipts of the company, The assec:see com -pany, in the cited case, was the owner of the Salisbury Houc:.e. and -the decision of the House of Lords re.c; ted on the view that Sche-

-dule A was exhaustive in respect of profits aisina from ownehil> / of land. The above decision is not of much helo to the respandent because the assessee in the present case is not the owner

(1) ·{1930} A.C. 432.

A .. ,~

S. G. MERCANTILE CORP. v. C.I.T. (Khanna. /,) 99l

but only a lessee of the prOperty in question; and section 9, which is anruogou.§ to Schedule A of the English Act, applies to income fwm property consistin~ of buildings orlands appurtenant hereto of wtuch the assessee is the owner.

The respondent can also have not much support from the decision of East India Housing and Land Development Trust V'.

Commissio11er of Income-tax(!) because what was decided therein was Lhat in the case of income from landed property by the owner company, the income would tall under the spectfic head:

described in section 9 and not under section 1 0 even though the company had been incorporated with the. object of buying and

dev~Jloping landed p1 operty and promoting a market thereon.

Section 9, as mentioned earlier, does not apply to the present case because the appellant is not owner of the .property in question. As such there arises no question in this case of the exclu.: sion of seotion 10 on the eround that section 9 is the specifichead.

In the instant case the revenue relies not' upon the specifichead given in section 9 but upon the residuary head given in sectio.n 12 of te Act. It is p1ain that the considerations which would weigh for applying section 9 on the ground .of being a specific head would not hold good for invoking section 12 which

can come into picture only if all the preceding heaqs of income, including b11siness incom.e as given in section 10, are ruled out.

Where, as in the present case, the income can appropriately fall under section 10 as being business income, no resort can be made to section 12 of the Act.

As a result of the above, we acceot the aooeal and set ac; ide the judgmem of the High Court.

The answer to the ques'ion referred by the Tribunal is that the income in ouestion wa~ asc; essabl•.! under section 10 and not under section 12 of the Act.

The appellant shall be entitled to 'the costs of this Court as weU as: th0l1e of the Hiah Court.

One hearin2 fee.

K.B.N.

Appeal allowed.

(l) [1961]42 I.T.R..~J

S. G. MERCANTILE CORPN. (P) L1D

January 4, 1972

M. SHELAT

I. D. DuA

H. R. KHANNA

G: K. MITTER, JJ.

Income Tax Act

ss. 10, 1

s. 10

s. 12

s. 10

s. 12

s. 10

s. 10

s. 12

s. 9

s. 9

s. 9

s. 10

Section 12

s. 12

s. 10

s. 2(4)

s. 10

s. 12

Calcutta High Court

M. C. Chagla

D. N. Mukherjee

S. C. Monchrmd'l

R. N. Sachthey

B. D. Sharma

section 66

Indian Incometax Act, 1922

January 25, 19~5

February 5, 1955

Calcutta

Shrimati Sujata Tagore

September 5,

1956

section 10

section 12

Assistant Commissioner

section 12

section 12

section 10

section 10

section 10

Income-tax Act, 1922

section 10

Supreme Court

East India

G. MERCANTILE CORP

C.I.T. (Khanna

section 10

section 1

Chagla

Manchanda

Section 6

Section 9

section 9

section 10

section 10

section 6

section 9

section 9

section 9

section 10

Manhanda

Section 10

section 2(4)

Section 12

Section 12

section 12

section 10

section 2( 4)

Karanpura Development Co. Ltd.

s

9

SUPREME OOVRT RBPOJt

Schedule D

Schedule D

Income-tax Act

Schedule D

Schedule D

section 9

Schedule A of the English Act

section 9

section 1

Section 9

section 9

section 9

section 9

section 12

section 10

section 10

section 12

section 10

section 12