Semester-VI

STUDY MATERIAL
Law of Taxation –I

Prof. (Dr.) P. Sree Sudha, LL. D

Number of Hours: 60 Number of Credits: 4

AY 2022-23

DamodaramSanjivayya National Law University

 2

Table of Contents

I. Definition of Income .................................................................................. 3

II. Agricultural Income ................................................................................ 31

III. Person: ...................................................................................................... 54

IV. Residential Status of Individual, Company: ....................................... 101

V. Income under the Head Salaries .......................................................... 152

VI. Minimum Alternate Tax (MAT): ......................................................... 200

VII. Tonnage Tax: ......................................................................................... 206

VIII. Double Tax Avoidance Agreements (DTAAs) .................................... 226

IX. Powers & Functions of Income Tax Authorities: ............................... 252

 3

Objectives of the Course Is to:

➢ Introduce constitutional provisions and basic concepts of direct taxation.
➢ Enable the students to understand the scope of Direct Tax Laws.
➢ Explain the classification of Income and sources of Income.
➢ Discuss the Judgments relating to Income Tax Act 1961.
Learning outcomes:
On completion of this course students should be able to:
➢ Understand the powers and functions of the Income Tax Authorities.
➢ Interpret the settlement of cases, appeals, revisions.
➢ Analyse the provisions of Penalties, offences and prosecution.
➢ Learn the e-filing of income tax returns.
Pedagogy for Course Delivery:
The basic objective of the course is to equip the students with the understanding taxation laws
in India. The course is covered by adopting a combination of case study method, lecture
method to empower the student for better understanding which leads to application of
taxation laws.
Summary of the Judgments:
I. General Principles of Taxation:
Taxation provides governments with the funds needed to invest in development,
relieve poverty and deliver public services. It offers an antidote to aid dependence in
developing countries and provides fiscal reliance and sustainability that is needed to promote
growth. Tax system design is also closely linked to domestic and international investment
decisions, including in terms of transparency and fairness. Strengthening domestic resource
mobilisation is not just a question of raising revenue: it is also about designing a tax system
that promotes inclusiveness, encourages good governance, matches society’s views on
appropriate income and wealth inequalities and promotes social justice. Taxation is integral
to strengthening the effective functioning of the state and to the social contract between
governments and citizens. By encouraging dialogue between states and their citizens, the
taxation process is central to more effective and accountable states.
I. Definition of Income

(i)Mehboob Productions (P) Ltd. v CIT (1977) 106 ITR 758 (Bom) -
VIMADALAL AND DESAI, JJ

Facts:
The assessee was private limited company which, at all relevant times, was doing business in
production of films. The relevant assessment year was 1959-60, the corresponding previous
year being the year ended 30-9-1958 Sometime in 1957, the assessee-company completed the
production of a film entitled Mother India.In that very year, i.e., in 1957, it was awarded a
certificate of merit (presumably by the Government of India), and the assessee-company
preferred a claim before the State Government that the picture should be declared as 'exempt
from entertainment duty' and that as producer of that picture it was entitled to that portion of
the proceeds of the exhibition of the film which represented entertainment duty. The claim of
 4

the assessee was accepted by the then Government of Bombay on 25-10-1957, and in
pursuance of that decision the assessee-company recovered from the various exhibitors and
theatres in the then State of Bombay the aggregate amount of Rs. 10,67,212 being the amount
these exhibitors and theatre-owners had collected by way of entertainment duty in the year of
account. It might be mentioned that the decision of the Government was pursuant to the
procedure to be found contained in the notification dated 18-5-1957, issued by the Director of
Publicity.
Before the ITO the assessee-company claimed that the amount of Rs. 10,67,212 was not
liable to be included in its total income because it was not a trading receipt but only an
amount received by way of a personal testimonial and that, at any rate, it was casual and
nonrecurring and was, therefore, exempt under section 4(3)(vii) of the Act.
Further, certain expenses incurred by 'M' a director of the assessee-company, while he was on
tour of the United States of America in the following circumstances: The picture, Mother
India, was one of the foreign films nominated by the Academy of Arts and Sciences,
Hollywood, and 'M' accompanied by his wife, proceeded to the U.S.A. to attend the function
for the awards by this body. While he was in the U.S.A., he suffered a serious heart attack,
for which he had to be hospitalized and an aggregate expenditure of Rs. 33,667 was incurred
in connection with this illness. After his return to India from the U.S.A. the board of directors
of the assessee-company at its meeting held on 1-5-1958, passed a resolution to the effect that
the entire expenditure on his treatment should be borne by the company and debited to its
account. The assessee-company accordingly claimed the whole of the expenditure of Rs.
33,667 as a proper deduction in determining its profits for the assessment year
The ITO rejected both the claims made by the assessee-company. He included the amount of
Rs. 10,67,212 in the assessee's total income and rejected its claim for the deduction of Rs.
33,667 invoking the provisions of section 10(4A) of the Act. According to the ITO the
amount of Rs 10,67,212 constituted receipts on account of the assessee's venture of film
production which was their normal business, and accordingly the said amount had to be
treated as trading receipts in the hands of the assessee. According to him, further, the assessee
was getting regular receipts out of the proceeds of the picture and since receipts were being
received as part of the assessee-company's business, the same were neither casual nor non-
recurring. Accordingly, the assessee-company's claim to exemption under the provisions of
section 4(3)(vii) of the Act was also rejected. The ITO further held that the amount spent for
the medical expenses of 'M' in the U S.A. was an expenditure which resulted directly in the
benefit or amenity to the director who had a substantial interest in the assessee-company
within the meaning of sub-clause (iii) of clause (6C) of section 2 of the Act. Accordingly, the
assessee-company's claim for deduction of this amount reimbursed to the director was
disallowed, applying the provisions of section 10(4A) of the Act.
The assessee, thereafter, appealed to the AAC, who confirmed the order of the ITO on both
the issues.
The assessee, thereafter, appealed to the ITAT, and the Tribunal upheld the orders of the ITO
and the AAC as regards the inclusion of Rs. 10, 67,212 in the assessee's total income, but it
restricted the disallowance of the medical expenses to only 1/3rd of the amount claimed by
the assessee. It found it impossible to divorce the amount received by the assessee-company
from its trading activity. According to the Tribunal, this was not a case where the amount was
received without any reference to the business, profession or vocation of a person. The
amount was 'related to a picture which was essentially a commercial commodity produced in
 5

a commercial manner. It has, therefore, no aspect of a personal testimonial which could be

linked to personal qualities which had nothing to do with business, profession or vocation'.
According to the Tribunal, 'to all intents and purposes, the amount seems to us to be in the
nature of production bonus, the emphasis in this case being not on the production of quantity
but production of quality'. In the view that it took, viz., that the amount was related to the
company's business of producing films, which, in the view of the Tribunal, would include
production of good films, the assessee was not entitled to claim exemption in respect of the
said amount under the provisions of section 4(3)(vii) of the Act. Thus, the Tribunal was of the
view that the amount was rightly included in the assessee's total taxable income.
As regards the medical expenses, the Tribunal accepted the assessee's contention that 'M' visit
to the U S.A. was for the purposes of the assessee's business. According to the Tribunal, he
must be held to have suffered a heart attack while he was in the U.S.A. by reason of the
company's work and, therefore, it came to the conclusion that the expenses of medical
treatment in the U.S.A. to the extent that it was in excess of the expenses which would
normally have been incurred in India should be allowed as a deduction to the assessee. On a
rough and ready basis such expenses in India were estimated by the Tribunal at l/3rd of the
expenses incurred in the U.S.A., and, accordingly, the Tribunal upheld the disallowance only
of an amount equivalent to l/3rd of the medical expenses, and the assessee was permitted to
claim the balance 2/3rd expenses as a deduction.
Cases Referred:
CIT v. Smt. Shanti Meattle [1973] 90 ITR 385 395 (All.), CIT v. Shaw Wallace & Co. [1932]
2 Comp. Cas. 276; AIR 1932 PC 138, Smt. Dhirajben R. Amin v. CIT [1968] 70 ITR 194
(Guj.), Dooars Tea Co. Ltd. v. Commr. of Agrl. IT [1962] 44 ITR 6 (SC), Gopal Saran
Narain Singh (Maharajkumar) v. CIT [1935] 3 ITR 237 (PC), Hemant Singhji (Maharaja
Rana) v. CIT [1971] 79 ITR 83 (Raj.), Herbert v. Mc Quade [1902] 4 TC 489 (CA), Mahesh
Anantrai Pattani v. CIT [1961] 41 ITR 481 (SC), B. Malick v. CIT [1968] 67 ITR 616,
(All.), Parelkar Gore &Parpia v. CIT [1958] 34 ITR 312 (Bom.), Ruby Rajiber Kaur
(Princess) v. CIT [1967] 64 ITR 624 (Punj.), Raghuvanshi Mills Ltd. v. CIT [1952] 22 ITR
484, (SC), Rani Amrit Kunwar v. CIT [1946] 14 ITR 561 (All.) (FB), Seaham Harbour Dock
Company v. Crook [1931] 16 TC 333 (HL), Susil C. Sen, In re [1941] 9 ITR 261 (Cal.), A.
Janab Syed Jalal Sahib v. CIT [1960] 39 ITR 660 (Mad.) and Maharani Vijaykuverba Saheb
of Morvi v. CIT [1963] 49 ITR 594 (Bom.).
Questions before the Court:
"1. Whether, on the facts and in the circumstances of the case, the amount of Rs. 10,67,212
recovered by the assessee-company in the year of account could be included in its total
income for the year 1959-60 ?
2. Whether, on the facts and in the circumstances of the case, l/3rd of the medical expenses
claimed by the assessee-company for the treatment in the U.S.A. of the managing director
could be disallowed under section 10(4A)?"
It is true that in Raghuvanshi Mills Ltd. v. Commissioner of Inome-tax [1952] 22 ITR 484
(SC), the Supreme Court has observed that the remarks of the Judicial Committee
in Commissioner of Income-tax v. Shaw Wallace & Co. [1932] 2 Comp Cas 276; AIR 1932
PC 138, with regard to the meaning of the word "income" must be read with reference to the
particular facts of the case. In Raghuvanshi Mill's case [1952] 22 ITR 484 (SC) the Supreme
Court was considering the case of the assessee-company which had insured its mills with a
certain insurance company and had also taken out certain policies known as "consequential
 6

loss policies" which insured against loss of profits, standing charges and agency commission.
The mills were completely destroyed as a result of fire.
Accordingly, it was held to be income and, further, income which was not exempt within the
meaning of section 4(3)(vii) of the Act. It may be mentioned in passing that earlier
in Maharajkumar Gopal Saran Narain Singh v. Commissioner of Income-tax [1935] 3 ITR
237 (PC) the Judicial Committee of the Privy Council had itself pointed out that "the word
'income' is not limited by the words 'profits' and 'gains' and that anything which can properly
be described as income is taxable under the Act, unless expressly exempted". Thus, it would
be seen that the word "income" as used in section 4(1) of the Act not only may denote
something larger than profits and gains but may denote whatever may properly be described
as "income" in the ordinary parlance of language unless expressly exempted from the charge
of tax by the Act itself.
In Commissioner of Income-tax v. Shaw Wallace & Co. [1932] 2 Comp Cas 276; AIR 1932
PC 138 it appears to have been held that, in order to constitute "income", the receipt must be
something which comes in, (1) periodically, (2) as a return, (3) with some sort of regularity or
expected regularity, and (4) from a definite source, it being made clear that it would not be in
the nature of a windfall. As seen from the Supreme Court decisions above cited, in order to
constitute income such receipt need not necessarily come in periodically, nor with any sort of
regularity or expected regularity. According to this decision and some other decisions, to
which reference will now be made, such receipts in order to constitute income of the assessee
need not necessarily have their origin in business activity, investment or enforceable
obligation.
The meaning to be given to the expression "income" has received elaborate consideration in a
Full Bench decision of the Allahabad High Court in Rani Amrit Kunwar v. Commissioner of
Income-tax [1946] 14 ITR 561 (All) [FB], where separate judgments have been given by each
of the three judges constituting the Full Bench. At page 573 of the report, Braund J. considers
the test indicated by the Privy Council in Shaw Wallace & Co.'s case [1932] 2 Comp Cas
276; AIR 1932 PC 138, and observes that the principal emphasis was on the words "return"
and "definite sources" used by Sir George Lowndes J., who delivered the judgment for the
Privy Council.
The Full Bench of the Allahabad High Court was considering certain regular payments
received by the assessee from the Ruler of Kalsia State and the Maharaja of Nabha State: she
was the wife of the Kalsia Ruler and the sister of the Maharaja of Nabha. It was held
ultimately that the allowances received by the assessee from the Kalsia State were
remittances from her husband and were taxable as income. As the assessee was residing at
Dehra Dun in British India, it was further held that the accrual to the assessee was in British
India. It was also held that there was no evidence in the case to show that the payments made
by the Nabha State were attributable to any custom, usage or traditional obligation and there
was consequently no origin for the payments which could amount in its nature to a definite
source so as to render such payment "income" and not merely a casual or annual windfall. It
was accordingly held that the payments received by the assessee from her brother (Nabha
State) were not income and were not assessable to income-tax. After considering certain
English authorities, Braund J. observed as follows [1946] 14 ITR 561, 574 (All) [FB]:
"The conclusion, therefore, I have reached is that, in construing the word 'income' in the
Indian Income-tax Act, one has to ask oneself whether, having regard to all the circumstances
surrounding the particular payments and receipts in question, what is received is of the
 7

character of income according to the ordinary meaning of that word in the English language
or whether it is merely a casual receipt or mere windfall."
In this very decision of the Allahabad High Court Malik J., who gave a supporting judgment,
considered several dictionary meanings of the word "income", which may be usefully set out
(page 583):
"That which comes in as the periodical produce of one's work, business, lands or investments
(considered in reference to its amount and commonly expressed in terms of money) or
'annual or periodical receipts accruing to a person or corporation' (See Oxford Dictionary) .
It is denned in the Oxford Concise Dictionary as: 'Periodical receipts from one 's business,
lands, work, investments, etc. (income-tax levied on this).'In the Webster's Dictionary it is
defined as:
'That gain or recurrent benefit (usually measured in money) which proceeds from labour,
business or property; commercial revenue or receipts of any kind, including wages or
salaries, the proceeds of agriculture or commerce, the rent of houses or return on
investments'."
It may be observed that the contention of the above assessee, that voluntary payments which
did not involve a legal or enforceable obligation to pay on the payee would not constitute
income, was decisively rejected by the Full Bench of the Allahabad High Court in Rani Amrit
Kunwar's case [1946] 14 ITR 561 (All) [FB].
In H.H. Maharaja Rana Hemant Singhji v. Commissioner of Income-tax [1971] 79 ITR 83
(Raj) the Rajasthan High Court was called upon to consider the nature of certain payments
made in respect of "Dholpur House" at New Delhi to the erstwhile Maharaja of Dholpur
State. In a number of letters written by the Government of India it had been clarified and
reiterated that these were ex gratia payments. It was accordingly contended on behalf of the
assessee that payments by virtue of gratuitous arrangement which could not be enforced in a
court of law would not amount to income, as the receipt would not be referable to a definite
source capable of yielding some periodical return. The Division Bench of the Rajasthan High
Court rejected the contention, holding that it could not be said that there was no source for the
income. According to that High Court, the payments were being made "by virtue of an
arrangement which, as mentioned in the letter dated 15th May, 1963, was of such a nature
that the Government of India considered themselves bound to honour and which the assessee
expected the Government of India to honour. No doubt, every time the payment that was
made was gratuitous payment in the eye of law, but it was expected that such payment was to
be made annually"(page 88). In this view of the matter, the payments were held to be income
liable to taxation unless the assessee was able to show that it fell within one of the
exemptions provided under the Act. It may be mentioned that the judgment subsequently
goes on to consider the claim of the assessee for exemption under section 4(3)(vii) of the Act,
which claim was upheld. That portion of the judgment may be usefully referred to later on
since it deals with the second aspect involved in this question.
Our attention was drawn by the learned counsel for the revenue to a decision of the Allahabad
High Court in Commissioner of Income-tax v. Smt. Shanti Meattle [1973] 90 ITR 385 395
(All), where an observation is to be found to the following effect:
"Every receipt generally may be described as income unless it is expressly exempt."
 8

Privy Council in Shaw Wallace's case [1932] 2 Comp Cas 276; AIR 1932 PC 138. If one
analyses that definition, it is clear that the Privy Council laid down that in order that a receipt
by an assessee should constitute income, it must satisfy the following ingredients:

(1) It must be a periodical monetary return which, in my opinion, must mean a return for
labour and/or skill and/or capital;

(2) coming in with regularity, or expected regularity;

(3) from a definite source;

(4) excluding a receipt "in the nature of a mere windfall", i.e., not a windfall in regard only
to the extent or quantum of what is received.

It has been clarified by the Privy Council in the said case that the words "profits and gains"
do not add anything to the amplitude of the concept of "income".
the definition of "income" given by the Privy Council in Shaw Wallace's case [1932] 2 Comp
Cas 276; AIR 1932 PC 138, as pruned by those decisions, should now, therefore, read as
follows:
"Income is a monetary return expected by the assessee for the labour and/or skill bestowed,
and/or capital invested by him; coming in from a definite source, which need not be a legal
source, in the sense that the failure to pay the same need not be enforceable in a court of law;
and excluding a receipt 'in the nature of' a mere windfall which, as already stated above, must
mean a windfall in regard to its very nature and not in regard to its extent or quantum."
Applying that definition to the receipt of the amount of Rs. 10,67,212 by the assessee in the
present case, though the said amount did come in from a definite source, it was not a return
expected by the assessee for the labour, and/or skill bestowed, and/or capital invested by him,
but was, in my opinion, "in the nature of a mere windfall". I, therefore, agree with my
brother, Desai, that it is not "income". Though called an exemption from entertainment duty,
it did not really have the character of an exemption, but was in the nature of a prize, though
its computation was on the basis of the entertainment duty paid by the public.
By the Court
Question No. 1.—In the negative and in favour of the assessee.
Question No. 2.—Also in the negative and in favour of the assessee.
The Commissioner must pay the assessee's costs of the reference.
In favour of assessee.

(ii) Commissioner of Income-tax v. G.R. Karthikeyan -[1980] 4 Taxman 49 (Mad.) -

SETHURAMAN AND BALASUBRAMANYAN, JJ.
Facts
 9

The assessee participated in an All India Highway Motor Rally. According to the regulations
of the rally, the emphasis was on endurance driving and it was designed as a reliability test
for automobiles. The first prize of Rs. 20,000 was ascertainable by adopting a system of
penalty points for various violations of any traffic rules or regulations. The competitor with
the least penalty points would be adjudged the best. The assessee won the first prize of Rs.
20,000 and he got another sum of Rs. 2,000 for the same performance from another concern
in the accounting year relevant for the assessment year 1973-74. The ITO opined that this
sum of Rs. 22,000 was liable to tax under section 2( 24)(ix) because it represented winnings
from race. On appeal, the AAC held that the contest was not a race because speed was not its
essence but it was only a careful driving and, therefore, the sum was not taxable. On
revenue's appeal, the Tribunal sustained the AAC's view, holding, inter alia, ( i) that the
event was not even a game as it did not involve gambling or betting; and (ii) that the receipt
was casual but not income and, therefore, immune from tax.
2. The question before the ITO was whether this amount was liable to be taxed in the light of
section 2(24)(ix ) of the Income-tax Act. The ITO was of the view that the amount of Rs.
22,000 represented winnings from race. The assessee appealed to the AAC, who held that the
contest was not a race, that speed was not the essence of the race, and that in the present case
every competitor had to drive carefully. In his view, the sum of Rs. 22,000 could not have
been taxed under the said provision. The department appealed to the Tribunal. The Tribunal
held that the contest could not be a race and that it was predominantly a test of skill and
endurance as well as reliability of the vehicle. In view of the Tribunal, the event was not a
game also within the meaning of section 2(24)( ix). The Tribunal held also that the receipt
was casual, but nevertheless was not income, and that it would fall outside the provisions of
the Act and, therefore, not liable to be taxed. The construction placed on the section having
regard to the phraseology used was that games in question should involve some sort of
gambling or betting and that in this case there is no such gambling or betting. It is this order
of the Tribunal that is now the subject-matter of challenge in the present reference.
3. Section 2(24 )(ix) was introduced into the statute by the Finance Act, 1972. Section
3(b)( ii) of the said Act provided:
"after sub-clause (viii), the following sub-clause shall be inserted, namely:—
'(ix ) any winnings from lotteries, crossword puzzles, races including horse races, card games
and other games of any sort or from gambling or betting of any form or nature whatsoever;' "
It is this provision that is relied on in the present case. The attempt of the revenue is to bring
the case within the scope of the expression "any winnings from races . . . and other games of
any sort . . . ". In order to get a proper background of this provision, it would be necessary to
refer to the other amendments made to the Act. Section 4 of the Finance Act, 1972 substituted
clause (3) of section 10 of the Income-tax Act in the place of old clause (3). The new
provision, insofar as it is material, runs as follows :
"any receipts which are of a casual and non-recurring nature, not being winnings from
lotteries, to the extent such receipts do not exceed one thousand rupees in the aggregate:"
4. Section 11 of the Finance Act, 1972 introduced also section 74A into the Income-tax Act,
and the said provision runs as follows:
"Losses from certain specified sources falling under the head 'Income from other sources'.—
 10

(1) Where the net result of the computation made for any assessment year in respect of any
source falling under the head 'Income from other sources' and being a source specified in sub-
section (2), is a loss, such loss shall not be set off except against income, if any, from the
same source.
(2)The sources referred to in sub-section (1) are—
(a)lotteries;
(b)crossword puzzles;
(c)races including horse races ;
(d)card games;
(e)other games of any sort;
(f)gambling or betting of any form or nature whatsoever not falling under any of the
foregoing clauses."
It may be seen that sub-section (2) of section 74A is more or less a reproduction of
section 2(23 )(ix) broken into different components. The idea behind this provision is that if a
person sustained losses, e.g., in horse racing, then such losses could be set off only against
the income from the same source. There is no inter-changeability of items (a) to (f). Each is a
separate source by itself.
5. We are now concerned with finding out whether there are any winnings from races or other
games of any sort The word "winnings" has given the following meaning in The Universal
Dictionary of English Language by Henry CeicilWyld. Rentlodge and Kagat Paul Ltd.,
London, 1952 Edition : "Amount won, esp. money won in betting".
In The Oxford English Dictionary, Volume XII, the word "winnings" is given the following
meaning : "Things or sums gained, gains, profits, earnings (obs. or dial) in mod. use chiefly
applied to money won by gaming or betting". For the word "winnings", The Oxford
Dictionary refers to Law Reports, namely, 1885 Weekly Notes, page 145 in which the
following passage occurs: "The defendant . . . having won on those bets received the
winnings from the persons with whom he had betted". This shows that the word is used in
association with chance rather than skill. There is a singular form of "winning" and the
meaning assigned to this expression is. . ."1. the act of a person or thing that wins. 2. usually,
winnings—that which is won especially money". (See The Random House Dictiondary of
English Language, (College Edition, at page 1510). In Websters' Third International
Dictionary, the word "winning" is given this meaning : "Something one wins esp. the money
won by success in competition".
It is clear from the above dictionary meanings that there are two forms of the expression
"winning"—one in singular and the other in plural. As far as the plural form is concerned, it
is given a specific meaning in The Oxford Dictionary. Especially, in current or modern usage,
it is chiefly applied to "money won by gaming or betting". Though the expression would in
old days comprehend all things or sums gained, gains, profits, earnings, still its modern usage
is confined to money won by gaming or betting.
6. In the present case, as already seen, the assessee participated in a race which involved skill
in performance of driving of the vehicle. He had to cover a very long distance and had to
 11

qualify by getting the least of the penalty points. The idea obviously is to encourage the
motorists to comply with all the regulations. It is not mere speed that counts. Perhaps, in the
present case, speed would be only a secondary thing for winning the race, in the sense that he
had to complete the race within the particular time, but the emphasis is on the least number of
penalty points being incurred by the motorists concerned.
7. The Supreme Court in State of Bombay v. R.M.D. Chambrbaugwala [1957] II MLJ 87 was
concerned with the validity of the Bombay Lotteries & Prize Competitions Control & Tax
Act, 1948 as amended by the Act 30 of 1952. The question was whether the Act fell within
the entry 34 List II "gambling". It is unnecessary for our present purpose to go into the details
of that case. During the course of the judgment, Das, CJ. referred to the dictum of Lord
Hewart, CJ. in Coles v. Odhams Press Ltd. [1936] KB 416 to the effect c "the competitors are
invited to pay certain number of pence to have the opportunity of taking blind shotes at a
hidden target". In the context of finding out the meaning of "gambling", their Lordships
referred to the nature of the competition that was involved in that case. At page 95, it was
pointed out that if even a scintilla of skill was required for success, the competition could not
be regarded as of a gambling nature. Judged by this test in this case, the present would not be
a case of winnings income from gambling or betting of any form. As pointed out earlier, the
winnings being from some sort of skill in the performance of driving, the ordinary use of the
expression "winnings" would not comprehend the "winning of a prize" in a case of this kind.
8. The learned counsel for the revenue drew attention to two other decisions to emphasise the
point that merely a dictionary meaning of the word should not be made to govern the
interpretation of a provision of this kind. The first case cited was Kanwar Singh v. Delhi
Administration AIR 1965 SC 871. It is unnecessary to refer to the actual details of that case.
It is enough for our purpose to advert to what the Supreme Court stated, as a rule of
construction, for the courts in construing a statute at page 874 :
"It is the duty of the court in construing a statute to give effect to the intention of the
Legislature. If, therefore, giving a literal meaning to a word, used by the draftsman,
particularly in a penal statute, would defeat the object of the Legislature which is to suppress
a mischief, the court can depart from the dictionary meaning or even the popular meaning of
the word and instead give it a meaning which will 'advance the remedy and suppress the
mischief."
9. In PyaraliK. Tejali v. Mahadeo Ramchandra Dange AIR 1974 SC 228, the Supreme Court
was concerned with the meaning of the word "supari" in the context of the provisions of the
Prevention of Food Adulteration Act. In the course of the judgment, in paragraph 10 at page
233, section 2(v ) of the Act, then under construction, was referred to, and it was pointed out :
"He who runs and reads the definition in section 2(v ) of the Act will answer back that supari
is a food. The lexicographic learning, pharmacopic erudition, the ancient medical literature
and extracts of encyclopaedias pressed before us with great industry are worthy of a more
substantial submission. Indeed, learned counsel treated us to an extensive study to make out
that supari was not a food but a drug ... In the field of legal interpretation, dictionary
scholarship and precedent based connotations cannot become a universal guide or semantic
tyrant, oblivious of the social context, subject of legislation and object of the law."
Again reference was also made to Bolani Ores Ltd. v. State of Orissa AIR 1975 SC 17. At
page 25 the following passage occurs :
 12

"As usual references have been made to the dictionaries but quite often it is not possible to
hold a dictionary in one hand and the statute to be interpreted in the other for ascertaining the
import and intent of the word or expression used by the Legislature. The shade of meaning of
a word, its different connotations and collections which one finds in a dictionary does not
relieve us of the responsibility of having to make the ultimate choice of selecting the right
meaning. We chose that meaning which is most apt in the context, colour and diction in
which the word is used. The use of a dictionary ad lib without analysis of the entire Act, its
purpose and its intent, for ascertaining the meaning in which the Legislature could have used
the word or expression may not lead us to the right conclusion."
10. These pronouncements of the Supreme Court were relied on for the purpose of showing
that we must not be unduly guided by the meaning given in the dictionary for a word. We are
unable to accept this submission of the learned counsel. Though an overemphasis of the
dictionary meaning is discouraged in all these cases and a contextural meaning envisaged,
still courts cannot take leave of the dictionary completely. If this were to be done, then
practically the problem of interpretation would land us in a wilderness. What is emphasised
in all these judgments, as we read the passages set out above, is to show that we have to give
a proper and not necessarily a literal meaning to the words used in a statute. The meaning of
the word takes its colour from the context in which it is used. If the context shows that a
particular expression is used in a manner which is not the same as the meaning given in the
dictionary, then the dictionary meaning may have to be discarded and the contextural
meaning have to be adopted. The purpose of interpreting a particular provision is to give
effect to the intention of the Legislature to the extent manifested by the words. We have to
consider the question in the present case in this background.
11. The Oxford English Dictionary has given a modern usage of the expression "winnings".
We cannot proceed on the assumption that the draftsman was not aware of the meaning given
to this word in its modern sense. A statute cannot be taken to use words in their archaic sense.
The modern usage is to show that the winnings are to be taken, as applied only to money won
by chance, as a kind of windfall as in a lottery, a horse race, gambling or betting. Though a
prize is won, all winnings cannot be equated to prizes. If counsel were right, prizes won, say,
in a garden competition would have to be taxed. We do not find this to be the legislative
intent. The learned counsel for the Commissioner pointed out that if the above construction
was correct or was intended by Parliament, then the words, "any winnings from gambling or
betting of any form or nature whatsoever" would be tautologous and would not find a place in
the provision. His point was that tautology should not be attributed to the Legislature. It may
be that the draftsman was overanxious not to miss by any chances the gambler and his kind in
the extended net of taxation. Hence, he made clear the intention by including the obvious
also.
12. It has to be remembered that this pro vision was introduced with a view to counter acting
the evasion of tax. This is brought out in the memorandum explaining the provisions of the
Finance Bill, 1972 and this memorandum is to be found in [1972] 83 ITR (St.) 177. At page
177, the following background is given as and by way of explanation to the introduction of
the provisions under the Finance Act :
"13. Under the existing provisions of the Income-tax Act, receipt which are of a casual and
non-recurring nature are exempt from tax except where the receipts constitute capital gains or
arise from a business or the exercise of profession, vocation or occupation or are by way of
additions to the remuneration of an employee. In view of this exemption, no tax is currently
chargeable in respect of winnings from lotteries, crossword puzzles, races, card games or
 13

from gambling or betting. The exemption from tax of such receipts is not in keeping with the
principle of taxing equally persons with equal capacity, to pay. The exemption also provides
scope for tax evasion and conversion of 'black' money into 'white' by ascribing income which
would normally be taxable to winnings from lotteries, races, card games, etc. The Bill seeks
to make the following amendments to the Income-tax Act with a view to withdrawing the
exemption currently available in respect of casual and non-recurring receipts."
Prior to this amendment, the persons who had this kind of windfall from lotteries, races, card
games, etc., were completely free from having to pay any tax, while the persons who earned
by the sweat on their brow had to pay the tax levied under the Act. This was anomaly
especially in an egalitarian society. This is also inconsistent with the cardinal doctrine of
taxation based on ability to pay. Bearing these aspects in mind, Parliament has brought in the
relevant provisions so as to tax receipts by chance winnings or windfalls. In doing so, the
Parliament virtually introduced a statutory fiction so as to enlarge the concept of taxable
income by including the winnings in races, etc., which are not ordinarily regarded as income.
In the context of this legislative intent and in the light of the meaning given in the dictionary
to the word "winnings", it would be clear that what was intended to be taxed was only a
windfall that reached persons without any effort on their part, without any skill being
exhibited by them. This is a case, as we have already seen, where there was an exhibition of
skill and there was an element of effort in getting the prize and, therefore, there is a no scope
for such receipt being considered as falling under the above provision. Thus considered in the
light of the above background, we are satisfied that the word "winnings" should be assigned
the meaning of chance winning and not winning a prize.
13. Section 74A, simultaneously introduced as part of the scheme of taxation of such
windfalls, emphasises the meaning that we have given above. It contemplates some kind of
losses being liable to be incurred by the person, whose income includes the amount taxable
under section 2(24 )(ix). There is no likelihood of any loss being incurred by a person who
enters into a contest for a prize. For instance, gambling or betting may even be a habit so that
a person who habitually indulges in it may sometimes receive income and may also incur
losses. In such a case, the Legislature did not want to tax only the winnings leaving alone the
losses. Winning prizes of this kind cannot be a habit. There is no possibility of such an
adjustment for loss in a case of this kind. Section 74A thus supports the construction placed
above.
14. Reliance was placed during the course of the argument on section 10(5) on behalf of the
revenue. It does not appear to support the contention put forward. That is a pro vision which
exempted the receipts of casual or non-recurring nature to the extent such receipts did not
exceed Rs. 1,000 in the aggregate. However, even the exemption of Rs. 1,000 would not
apply to winnings from lotteries. Therefore, the use of the expression "not being winnings
from lotteries" does not in any manner suggest that the other kinds of winnings are brought
within the scope of taxation. It would be incongruous to infer a liability to tax from the
language employed in a provision granting exemption.
15. The only other contention that was put forward was that the receipt cannot be said to be
of a casual or non-recurring nature so as to be completely exempted from assessment. An
exemption would be ordinarily necessary only if it is otherwise taxable. Only, if there is a
charge or its possibility, there would be need to see how far the exemption provision applies.
When there is no charge as seen above, there is no need to go into any question of exemption.
 14

16. The result is, we answer the question referred to in the affirmative and in favour of the
assessee. The assessee will be entitled to his costs.
(iii) Commissioner of Income-tax v.Sunil J. Kinariwala - [2003] 126 Taxman 161 (SC) -
SYED SHAH MOHAMMED QUADRI AND K.G. BALAKRISHNAN, JJ.

Facts:
The assessee, partner of a firm, was having 10 per cent share therein. He created a trust by a
deed of settlement assigning 50 per cent out of his 10 per cent right, title and interest
(excluding capital), as a partner in the firm, and a sum of Rs. 5,000 out of his capital in the
firm in favour of the said trust. The assessee claimed that 50 per cent of the income
attributable to his share from the firm stood transferred to the trust resulting in diversion of
income at source and the same could not be included in his total income for the purpose of his
assessment. The ITO rejected the assessee's claim holding that it was a case of application of
income and not diversion of income at source. The AAC allowed the assessee's appeal and
directed that sum transferred to the trust be excluded from the assessee's total income. On
revenue's appeal, the Tribunal, however, reversed the order of the AAC. On reference, the
High Court reversed the order of the Tribunal.
Cases Referred:
Sunil J. Kinariwala v. CIT [1995] 211 ITR 127/[1994] 76 Taxman 601
(Guj.), CIT v. Bhagyalakshmi& Co. [1965] 55 ITR 660
(SC), MurlidharHimatsingka v. CIT [1966] 62 ITR 323 (SC), Raja Bejoy Singh
Dudhuria v. CIT [1933] 1 ITR 135 (PC), P.C. Mullick v. CIT [1938] 6 ITR 206
(PC), CIT v. SitaldasTirathdas [1961] 41 ITR 367 (SC), K.A. Ramachar v. CIT [1961] 42
ITR 25 (SC) and Moti Lal Chhadami Lal Jain v. CIT [1991] 190 ITR 1/56 Taxman 4A (SC).
At the instance of the Revenue, the Income-tax Appellate Tribunal ('the Tribunal') referred
the following questions, under section 256(1) of the Income-tax Act, 1961 ('the Act'), for the
opinion of the High Court :

"1. Whether, on the facts and in the circumstances of the case, 50 per cent out of the
assessee's ten per cent, right, title and interest in the partnership firm of Messrs.
Kinariwala R.J.K. Industries belongs to Sunil JivanlalKinariwala Trust and the income
arising therefrom belongs to the said trust by overriding title?

2. Whether, on the facts and in the circumstances of the case, the sum of Rs. 20,141 being
the profits referable to 50 per cent, out of the assessee's right, title and interest of ten
per cent, in the partnership firm of Messrs. Kinariwala R.J.K. industries is not the real
income of the assessee, but of Sunil JivanlalKinariwala Trust and as such assessable
only in the hands of the trust ?

3. Whether, on the facts and in the circumstances of the case, fifty per cent, out of the
assessee's ten per cent, share in the firm of Messrs. Kinariwala R.J.K. Industries has
been validly assigned to Sunil JivanlalKinariwala Trust under the deed of trust dated
 15

December 27, 1973, and whether the income arising therefrom belongs to the said trust
by way of overriding title ?" (p. 130)

The High Court, relying on the judgments of this Court in CIT v. Bhagyalakshmi&
Co. [1965] 55 ITR 660 and MurlidharHimatsingka v. CIT [1966] 62 ITR 323 , held, inter
alia, that on assignment of fifty per cent share of the assessee in the firm, it became the
income of the trust by overriding title and it could not be added in the total income of the
assessee. In that view of the matter, the aforementioned question Nos. 1 to 3 were answered
in the affirmative, in favour of the assessee and against the Revenue.
It appears that for a considerable time no steps to file an appeal were taken against the
impugned judgment of the High Court. On the assumption that it was accepted by the
Revenue, various matters were disposed of by the High Court, following the said judgment.
In some of those cases, special leave petitions were filed but they were dismissed on the
ground that the main judgment of the High Court was allowed to become final. Thereafter,
the Revenue woke up and challenged the said judgment by filing the present appeal. That is
how, the appeal came to be filed and is before us.
Mr. PreeteshKapur, learned counsel appearing for the Revenue, contended that having regard
to the terms of the settlement, what was assigned was the right to receive profits to the extent
of fifty per cent of the share of the assessee; there was, therefore, no overriding title in the
Trust so as to divert the income at source and the High Court erred in treating the assignment
as resulting in diversion of the income. The question of application of section 60 of the Act
was urged as an alternative contention and was not seriously pursued. Mr. U.U. Lalit, learned
counsel appearing for the respondent-assessee, on the other hand, argued that under section
29(1) of the Indian Partnership Act, 1932, the Trust became entitled to receive fifty per cent
share of the assessee's income from the firm by assignment under the settlement deed and,
therefore, the Trust was getting the income by virtue of the overriding title and the High
Court had correctly answered the questions. Further, it was conceded by the learned counsel
for the parties that question Nos. 1 and 3 overlap and they need to be re-framed. By order of
this Court dated December 3, 2002, they were re-framed as question No. 1. Now, we have to
advert to the following two questions :

"1. Whether, on the facts and in the circumstances of the case, assignment of 50 per cent
out of the assessee's ten per cent share in right, title and interest (excluding capital) in
M/s. Kinariwala R.J.K. Industries in favour of Sunil JivanlalKinariwala Trust under
deed of trust dated December 27, 1973 creates overriding title in favour of the Trust
and whether the income accruing to the Trust can be treated as the income of the
assessee ?

2. Whether, on the facts and in the circumstances of the case, the sum of Rs. 20,141 being
the profits referable to 50 per cent, out of the assessee's right, title and interest of ten
per cent, in the partnership firm of Messrs. Kinariwala R.J.K. Industries is not the real
income of the assessee, but of Sunil JivanlalKinariwala Trust and as such assessable
only in the hands of the trust ?"

It may be pointed out that under the scheme of the Act, it is the total income of an assessee,
computed under the provisions of the Act, that is assessable to income-tax. So much of the
income which an assessee is not entitled to receive by virtue of an overriding title created in
favour of a third party would get diverted at source and the same cannot be added in
 16

computing the total income of the assessee. The principle is simple enough but more often
than not, as in the instant case, the question arises as to what is the criteria to determine, when
does the income attributable to an assessee get diverted by overriding title ? The
determinative factor, in our view, is the nature and effect of the assessee's obligation in regard
to the amount in question. When a third person becomes entitled to receive the amount under
an obligation of an assessee even before he could lay a claim to receive it as his income, there
would be diversion of income by overriding title; but when after receipt of the income by the
assessee, the same is passed on to a third person in discharge of the obligation of the assessee,
it will be a case of application of income by the assessee and not of diversion of income by
overriding title. The decisions of the Privy Council in Raja Bejoy Singh
Dudhuria v. CIT [1933] 1 ITR 135 and P.C. Mullick v. CIT [1938] 6 ITR 206 together are
illustrative of the principle of diversion of income by overriding title.
In Raja Bejoy Singh Dudhuria's case (supra), under a compromise decree of maintenance
obtained by the step-mother of the assessee, a charge was created on the properties in his
hand. The Law Lords of the Privy Council, reversing the judgment of the Calcutta High
Court, held that the amount of maintenance recovered by the step-mother was not a case of
application of the income of the assessee. In contrast, in P.C. Mullick's case (supra) under a
Will, certain payments had to be made to the beneficiaries by the executors and the trustees
(assessees) from the property of the testator. It was held by the Privy Council that such
payments could only be out of the income received by the assessees from the property,
therefore, such payments were assessable to income-tax in the hands of the assessees and
there was no diversion of income at source. Whereas in the former case, the step-mother of
the assessee acquired the right to get the maintenance by virtue of charge created by the
decree of the court on the properties of the assessee even before he could lay his hands on the
income from the properties, but in the latter case, the obligation of the assessee to pay
amounts to the beneficiaries was required to be discharged after receipt of the income from
the properties.
In CIT v. SitaldasTirathdas [1961] 41 ITR 367 , speaking for a Bench of three learned Judges
of this Court, Hidayatullah, J. (as he then was) having considered, among others, the
aforesaid two judgments of the Privy Council laid down the test as follows :
". . . In our opinion, the true test is whether the amount sought to be deducted, in truth, never
reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the
nature of the obligation which is the decisive fact. There is a difference between an amount
which a person is obliged to apply out of his income and an amount which by the nature of
the obligation cannot be said to be a part of the income of the assessee. Where by the
obligation income is diverted before it reaches the assessee, it is deductible; but where the
income is required to be applied to discharge an obligation after such income reaches the
assessee, the same consequence, in law, does not follow. It is the first kind of payment which
can truly be excused and not the second. The second payment is merely an obligation to pay
another a portion of one's own income, which has been received and is since applied. The
first is a case in which the income never reaches the assessee, who even if he were to collect
it, does so, not as part of his income, but for and on behalf of the person to whom it is
payable. . . ." (p. 374)
In that case, the respondent-assessee derived his income from many sources. He sought to
deduct certain sums of money on the ground that, under a consent decree, he was required to
pay those sums as maintenance to his wife and children. Though no charge was created on
the properties of the assessee by the compromise decree, the decreed sums were, in fact, paid
 17

by the assessee to his wife and children. The High Court took the view that notwithstanding
absence of specific charge upon the properties of the assessee, the assessee was under an
obligation to pay maintenance under the decree which could be enforced by a court of law
and purporting to apply the principle of Raja Bejoy Singh Dudhuria's case (supra), held that
in view of the decree of the court, the sums must be taken to have been diverted to the wife
and children and never became income in the hands of the assessee. Setting aside the
judgment of the High Court, this Court held,—
"In our opinion, the present case is one in which the wife and children of the assessee who
continued to be members of the family received a portion of the income of the assessee, after
the assessee had received the income as his own. The case is one of application of a portion
of the income to discharge an obligation and not a case in which by an overriding charge the
assessee became only a collector of another's income. The matter in the present case would
have been different, if such an overriding charge had existed either upon the property or upon
its income, which is not the case. In our opinion, the case falls outside the rule in Bejoy Singh
Dudhuria's case and rather falls within the rule stated by the Judicial Committee in P.C.
Mullick's case." (p. 375)
We may notice a few decisions as instances of application of the principle of diversion of
income by overriding title.
In K.A. Ramachar v. CIT [1961] 42 ITR 25 (SC), the assessee was a partner in a firm. He
executed three deeds of settlement in favour of his wife, married daughter and a minor
daughter, assigning to each of them one-fourth of his share of the profits in the firm. They
were entitled to receive and collect their share from the firm under the settlement. The
assessee contended that the amounts covered by the settlements could not be included in his
total income for the purpose of assessment to income-tax. Applying the principle laid down
in SitaldasTirathdas' case (supra), it was held that under the law of partnership, it was the
partner and the partner alone who was entitled to profits and that a stranger, even if he were
an assignee, did not have and could not have any direct claim to the profits. The claim of the
assessee was negatived on the ground that what was paid was in law a portion of his income,
as such the amounts have to be included in his total income. The ratio of this case squarely
applies to the facts of the case on hand.
In Motilal Chhadami Lal Jain v. CIT [1991] 190 ITR 1 (SC), a company took over the
business of the Hindu undivided family ('the landlord'). Under the agreement of lease with the
landlord, the company was required to pay Rupees ten thousand to a college, run by a Trust
out of the annual rent of Rupees twenty one thousand. In a subsequent agreement entered into
between the landlord the company, the Trust and the college, it was stipulated, inter alia, that
in the event of failure to pay the amount to the college, it would have full right to recover the
said amount by recourse to the court and that the college shall have the first charge on the
property. The landlord claimed that the amount paid to the college was the income of the
college as it got diverted by overriding title and ceased to be the income of the landlord. That
contention was rejected by the Tribunal as well as the High Court. On appeal to this Court,
applying the principle in SitaldasTirathdas' case (supra), it was held by a Bench of three
learned Judges that the stipulation in the agreement to pay Rupees ten thousand out of the
annual rent directly to the college was only a mode of application of the income of the
landlord, which made no difference to its liability to pay tax on the entire rent of Rupees
twenty one thousand which had accrued to the landlord. The fact that the college was given
the right to sue and recover Rupees ten thousand directly from the company in case of
 18

default, it was observed, did not alter the position, nor would creation of charge in favour of
the college make any difference.
Now, we shall advert to the cases relied upon by the High Court.
In Bhagyalakshmi& Co.'s case (supra), two members of the Hindu undivi-ded family
together held ten annas share in a firm. On partition in the family, the share of the said
members was divided among various members of the family. Thereafter, a fresh partnership
deed was executed in which the said two persons were, however, shown as having the same
proportion of share in the firm. They claimed that they were liable to pay tax only on the
respective shares shown in the partnership deed. That contention was upheld by the Tribunal.
Thereafter, the Commissioner cancelled the registration of the partnership firm under the Act
on the ground that it did not specify the correct shares of the said two persons in the
partnership. It was held by this Court that the firm was entitled to be registered and that the
shares given to the said two persons in the partnership deed were correct according to the
terms of the deed, although they would be answerable to the divided members of the family
in respect of profits pertaining to their shares. This case does not deal with the principle of
diversion of income by overriding title and is of no help to the respondent-assessee to support
his contention that there was diversion of income by overriding title in his case.
In MurlidharHimatsingka's case (supra), one of the partners of the firm constituted a sub-
partnership firm with his two sons and a grandson. The deed of sub-partnership provided that
the profits and losses of the partner in the main firm shall belong to the sub-partnership and
shall be borne and divided in accordance with the shares specified therein. The question in
that case was : whether the share of the partner in the main firm, who had become a partner in
the sub-partnership, could be assessed in his individual assessment. It was held that there was
overriding obligation which converted the income of the partner in the main firm into the
income of the sub-partnership and, therefore, the income attributable to the share of the
partner had to be included in the assessment of the sub-partnership. That was on the principle
that a partner in the sub-partnership had a definite enforceable right to claim a share in the
profits accrued to or received by the other partner in the main partnership, as on entering into
a sub-partnership, such a partner changes his character vis-a-vis the sub-partners and the
income-tax authorities. Further, a sub-partnership creates a superior title and results in
diversion of the income from the main firm to the sub-partnership before the same becomes
the income of the concerned partner. In such a case, even if the partner receives the income
from the main partnership, he does so not on his behalf but on behalf of the sub-partnership.
Distinguishing K.A. Ramachar's case (supra), it was observed :
". . . In that case it was neither urged nor found that a sub-partnership came into existence
between the assessee who was a partner in a firm and his wife, married daughter and minor
daughter. It was a pure case of assignment of profits (and not losses) by the partner during the
period of eight years. Further the fact that a sub-partner can have no direct claim to the
profits vis-a-vis the other partners of the firm and that it is the partner alone who is entitled to
profits vis-a-vis the other partners does not show that the changed character of the partner
should not be taken into consideration for income-tax purposes. . . ." (p. 332)
It is apt to notice that there is a clear distinction between a case where a partner of a firm
assigns his share in favour of a third person and a case where a partner constitutes a sub-
partnership with his share in the main partnership. Whereas in the former case, in view of
section 29(1) of the Indian Partnership Act, the assignee gets no right or interest in the main
partnership except, of course, to receive that part of the profits of the firm referable to the
 19

assignment and to the assets in the event of dissolution of the firm, but in the latter case, the
sub-partnership acquires a special interest in the main partnership. The case on hand cannot
be treated as one of a sub-partnership, though in view of section 29(1) of the Indian
Partnership Act, the Trust, as an assignee, becomes entitled to receive the assigned share in
the profits from the firm not as a sub-partner because no sub-partnership came into existence
but as an assignee of the share of income of the assigner-partner.
In this view of the matter, it is unnecessary to consider the alternative contention based on
section 60 of the Act.
For the aforementioned reasons, we are of the view that the order under challenge cannot be
sustained. It is, accordingly, set aside. Consequently, the share of the income of the assessee
assigned in favour of the Trust has to be included in the total income of the assessee. The
questions are, accordingly, answered in favour of the Revenue and against the assessee.
The civil appeal is, accordingly, allowed but in view of the peculiar facts in which the appeal
came to be filed, we make no order as to costs.
(iv) U.P. Bhumi Sudhar Nigamv.Commissioner of Income tax [2005] 144 TAXMAN 94
(ALL.) - R.K. AGRAWAL AND PRAKASH KRISHNA, JJ.

Facts

The assessee-Nigam was a company wholly owned by the State Government. The State
Government had been giving grant-in-aid to the Nigam for implementation of various
specific projects. According to the assessee, the grants were with the stipulation that the sum
so provided by the State Government should be placed in personal ledger account with the
treasury and in case the funds were placed with commercial banks in any form, then the
interest earned on such funds should belong to the Government itself and the State
Government had been issuing notification from time to time in order to regulate the said
stipulations. During the relevant assessment years 1994-95 and 1995-96, the Nigam received
certain sum towards the interest accrued/received on fixed deposits made by it and claimed
that the interest on FDRs, which had not been shown in the income of the Nigam but in the
footnote of the balance sheet it was mentioned that it was income of the State Government,
was not the income earned by the Nigam but it belonged to the State Government and,
therefore, on the principle of diversion of income by overriding title it was not its income.
However, the Assessing Officer held it to be its income and, accordingly, imposed tax
thereon.

In both the appeals the following substantial questions of law with the difference in the figure
of receipts have been raised:

(i)Whether the Tribunal was legally correct in holding that the appellant company is not the
‘Government and its income’ therefore, was not outside the provisions of Income-tax Act ?

(ii)Whether on the due consideration of the true nature of receipts amounting to Rs.
47,23,315 and the attendant facts and circumstances of the case, the Tribunal was legally
correct in affirming taxability thereof, as income, in the case of assessee?

(iii)Whether there was any material for the Tribunal to come to the conclusion that interest
received in relation to the funds which got deployed with Scheduled/Nationalised banks
 20

remained lying with the appellant Nigam, and there was no diversion of the same, at the very
source, in favour of the State Government?

(iv) Whether the findings about the taxability of receipts amounting to Rs. 47,23,315 are not
vitiated in law as having been arrived at without giving due consideration of the relevant
materials/information, particularly to the effect that—

(a)the amount in question stood credited in a separate account classified as ‘Interest payable
to Government’;

(b)the State Government never gave up its claim for the said sum;

(c)the Nigam at its part had already taken effect steps for making over the said sum as stood
comprised in the over all credit balance under the head ‘Interest payable to State
Government’ with such governance; and

(d)other relevant/attendant facts and circumstances of the case.

(v)Whether the Tribunal was legally correct in not accepting the alternative plea of the
appellant, that it carried corresponding liability towards the State Government, which in any
case was liable to be allowed, as a sequel to the substance of addition of Rs. 47,23,315?

(vi)Whether the Tribunal was legally correct in holding that the amount in question did not
partake the character of grants-in-aid given by the State Government, and the same was
straightaway taxable in the hands of the appellant?

3. In the assessment year 1995-96 the amount is Rs. 47,23,315 whereas in the assessment
year 1994-95 the amount is Rs. 71,96,225.

5. We have heard Sri S.K. Garg, learned counsel for the appellant and Sri A.N. Mahajan,
learned standing counsel for the Revenue.

6. At the outset it may be mentioned that the learned counsel for the appellant did not
advance any argument on the question whether the Tribunal was legally correct in holding
that the appellant-Nigam is not Government and its income, therefore, was not outside the
provisions of the Income-tax.

7. Learned counsel for the appellant submitted that the amount of interest accrued/received by
the Nigam on fixed deposits which it had taken in respect of the amount of grant received
from the State Government did not reach the Nigam as by overriding title it was diverted to
the State Government and it was really the income of the State Government, thus, it was not
liable to tax at the hands of the Nigam. He further submitted that the State Government had
issued order dated 7th March, 1979 in which it had directed that all the State Government
undertakings/corporations/boards should keep the amount of grant in the Personal Ledger
Account (PLA) in the treasury and those amounts which had already been invested in the
fixed deposits in the commercial Bank be withdrawn and kept in the treasury. Another
Government Order was issued on 3rd April, 1980 in which the State Government had stated
that if in any special circum-stances the amount of grant had not been kept in the personal
ledger account in the treasury and had been invested in the fixed deposit account, the amount
of interest earned thereon should not be treated as income of the Nigam/Undertaking but
 21

should be added in the grant. In other words the interest would not be the income of
the Nigam/Undertaking but shall form part of the grant given by the State Government.
Similar view was reiterated by the State Government in its order dated 4th December, 1993.
According to the appellant in view of the aforementioned Government Orders the Nigam has
not been treating the amount of interest accrued/received on fixed deposits/receipts from the
commercial bank as its income and that is why its was not showing in the profit and loss
account and a note was made in the balance sheet/profit and loss account that the said amount
belonged to the State Government.

8. In support of his various pleas, the learned counsel for the appellant has relied upon the
following decisions :

1.CIT v. SitaldasTirathdas [1961] 41 ITR 367 (SC);

2.Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC);

3.Motilal Chhadami Lal Jain v. CIT [1991] 190 ITR 11 (SC);

4.Addl. CIT v. United Motor Transport Service Association [1991] 190 ITR 13 2 (All.);

5.CIT v. PandavapuraSahakara Sakkara Kharkane Ltd. [1992] 198 ITR 690 (Kar.);

6.CIT v. Shiv Prakash Janak Raj & Co. (P.) Ltd. [1996] 222 ITR 5833 (SC);

7.Godhara Electricity Co. Ltd. v. CIT [1997] 225 ITR 746 1 (SC);

8.National Handloom Development Corpn. Ltd. v. Dy. CIT [2004] 266 ITR 6472 (All.);

9.Jit & Pal X-Ray (P.) Ltd. v. CIT [2004] 267 ITR 370 3 (All.);

10.Siddheshwar SahakariSakharKarkhana Ltd. v. CIT [2004] 270 ITR 1 4 (SC);

9. Learned standing counsel on the other hand submitted that Nigam had invested the amount
of grant-in-aid in the commercial bank in its own name and further the interest which had
accrued on the said fixed deposits did belong to the Nigam. The Government Orders issued in
this behalf did not change the position, it was an opinion expressed by the State Government
regarding ownership of the income and its treatment. The Nigam had not acted strictly in
conformity with the said Government Orders and had been keeping the amount received from
the State Government in the commercial banks and not in the Treasury which itself shows
that the said orders had no binding force and further it is not diversion of income by
overriding title but a case of application of money after it has been earned. He has relied upon
a decision of Apex Court in the case of State Bank of Travancore v. CIT [1986] 158 ITR
102 .

10. We have given careful consideration and are of the view that so far as the alternate plea is
concerned in paragraph No. 3.23 of the order under appeal, the Tribunal has specifically
mentioned that the learned counsel for the assessee had not addressed them on this ground
and nothing has been said by them on the claim of deduction. As the appellant had not
pressed its alternative plea before the Tribunal for which specific finding has been recorded
by the Tribunal, we are not permitting the learned counsel for the appellant to raise this plea
 22

before us. The learned counsel, however, submitted that in the grounds of appeal such a plea
was specifically raised and in fact he had argued the same before the Tribunal. Be that as it
may, we are taking the facts recorded by the Tribunal on this aspect as final unless it is
rectified by the Tribunal in the appropriate proceedings. We are supported in the view which
we have taken by the decision of the Apex Court in the case of State of
Maharashtra v. Ramdas Shrinivas Nayak AIR 1982 SC 1249.

11. After hearing the learned counsel for the parties we find that the Nigam had been
depositing the amount of grant received by it from the Government of Uttar Pradesh in the
commercial banks notwithstanding the Government Orders dated 7th March, 1979 and 3rd
April, 1980. It has been enjoying income from interest for the last more than 15 years and it
has not bothered to pay amount of interest to the State Government except making a
provision in its books of account towards liability for payment of interest to the State
Government.

12. In the case of SitaldasTirathdas (supra) the Apex Court has set out the classic statement
of the true principle of diversion of income as follows:—

"...Obligations, no doubt, there are in every case, but it is the nature of the obligation which is
the decisive fact. There is a difference between an amount which a person is obliged to apply
out his income and an amount which by the nature of the obligation cannot be said to be a
part of the income of the assessee. Where by the obligation income is diverted before it
reaches the assessee, it is deductible; but where the income is required to be applied to
discharge an obligation (self-imposed and gratuitous) after such income reaches the assessee,
the same consequence, in law, does not follow. It is the first kind of payment which can truly
be excuted and not the second. The second payment is merely an obligation to pay another a
portion of one’s own income, which has been received and is since applied. The first is a case
in which the income never reaches the assessee, who even if he were to collect it, does so, not
as part of his income, but for and on behalf of the person to whom it is payable...." (p. 374)

13. In the case of Motilal Chhadami Lal Jain (supra) the Apex Court has held that the
existence of a mere obligation is not sufficient to constitute diversion of income. It has held
as follows:—

"In the above passage, it is clear that the expressions ‘reaches the assessee’ and ‘has been
received’ have been used not in the sense of the income being received in cash by one person
or another. What the passage emphasizes is the nature of the obligation by reason of which
the income becomes payable to a person other than the one entitled to it. Where the
obligation flows out of an antecedent and independent title in the former (such as, for
example, the rights of dependants to maintenance or of coparceners on partition, or rights
under a statutory provision or an obligation imposed by a third party and the like), it
effectively slices away a part of the corpus of the right of the latter to receive the entire
income and so it would be a case of diversion. On the other hand, where the obligation is self-
imposed or gratuitous (as here), it is only a case of an application of income." (p. 10)

14. In the case of CIT v. Sunil J. Kinariwala [2003] 259 ITR 10 1, the Apex Court, after
referring to the decisions of the Privy Council in the case of Raja Bejoy Singh
Dudhuria v. CIT [1933] 1 ITR 135 (PC) and P.C. Mullick v. CIT [1938] 6 ITR 206 (PC); of
the Apex Court in the case of SitaldasTirathdas (supra); K.A. Ramachar v. CIT [1961] 42
ITR 25 (SC); Motilal Chhadami Lal Jain (supra); CIT v. Bagyalakshmi& Co. [1965] 55 ITR
 23

660 (SC) and MurlidharHimatsingka v. CIT [1966] 62 ITR 323 (SC), has held that if a third
person becomes entitled to receive an amount under an obligation of an assessee even before
he could claim to receive it as his income, there would be a diversion of income by overriding
title but when after receipt of the income by the assessee, the same is passed on to a third
person in discharge of the obligation of the assessee, it will be a case of application of income
by the assessee and not of diversion of income by overriding title.

15. In the case of State Bank of Travancore (supra) the Apex Court has laid down the
following propositions :

"(1) It is the income which has really accrued or arisen to the assessee that is taxable.
Whether the income has really accrued or arisen to the assessee must be judged in the light of
the reality of the situation. (2) The concept of real income would apply where there has been
a surrender of income which in theory may have accrued but in the reality of the situation no
income had resulted because the income did not really accrue. (3) Where a debt has become
bad, deduction in compliance with the provisions of the Act should be claimed and allowed.
(4) Where the Act applies, the concept of real income should not be so read as to defeat the
provisions of the Act. (5) If there is any diversion of income at source under any statute or by
overriding title, then there is no income to the assessee. (6) The conduct of the parties in
treating the income in a particular manner is material evidence of the fact whether income has
accrued or not. (7) Mere improbability of recovery, where the conduct of the assessee is
unequivocal, cannot be treated as evidence of the fact that income has not been resulted or
accrued to the assessee. After debiting the debtors account and not reversing that entry but
taking the interest merely in suspense account cannot be such evidence to show that no real
income has accrued to the assessee or been treated as such by the assessee. (8) The concept of
real income is certainly applicable in judging whether there has been income or not but, in
every case, it must be applied with care and within well-recognised limits.

We were invited to abandon legal fundamentalism. With a problem like the present one, it is
better to adhere to the basic fundamentals of the law with clarity and consistency than to be
carried away by common cliches. The concept of real income certainly is a well-accepted one
and must be applied in appropriate cases but with circumspection and must not be called in
aid to defeat the fundamental principle of law of income-tax as developed." (p. 155)

16. In the case of Shiv Prakash Janak Raj & Co. (P.) Ltd. (supra) the Apex Court has
approved the view taken by this Court in the case of State Bank of Travancore (supra) that if
there is any diversion of income at source under any statute or by overriding title, then there
is no income to the assessee and the concept of real income certainly is a well-accepted one
and must be applied in appropriate cases but with circumspection and must not be called in
aid to defeat the fundamental principle of law of income tax as developed.

17. In the case of PandavapuraSahakara Sakkara Kharkane Ltd. (supra) the Karnataka High
Court has held that there was stipulation that one-third of the price charged for selling of
molasses as fixed by the Government of India under the Molasses Control Order should be
transferred to the fund called ‘Molasses Storage Fund’ which could be utilised only according
to the instructions issued by the Government from time to time. The amount, thus, transferred
has to be kept separately from other business funds in a separate bank account and it was not
possible to withdraw the same without the prior approval of the Excise Department. The right
of the fund got diverted from the hands of the assessee by virtue of the Molasses Control
 24

Order and, therefore, it could not be included in the income of the assessee as the amount in
question got diverted at the source itself by virtue of the statutory application.

18. In the case of SiddheshwarSahakariSakharKarkhana Ltd. (supra) the Apex Court has
held that the assessee merely acted as an agent in collecting the amounts towards the Chief
Minister Relief Fund, Late Y.B. Chavan Memorial Fund and Hutment Fund and remitting the
same to the Government or to the trustees in truth and in substance, the money collected by
the assessee was not reaching the assessee as part of its income but the collection was made
for and on behalf of the person to whom it is payable. It had no manner of right or title over
the same money, therefore these receipts should not treated as income of the assessee.

19. In the case of Jit & Pal X-Ray (P.) Ltd. (supra) this Court has held that the fundamental
principle is that an application of income is an allocation of one’s own income after it accrues
or has arisen, although such application may be under a contract or obligation, whereas
diversion of income is that which diverts away or deflects before it accrues or reaches the
assessee and it is received by him only for the benefit of the person who is entitled to the
income under an overriding charge or title. There is a distinction between the obligation to
spend money in a particular manner attached to an income, and a similar obligation attaching
to the source of the income. If the obligation is on the source of the income it is a case of
diversion of income by overriding title, but if the obligation is to spend the money in a
particular manner it is only an application of the income.

20. In the case of Godhra Electricity Co. Ltd. (supra) the Apex Court has held that income-
tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time
at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the
substance of the matter is the income. If income does not result at all, there cannot be a tax,
even though in book-keeping, an entry is made about the hypothetical income which does not
materialise.

21. In the case of National Handloom Development Corpn. Ltd. (supra) this Court has held
that a basic concept in income-tax law is that the assessee must have received or have
acquired a right to receive the income before it can be taxed. There must be a debt owed to
him by somebody, if the amount is to be taxed on mercantile (accrual) basis. Unless a debt
has been created in favour of the assessee by somebody it cannot be said that the income has
accrued to him or he has a right to receive the income. When one refers to the right of an
assessee to receive an amount so as to make it taxable, it necessarily means a right
enforceable under law. If the claim is not legally enforceable the assessee cannot be said to be
vested with a right to claim the amount.

22. In the case of Kedarnath Jute Mfg. Co. Ltd. (supra) the Apex Court has held that whether
the assessee is entitled to a particular deduction or not will depend on the provision of law
relating thereto and not on the view which the assessee might take of his rights; nor can the
existence or absence of entries in his books of account be decisive or conclusive in the
matter.

23. The decision of this Court in the case of United Motor Transport Service
Association (supra) relied upon by the learned counsel for the appellant is not applicable in
the present case inasmuch as it related to case of depreciation under section 10(2)(vi) of the
Income-tax Act, 1922. This Court has held that the depreciation is admissible only where the
assessee is the owner of the asset in question.
 25

24. From the aforesaid cases the following principle emerges :

(i)If a third person becomes entitled to receive an amount under an obligation of an assessee
even before he could claim to receive it as his income, there would be a diversion of income
by overriding title but when after receipt of the income by the assessee, the same is passed on
to a third person in discharge of the obligation of the assessee, it will be a case of application
of income by the assessee and not of diversion of income by overriding title.

(ii)If income does not result at all, there cannot be a tax, even though in book-keeping, an
entry is made about the hypothetical income which does not materialise.

(iii)The existence or absence of entries in his books of account cannot be decisive or

conclusive in the matter.

(iv)The concept of real income must be applied in appropriate cases but with circumspection
and must not be called in aid to defeat the fundamental principle of law of income-tax as
developed.

25. It is not in dispute that the Nigam had invested the amount of grant received by it in fixed
deposits with commercial bank on which interest had accrued. The appellant has not placed
on record the specific orders by which the Government of Uttar Pradesh had given the grant
and whether such orders contained any such stipulation that the amount of interest which may
accrue if the grant is invested/kept in commercial banks, shall be the income of the
Government of Uttar Pradesh and shall be added to the grant earned. In the absence of any
such material having been placed on record it is not possible to hold that the interest did not
belong to the Nigam. Moreover, we find that the Nigam has not at all complied with the
direction contained in the aforementioned Government Orders regarding deposit of amount
received from the State Government in the PLA account in the Treasury. These orders are,
therefore, in the nature of advisory orders only.

26. Applying the principle laid down in the aforesaid cases to the factsof the present case, we
find that no material has been placed on record to show that there was any stipulation that the
interest earned on such grant/aid if kept in fixed deposit in commercial bank would not
accrue to the appellant but to the State Government.

27. In view of foregoing discussions we do not find any merit in these appeals which are
hereby dismissed. However, the parties shall bear their own costs.

(v) CIT v Gopala Naicker Bangaru (2010) 46 DTR 280 (Mad) -D.
MURUGESAN AND M. SATHYANARAYANAN, JJ.
Facts:
As per profile submitted by the assessee, he was born in a village. During his childhood,
Goddess Adhiparasakthi frequented his dreams to make it known that she wanted to build a
temple and use it to alleviate the sufferings of humanity and, accordingly, the assessee had
built a temple which was also known as 'Sakthi peedam'. The devotees, on important
occasions, used to throng the temple and as per the practice prevailing in the temple, the
devotees, irrespective of their gender, could perform poojas and abishegams to the presiding
deity, namely, Goddess Parasakthi. The abovesaid practice of devotees performing
abishegams and poojas to the presiding deity was not prevalent in the State and, therefore, out
 26

of love and affection and veneration, they used to assemble in great numbers on the eve of the
assessee's birthday and offer gifts. The amounts of gifts so received by the assessee were
shown as capital receipts in his balance sheet. However, during assessment, the Assessing
Officer treated the gifts as having nexus to his profession as a religious head and, hence,
brought the entire income within the net of tax. On appeal, the Commissioner (Appeals) set
aside the order of the Assessing Officer on the ground that the amounts received by the
assessee were gifts and they were not considerations for his profession/vocation. The
Tribunal upheld the order of the Commissioner (Appeals).
2. This appeal was admitted on the following substantial questions of law:—
"(1) Whether on the facts and circumstances of the case, the Income-tax Appellate Tribunal
was right in law in holding that the gifts received on assessee's birthday of Rs. 1,75,70,347 as
Capital Receipt and having no nexus with his profession as vocation of religious practice is
valid ?
(2) Whether on the facts and circumstances of the case, the Income-tax Appellate Tribunal
was right in saying that the reopening under section 147 of the Income-tax Act, on mere
surmise, even though the assessment was reopened within 4 years with valid reasons from the
end of the assessment year and hence no proviso to section 147 will apply to the facts of this
case?"
4. The devotees of the assessee come and make their offerings for contribution voluntarily to
him at the time of his birthday and the same has been accounted as capital receipts and
receipts have also been issued. Thus, the assessee is performing religious practice for the
benefit of mankind.
5. According to the revenue, the assessee filed his Return of Income for the assessment year
2004-05 declaring taxable income of Rs. 5,23,680 and the same was accepted under section
143(1) of the Income-tax Act. On scrutiny of the Balance Sheet, it has been revealed that an
amount of Rs. 1,75,70,347 was received as gifts during that year and was shown as capital
receipts.
6. The Assessing Officer during the course of assessment, treated the gifts as having nexus to
his profession as a religious head and, hence, brought the entire income within the net of tax
and vide assessment order dated 5-11-2007 under section 143(3) read with section 147 of the
Income-tax Act, 1961 and credited the abovesaid gift as professional income and held that the
assessee is liable to pay a sum of Rs. 75,56,439 as Income-tax. It is also indicated in the said
order that penalty proceedings under section 271(1)(c) are being initiated separately.
7. The assessee/respondent herein aggrieved by the Assessment Order passed by the Assistant
Commissioner of Income-tax Circle I, Tambaram, Chennai-45, has preferred appeal before
the Commissioner of Income-tax (Appeals), Chennai in I.T.A. No. 97/07-08. The
Commissioner of Income-tax (Appeals) vide order dated 9-1-2008 has set aside the order
passed by the Assistant Commissioner of Income-tax Circle-I, on the ground that the amounts
received by the assessee are gifts and they are not consideration for profession/vocation. The
Commissioner of Income-tax (Appeals) has also considered the decision
in CIT v. Vanamamalai Ramanuja Jeer Swamigal [1998] 231 ITR 632 (Mad.) for arriving at
such a finding and allowed the appeal filed by the assessee.
 27

8. The department/revenue aggrieved by the order passed by the Commissioner of Income-

tax (Appeals), had preferred further appeal before the Income-tax Appellate Tribunal 'C'
Bench, Chennai in I.T.A. No. 588/Mds./2005 for the assessment year 2004-05.
9. The Appellate Tribunal after taking into consideration the rival submissions and
considering the various decisions cited before him, vide order dated 17-10-2008, has
dismissed the appeal on the ground that that the gifts received by the assessee, have no direct
nexus with any of his activities and it is squarely covered by the decision in Vanamamalai
Ramanuja Jeer Swamigal's case (supra). The revenue aggrieved by the order of dismissal of
the appeal passed by the Income-tax Appellate Tribunal 'C' Bench, Chennai, had preferred
this appeal.
10. Mr. J. Nareshkumar, learned Senior Standing Counsel appearing for the Income-tax
Department/appellant, has submitted that but for the fact the assessee is a religious leader,
and that his profile also states that he is performing Oracles, the devotees would not have
made gifts to him.
11. It is further submitted by the learned senior standing counsel appearing for the appellant
that the assessee is admittedly living with his family and keeping the amount in his bank
account and it was also shown in his Wealth Tax Returns filed for the assessment year 2005-
06. It is the further submission of the learned senior standing counsel appearing for the
appellant, the assessee has not offered any proper explanation as to why gifts/donations
received from his devotees were deposited in his individual bank account and even though
two charitable trusts are run by him, the assessee has not deposited the donations in the
accounts of the trust. Therefore, the learned senior standing counsel appearing for the
appellant would submit that in the absence of any supporting material produced by the
assessee that it is a capital receipt, the Assessing Officer on a careful consideration of the
materials available on record, has rightly arrived at a finding that it is liable to be taxed and
consequently levied tax on the said income with liberty to proceed under section 271(1)(c) by
way of penalty proceedings. It is the further submission of the learned senior standing
counsel appearing for the Department that the Commissioner of Income-tax (Appeals) as well
as the Tribunal had failed to take into consideration the said vital aspects and by placing
reliance upon the decisions which are not applicable to the facts of the case, had upheld the
claim of the assessee and therefore, the impugned order passed by the Tribunal confirming
the order passed by the Commissioner of Income-tax (Appeals) is liable to be set aside.
12. Learned senior standing counsel appearing for the appellant in order to buttress his
submissions, has placed reliance upon the following decisions :—
(i) P. Krishna Menon v. CIT [1959] 35 ITR 48 (SC).
(ii) Maharaj Shri GovindlaljiRanchhodalalji v. CIT [1983] 34 ITR 92 (Bom.).
(iii) Dr. K. George Thomas v. CIT [1985] 156 ITR 412 (SC).
(iv) Father Epharam v. CIT [1989] 176 ITR 78 (Ker.).
(v) Unreported Judgment dated 16-12-2008 in W.P. Nos. 15527 to 15537 of 2003.
13. In P. Krishna Menon's case (supra) the assessee after his retirement as a Superintendent
of Police, spending his time in studying Vedanta Philosophy and expounding the same to
such persons. He soon gathered a number of disciples. One of the disciples had transferred
the entire balance outstanding in his account to the credit of the assessee and the said amount
 28

was the subject-matter of assessment. The Income-tax Officer had assessed the said income
as a taxable income and the assessee preferred an appeal before the Asstt. Commissioner who
dismissed the appeal. The assessee's appeal to Appellate Tribunal has also ended in dismissal
and hence, further appeal was preferred before the High Court of Bombay which has also
ended in dismissal. The assessee filed appeal before the Hon'ble Supreme Court of India. The
Hon'ble Supreme Court on the facts, found that the assessee was teaching his disciples
Vedanta, without any motive or intention of making profit out of such activity and that
teaching of Vedanta by the assessee can properly be called the carrying on of a vocation by
him. The Supreme Court held that the importing of the teaching was the cause causans of the
making of the gift and that the payments with which were income arising from the vocation
of the appellant as a teacher of Vedanta, no question of exemption under section 4(3)(vii) of
the Act arises. The Supreme Court citing the said reasons has dismissed the appeal filed by
the assessee.
14. In Maharaj Shri GovindlaljiRanchhodalalji's case (supra ) the assessee is a direct
descendant of Shri Vallabhacharyaji who founded the faith known as 'Vallabh Sampradaya'
Maharaj Shri is not a sanyasi and he has married and has children. He is succeeded by his
sons who inherit and divide the properties. The assessee keeps an idol of Lord Krishna in his
house and the offerings are made to the assessee. The authorities below held that the assessee
therein was carrying on a vocation and the assessee aggrieved by the same, preferred an
appeal to the High Court of Bombay. The Bombay High Court held that even practice of
religion can become a vocation and more so, when it brings in a steady income. Therefore,
the Bombay High Court upheld the claim of the Department that the assessee was rightly
assessed to tax as income.
15. In Dr. K. George Thomas' case (supra), the assessee was a lecturer in a college and he
associated himself with the Indian Gospel Masson in the USA, which collected money for its
working abroad through the Indian Christian Crusade. On returning to India, the assessee was
propagating the ideals of the Indian Christian Crusade and was engaging in a movement for
the spread of religion etc., and he also started publishing a daily newspaper. The income of
the assessee was subjected to tax and challenge made by the assessee before the authorities
below had ended in futile before the High Court of Kerala also. Hence, the assessee preferred
an appeal before the Hon'ble Supreme Court of India.
16. The Hon'ble Supreme Court of India in the decision held that there was a link between the
activities of the appellant and the payments received by him and the link was close enough
and that the appellant got receipts on account of carrying on of his vocation and they were not
casual and non-incurring receipts. The Hon'ble Supreme Court of India citing the said
reasons, has upheld the case of the Department that the incomes were taxable.
17. In Father Epharam's case (supra), the assessee was a Priest in a Monastery and he
received substantial foreign remittances and the surplus amount that remained after
distribution to various other Priests for performing the mass, was treated as the income of the
assessee and was taxed. The assessee challenged the imposition of tax, and lost before the
authorities and hence, he preferred further appeal to High Court of Kerala. The High Court of
Kerala held that there was a close and intimate link between the occupation or avocation of
the assessee and the payments received by him and based on the said reason, dismissed the
appeal filed by the assessee.
18. Similar view was taken in the unreported judgment dated 16-12-2008 made in W.P. Nos.
15527 to 15537 of 2003.
 29

19. The learned senior standing counsel appearing for the appellant/department by placing
strong reliance on the abovecited decisions would submit that but for the fact the
assessee/respondent herein is a religious leader, he would not have received gifts and hence,
there is a close and intimate link between the activities/avocation of the assessee and the
payments received by him and therefore, it was rightly taxed by the Assessing Officer and it
was erroneously reversed by the Commissioner of Income-tax (Appeals) and the Appellate
Tribunal and hence, the learned standing counsel appearing for the appellant praying for the
setting aside of the order passed by the Tribunal and to confirm the order passed by the
Assessing Officer.
20. Per contra Mr. V. Ramachandran, learned senior counsel appearing for M/s. P.
Sivagnanam and A.S.Balaji, learned counsel appearing for the respondent/assessee would
submit that the Commissioner of Income-tax (Appeals) as well as the Appellate Tribunal had
rendered a clear and categorical finding that there was no nexus between the receipt of the
birthday gifts and the exercise of any profession or vocation by the assessee and that the gifts
were voluntarily made by the devotees on account of personal esteem and veneration and
therefore, the said finding cannot be disturbed. It is further submitted by the learned senior
standing counsel appearing for the appellant that the assessee's own case in assessment year
1988-89, the Department has accepted his case after due enquiry and that the gifts received
by the respondent herein on birthdays and other occasions were not taxable. The learned
senior counsel appearing for the respondent in support of his submissions, though relied upon
number of decisions, it will be useful to refer to the following decisions :—
CIT v. M. Balamuralikrishna [1988] 171 ITR 447 (Mad.), C.P. Chitrarasu v. CIT [1986] 160
ITR 534 (Mad.), CIT v. Sri Vanamamalai Ramanuja Jeer Swamigal's case( supra). In all the
said decisions the judgment of the Hon'ble Supreme Court of India in P. Krishna
Menon's case (supra) has been referred.
21. In M. Balamuralikrishna's case (supra) the assessee is a Musician by profession and he
claimed a sum of Rs. 30,000 given to him by his fans in appreciation of his completing 30
years of service rendered to Carnatic Music as exempted from tax. The Income-tax Officer
treated the said income as professional income and levied tax. The assessee preferred appeal
and the Appellate Authority held that the said payment was received by way of a testimonial
or personal gift and not taxable and the said view was also upheld by the Tribunal and hence,
the Department taken up the matter for further appeal before this Court. A Division Bench of
this Court by placing reliance upon P. Krishna Menon's case (supra), S.A.
Ramakrishnan v. CIT [1978] 114 ITR 253 (Mad.), and other decisions, has held that though
the assessee is an artist by profession, there is no direct nexus between this payment and his
vocation though it may not be denied that there is an indirect connection between the two.
The payment received by the assessee from his fans, was expression of their goodwill and
hence, the said amount cannot be said to have been paid to him by way of remuneration for
those services. Citing the said reasons, this Court in the said decision, has upheld the claim of
the assessee and dismissed the appeal preferred by the Income-tax Department.
22. In C.P. Chitrarasu's case (supra), the assessee was an active member of a political party
and held various offices. A committee consisting of the party men of that party had collected
donations from the members of the party, businessmen and public and also arranged a drama
for the purpose of donating a purse and the same was donated to the assessee. The Income-
tax Officer held that a sum of Rs. 51,000 out of the amount given to the assessee by his
admirers, would constitute income received by the assessee in the course of his vocation as a
politician and therefore, it was taxable. The assessee was successful before the authorities
 30

below and hence, the revenue preferred the said appeal before this Court. A Division Bench
of this Court after taking into consideration the factual aspects and the decisions cited before
it, held that the presentation of Rs. 51,000 to the assessee amounted to windfalls or gift for his
personal qualities, though his profession or vocation as a politician. This Court further held
that no materials placed before the lower authorities by the revenue that the presentation of
Rs. 51,000 to the assessee will amount to a receipt arising from the exercise of a profession or
vocation or occupation and therefore, for the said reasons, the appeal preferred by the revenue
was dismissed.
23. In Vanamamalai Ramanuja Jeer Swamigal's case (supra), the assessee namely Shri
Vanamamalai Ramanuja Jeer Swamigal, Nanguneri, Tirunelveli District, received amounts
by way of Kanikkai and Sambhavanai amounting to a sum of Rs. 12,156. The question arose
was whether the said amount was assessable as income-tax under the Income-tax Act, for the
assessment year 1974-75. The Tribunal held that the said presentation was out of personal
regard, personal esteem and veneration for Swamigal and did not constitute income from the
exercise of any profession or vocation and that there was no evidence to show that Swamiji
had been exercising any profession or vocation. The revenue preferred appeal before this
Court and it was contended that any amount brought by his followers would amount to
income assessable to tax under the Income-tax Act. A Division Bench of this Court in the
said decision, has taken into consideration the P. Krishna Menon's case (supra) and other
decisions, held that Kanikkai and Sambhavanai were paid by the devotees to the Jeer
Swamigal out of personal regard, esteem and veneration and that the Swamigal is not
exercising any profession or avocation and the voluntary offerings made by the devotees are
not on account of any profession or vocation. This Court for the said reasons, has held that
the said offerings will not be considered as income under the Income-tax Act and, therefore,
dismissed the appeal preferred by the revenue.
24. Learned senior counsel appearing for the respondent/assessee would submit that the
decision in Vanamamalai Ramanuja Jeer Swamigal's case (supra) is squarely applicable to
the facts of the case and further that the Commissioner of Income-tax (Appeals) as well as the
Income-tax Appellate Tribunal had upheld the case of the respondent by rendering concurrent
findings. It is further submitted that no substantial questions of law arose for consideration in
this appeal and hence, prayed for dismissal of this appeal.
25. This Court has carefully considered the submissions made by the learned senior standing
counsel appearing for the appellant and the learned senior counsel appearing for the
respondent and also the decisions relied on by the respective counsel.
26. The Commissioner of Income-tax (Appeals) as well as the Income-tax Appellate Tribunal
held that simply because the respondent/assessee practising ritualism while leading normal
family life, cannot said to be carrying on any profession or vocation and that no link has been
established between the receipt received on the occasion of the birthday and so called
vocation carried on by the assessee.
27. The decisions relied on by the learned senior standing counsel appearing for the
appellant/department have no application to the facts of the present case as in those cases.
Courts held that the activities of the concerned assessees would amount to vocation and
object of which, is to make a profit and also amount to revenue receipt.
28. The decisions in M. Balamuralikrishna's case( supra), C.P. Chitrarasu's case
(supra), Vanamamalai Ramanuja Jeer Swamigal's case (supra), the facts of which have been
discussed in detail by this Court in the earlier paragraphs, are squarely applicable to the facts
 31

of this case, for the reason that the gifts made by the followers are voluntary in nature which
are neither income nor capital in the hands of the assessee. It has been further held in those
decisions that unless and until the gift is connected with the profession or avocation, it cannot
be taxed and in the absence of link or connection between the gift made by the devotees and
the profession or avocation carried on by the assessee, the personal gift cannot be termed as
income taxable under the Act. It is pertinent to point out at this juncture, in the
respondent/assessee's own case in assessment year 1988-89, the Department has accepted the
position that gifts received by him on birthdays and other occasions were not taxable. In the
decision in Radhasoami Satsang v. CIT [1992] 193 ITR 321 (SC), it has been held that—
"Where a fundamental aspect permeating through the different assessment years has been
found as a fact one way or the other and parties have allowed that position to be sustained by
not challenging the order, it would not be at all appropriate to allow the position to be
changed in a subsequent years."
Since, there is no change in facts and law in the present case, the reasons assigned by the
Income-tax Appellate Tribunal are correct and this Court finds no infirmity or error apparent
on the face of record in the impugned order.
29. This Court after taking into consideration the factual as well as the legal aspects is of the
considered opinion that the substantial questions of law raised by the revenue are to be
answered in negative against them. Therefore, the appeal is dismissed confirming the order
dated 17-10-2008, passed by the Income-tax Appellate Tribunal 'C' Bench, Chennai in I.T.A.
No. 588/Mds./2005. In the circumstances, there will be no order as to costs.

II. Agricultural Income

(i)Bacha F. Guzdarv. C.I.T., Bombay AIR 1955 SC 74 - MEHR CHAND MAHAJAN, CJ.
AND S.R. DAS, GHULAM HASAN, N.H. BHAGWATI AND T.L. VENKATARAMA
AYYAR, JJ.
Facts
The assessee was a shareholder in two tea companies, which carried on business of growing
and manufacturing tea. For the relevant assessment year, the appellant claimed that the
dividend income received by her in respect of the shares held by her in the said tea companies
was to the extent of 60 per cent agricultural income in her hands and, therefore, pro
tanto exempt from tax while the revenue contended that dividend income was not agricultural
income and, therefore, the whole of the income was liable to tax. The ITO, and on appeal, the
AAC both concurred in holding the whole of the said income to be liable to tax. The Tribunal
confirmed the view that the dividend income could not be treated as agricultural income in
the hands of the shareholder and decided in favour of the revenue.
This appeal raises an interesting point of law under the Indian Income-tax Act.
The question referred by the Tribunal to the High Court of Judicature at Bombay was stated
thus:
"Whether 60% of the dividend amounting to Rs. 2,750 received by the assessee from the two
tea companies is agricultural income and as such exempt under section 4(3) (viii) of the Act."
Sub-section (15) of section 2 defines "total income" as total amount of income, profits
and gains, referred to in sub-section (1) of section 4 computed in the manner laid
down in this Act. Section 3 authorises income-tax to be charged upon a person in
 32

respect of the total income of the previous year. Section 4 lays down that the total
income of any previous year of any person to be charged must include all income,
profits and gains, from whatever source derived and defines the scope of its
application for purposes of tax. Sub-section (3) of the same section enacts certain
exemptions upon the chargeability of the income and clause (viii) includes
agricultural income in the category of exemptions. Section 6 mentions the various
heads of income, profits and gains, chargeable to income-tax including in that
category clause (v), "income from other sources". It is common ground that dividend
falls under this category.
It was argued by Mr. Kolah on the strength of an observation made by Lord Andersqn
in Commissioners of Inland Revenue v. Forrest [1924] 8 Tax Cas. 704 at 710that an
investor buys in the first place a share of the assets of the industrial concern
proportionate to the number of shares he has purchased and also buys the right to
participate in any profits which the company may make in the future. That a
shareholder acquires a right to participate in the profits of the company may be readily
conceded but it is not possible to accept the contention that the shareholder acquires
any interest in the assets of the company. The use of the word "assets" in the passage
quoted above cannot be exploited to warrant the inference that a shareholder, on
investing money in the purchase of shares, becomes entitled to the assets of the
company and has any share in the property of the company. A shareholder has got no
interest in the property of the company though he has undoubtedly a right to
participate in the profits if and when the company decides to divide them. The interest
of a shareholder vis-a-vis the company was explained in the Sholapur Mills case
[1950] SCR 869 at 904. That judgment negatives the position taken up on behalf of
the appellant that a shareholder has got a right in the property of the company. It is
true that the shareholders of the company have the sole determining voice in
administering the affairs o f the company and are entitled, as provided by the articles;
of association, to declare that dividends should be, distributed out of the profits of the
company to the shareholders but the interest of the shareholder either individually or
collectively does not amount to more than a right to participate in the profits of the
company. The company is a juristic person and is distinct from the shareholders. It is
the company which owns the property and not the shareholders.
The dividend is a share of the profits declared by the company as liable to be
distributed among the shareholders. Reliance is placed on behalf of the appellant on a
passage in Buckley's Companies Act (12th Ed., page 894) where the etymological
meaning of dividend is given as dividendum, the total divisible sum, but in its
ordinary sense it means the sum paid and received as the quotient forming the share of
the divisible sum payable to the recipient. This statement does not justify the
contention that shareholders are owners of a divisible sum or that they are owners of
the property of the company. The proper approach to the solution of the question is to
concentrate on the plain words of the definition of agricultural income which connects
in no uncertain language revenue with the land from which it directly springs and a
stray observation in a case which has no bearing upon the present question does not
advance the solution of the question. There is nothing in the Indian law to warrant the
assumption that a shareholder who buys shares buys any interest in the property of the
company which is a juristic person entirely distinct from the shareholders. The true
position of a shareholder is that on buying shares an investor becomes entitled to
participate in the profits of the company in which he holds the shares if and when the
company declares, subject to the articles of association, that the profits or any portion
thereof should be distributed by way of dividends among the shareholders. He has
 33

undoubtedly a further right to participate in the assets of the company which would be
left over after winding up but not in the assets as a whole as Lord Anderson puts it.
The High Court expressed the view that until a dividend is declared there is no right in
a shareholder to participate in the profits and according to them the declaration of
dividend by the company is the effective source of the dividend which is subject to
tax. This statement of the law we are unable to accept. Indeed the learned Attorney-
General conceded that he was not prepared to subscribe to that proposition. The
declaration of dividend is certainly not the source of the profit. The right to
participation in the profits exists independently of any declaration by the company
with the only difference that the enjoyment of profits is postponed until dividends are
declared.
It was argued that the position of shareholders in a company is analogous to that of
partners inter se. This analogy is wholly inaccurate. Partnership is merely an
association of persons for carrying on the business of partnership and in law the firm
name is a compendious method of describing the partners. Such is, however, not the
case of a company which stands as a separate juristic entity distinct from the
shareholders. In Halsbury's Laws of England, Vol. 6 (3rd Ed.), page 234, the law
regarding the attributes of shares is thus stated:
"A share is a right to a specified amount of the share capital of a company carrying with it
certain rights and liabilities while the company is a going concern and in its winding up. The
shares or other interest of any member in a company are personal estate transferable in the
manner provided by its articles, and are not of the nature of real estate."
In Borland's Trustee v. Steel Brothers & Co. Ltd. [1901] 1 Ch. 279Farwell, J., held
that "a share in a company cannot properly be likened to a sum of money settled upon
and subject to executory limitations to arise in the future; it is rather to be regarded as
the interest of the shareholder in the company, measured, for the purposes of liability
and dividend, by a sum of money……….." It was suggested that the dividend« arises
out of the profits accruing from land and is impressed with the same character as the
profits and that it does not change its character merely because of the incident that it
reaches the hands of the shareholder. This argument runs counter to the definition of
agricultural income which emphasizes the necessity of the recipient of income having
a direct and an immediate rather than an indirect and remote relation with land. To
accept this argument will be tantamount to saying that the creditor recovering interest
on money debt due from the agriculturist who pays out of the produce of the land is
equally entitled to the exemption. In fairness to Mr. Kolah it must, however, be stated
that the contention was not so broadly put but there is no reason why one should stop
at a particular stage and not pursue the analogy to its logical limits.
English decisions resting upon the peculiarities of the English Income-tax law can
hardly be a safe guide in determining upon the language of the Indian Income-tax Act
the true meaning of the word "agricultural income". A few cases of the Privy Council
decided with reference to the provisions of the Indian Income-tax Act, however,
deserve notice. The first case, viz., Commissioner of Income-tax v. Raja Bahadur
Kamakshya Narayan Singh [1948] 16 ITR 325 dealt with the question whether
interest on arrears of rent payable in respect of land used for agricultural purposes is
agricultural income and therefore exempt from income-tax. It was held that it was
neither rent nor revenue derived from land within the meaning of section 2(1) of the
Income-tax Act. Lord Uthwatt who delivered the judgment of the Privy Council used
the following piquant language in coming to that conclusion;
 34

"The word 'derived' is not a term of art. Its use in the definition indeed demands an enquiry
into genealogy of the product. But the enquiry should stop as soon as the effective source is
discovered. In the genealogical tree of the interest land indeed appears in the second degree,
but the immediate and effective source is rent, which has suffered the accident-of non-
payment. And rent is not land within the meaning of the definition."
The second case, viz., Premier Construction Co., Ltd. v. Commissioner of Income-
tax [1948] 16 ITR 380 (Bom.), dealt with the nature of the commission of a managing
agent of the company a part of whose income was agricultural income. The assessee
claimed exemption from tax on the ground that his remuneration at 10% of the profits
was calculated with reference to the income of the company part of which was
agricultural income. It was held that the assessee received no agricultural income as
defined by the Act but that he received a remuneration under a contract for personal
service calculated on the amount of profits earned by the employer, payable not in
specie out of any item of such profits, but out of any moneys of the employer
available for the purpose, and that the remuneration therefore was not agricultural
income and was not exempt from tax. Sir John Beaumont in the above case observed :
"In their Lordships' view the principle to be derived from a consideration of the terms of the
Income-tax Act and the authorities referred to is that where an assessee receives income, not
itself of a character to fall within the definition of agricultural income contained in the Act,
such income does not assume the character of agricultural income by reason of the source
from which it is derived, or the method by which it is calculated."
In the third case, viz., Maharajkumar Gopal Saran Narain Singh v. Commissioner of
Income-tax [1935] 3 ITR 237, an annual payment for life to the assessee was not held
to be agricultural income and therefore not exempt from tax where the annuity arose
out of a transfer made by the assessee of a portion of his estate for discharging his
debts and for obtaining an adequate income for his life it being held that it was not
rent or revenue derived from land but money paid under a contract imposing personal
liability on the covenantor the discharge of which was secured by a charge on land.
But reliance was placed upon another judgment of the Privy Council in the same
volume at page 305 in Commissioner of Income-tax v. Sir Kameshwar Singh [1935] 3
ITR 305. That was a case of a usufructuary mortgagee the profits received by whom
were exempt from income-tax on the ground that they were agricultural income in his
hands. Lord Macmillan, after referring to certain sections of the Act, observed that "
the result of those sections is to exclude agricultural income altogether from the scope
of the Act howsoever or by whomsoever it may be received." These observations
must be held to be confined to the facts of that particular case which was a case of
usufructuary mortgagee who had received profits directly from the land. The obvious
implication of the words used by Lord Macmillan was that whosoever receives profit
from the land directly is entitled to the exemption.
Reference was also made to some English decisions but they have no bearing upon
the present case as they were founded on the English income-tax law and the
provisions of the particular statute.
The learned Attorney-General also contended that the conclusion that dividend is not
agricultural income also follows from the provisions of section 16, sub-section (2),
and the proviso to the Act. According to him, this section compels the assessee to
show in his return the whole dividend including the portion which is excluded on the
ground of agricultural income. We do not consider it necessary to express any opinion
 35

upon this contention as our conclusion reached as a result of the foregoing discussion
is sufficient to dispose of the appeal. We accordingly dismiss the appeal with costs.
(ii) C.I.T. v. Benoy Kumar Sahas Roy AIR 1957 SC 768 - BHAGWATI, VENKATARAMA
AIYAR AND KAPUR, JJ.

Facts:
The assessee owned an area of 6,000 acres of forest land assessed to land revenue and grown
with sal and piyasal trees. The forest was originally of spontaneous growth. For the
assessment year in question, the assessee filed its return. The assessment was made without
including therein any forest income. Subsequently, the assessment was reopened under
section 34 of 1922 Act. In response to a notice, the assessee submitted a return showing the
gross receipt from the said forest. A claim was, however, made that the said income was not
assessable under the Act as it was agricultural income and was exempt under section
4(3)(viii) of 1922 Act. The ITO rejected this claim and added a sum to the assessable income
as income derived from the forest after allowing certain sum as expenditure. The AAC
confirmed the assessment and the ITAT also was of opinion that the said income was not
agricultural income but was income derived from the sale of jungle produce of spontaneous
growth and as such was not covered by section 2(1) of the 1922 Act.
On reference, the High Court held that actual cultivation of the land was not required and as
human labour and skill were spent for the growth of the forest the income from the forest was
agricultural income.
At the instance of the assessee the Tribunal referred to the High Court under section 66(1) of
the Act two questions of law arising out of its order, one of which was:
"Whether on the facts and in the circumstances of this case, the sum of Rs. 51,977 is
'agricultural income' and as such is exempt from payment of tax under section 4(3)(viii) of the
Indian Income-tax Act ?''
The Tribunal submitted a statement of case from which the following facts appear as
admitted or established :
"(i) The area covered by the forest is about 6,000 acres, trees growing being sal and piyasal ;
(ii) It is of spontaneous growth being about 150 years old. It is not a forest grown by the aid
of human skill and labour;
(iii) The forest is occasionally parcelled out for the purposes of sale and the space from which
trees sold are cut away is guarded by forest guards to protect offshoots ;
(iv) It has been satisfactorily proved that considerable amount of human labour and care is
being applied year after year for keeping the forest alive as also for reviving the portions that
get denuded as a result of destruction by cattle and other causes ;
(v) The staff is employed by the assessee to perform the following specific operations:
(a) Pruning,
(b) Weeding,
 36

(c) Felling,
(d) Clearing,
(e) Cutting of channels to help the flow of rain water,
(f) Guarding the trees against pests and other destructive elements,
(g) Sowing of seeds after digging of the soil in denuded areas".
The Tribunal found that the employment of human labour and skill in items (a) to (f ) was
necessary for the maintenance and upkeep of any forest of spontaneous growth. Regarding
item (g), however, it found that the said operation had been performed only occasionally and
over a small fraction of the area where the original growth had been found to have been
completely denuded. Such occasions were, however, few and far between, the normal process
being that whenever a tree was cut, a stump of about 6" height was left intact which sent forth
offshoots all round bringing about fresh growth in course of time. This went on perpetually
unless an area got otherwise completely denuded.
The. reference was heard by the High Court and the High Court held that actual cultivation of
the land was not required and as human labour and skill were spent for the growth of the
forest the income from the forest was agricultural income. It accordingly answered the above
question in the affirmative. The Revenue obtained the requisite certificate of fitness for
appeal to this Court and hence this appeal.
The question that arises for consideration in this appeal is whether income derived from the
sale of sal and piyasal trees in the forest owned by the assessee which was originally a forest
of spontaneous growth "not grown by the aid of human skill and labour" but on which
forestry operations described in the statement of case had been carried on by the assessee
involving considerable amount of expenditure of human skill and labour is agricultural
income within the meaning of section 2(1) and as such exempt from payment of tax under
section 4(3)(viii) of the Indian Income-tax Act.
Section 2(1) of the Act defines agricultural income and states (so far as it is relevant for the
purposes of this appeal):
"(1) 'agricultural income' means—

(a) any rent or revenue derived from land which is used for agricultural purposes, and is
either assessed to land revenue in the taxable territories or subject to a local rate
assessed and collected by officers of the Government as such ;

(b) any income derived from such land by—

(i) agriculture, or

(ii) the performance by a cultivator or receiver of rent-in-kind of any process

ordinarily employed by a cultivator or receiver of rent-in-kind to render the
produce raised or received by him fit to be taken to market, or
 37

(iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or

received by him, in respect of which no process has been performed other than
a process of the nature described in sub-clause (ii) ;..".

Section 4(3) of the Act provides :

"(3) Any income, profits or gains falling within the following classes shall not be included in
the total income of the person receiving them:
(viii) Agricultural income".
Even though "agricultural income" which is exempted under section 4(3)(viii) of the Act is
defined in section 2(1) as above, there is no definition of "agriculture" or "agricultural
purpose" to be found in the Act and it, therefore, falls to be determined what is the
connotation of these terms.
An argument based on entries 14 and 19 of List II of the Seventh Schedule to the Constitution
may be disposed of at once. It was urged that entry No. 14 referred to agriculture including
agricultural education and research, protection against pests and prevention of plant diseases
while entry No. 19 referred to forests and there was, therefore, a clear line of demarcation
between agriculture and forests with the result that forestry could not be comprised within
agriculture. If forestry was thus not comprised within agriculture, any income from forestry
could not be agricultural income and the income derived by the assessee from the sale of the
forest trees could not be agricultural income at all, as it was not derived from land by
agriculture within the meaning of the definition of agricultural income given in the Indian
Income-tax Act.
Cozens-Hardy, M.R., also said in Camden ( Marquis)v. Inland Revenue
Commissioners [1914] 1 KB 641, 647:
"It is for the Court to interpret the statute as best they can. In so doing the Court may no
doubt assist themselves in the discharge of their duty by any literary help which they can
find, including of course the consultation of standard authors and reference to well-known
and authoritative dictionaries".
Turning, therefore, to the dictionary meaning of "agriculture" we find Webster's New
International Dictionary describing it as "the art or science of cultivating the ground,
including rearing and management of live-stock, husbandry, farming, etc. and also including
in its broad sense farming, horticulture, forestry, butter and cheese-making etc".
Murray's Oxford Dictionary describes it as "the science and art of cultivating the soil;
including the allied pursuits of gathering in the crop and rearing live-stock; tillage,
husbandry, farming (in the widest sense)". In Bouvier's Law Dictionary quoting the Standard
Dictionary "agriculture" is defined as "the cultivation of soil for food products or any other
useful or valuable growths of the field or garden tillage, husbandry; also by extension,
farming, including any industry practised by cultivator of the soil in connection with such
cultivation, as breeding and rearing of stock, dairying, etc. The science that treats of the
cultivation of the soil".
In Corpus Juris the term "agriculture" has been understood to mean : "art or science of
cultivating the ground, especially in fields or large quantities, including the preparation of the
soil, the planting of seeds, the raising and harvesting of crops, and the rearing, feeding and
 38

management of live-stock; tillage, husbandry and farming. In its general sense the word also
includes gardening of horticulture".
Considerable stress was laid on the fact that section 4(3)(viii ) of the Act enacted a provision
in regard to the exemption of "agricultural income" from assessment and it was contended
that exemptions should be liberally construed. Reliance was placed on the observations of
ViswanathaSastri, J., in Commissioner of Income-tax, Madras v. K.E. SundaraMudaliar and
Others [1950] 18 ITR 259, 271 :
"Exemption from tax granted by a statute should be given full scope and amplitude and
should not be whittled down by importing limitations not inserted by the Legislature".
Mookerjee, J., in Commissioner of Agricultural Income-tax, West Bengal v. Raja Jagadish
Chandra Deo Dhabal Deb [1949] 17 ITR 426, 438 also expressed himself similarly :
"and the present-day view seems to be that where an exemption is conferred by statute, that
clause has to be interpreted liberally and in favour of the assessee but must always be without
any violence to the language used. The rule must be construed together with the exempting
provisions, which must be regarded as paramount".
He also quoted a passage from Upper India Chamber of Commerce v. Commissioner of
Income-tax, C.P. & U.P. [1947] 15 ITR 263 :
"It is needless to observe that, as in the present case, we are concerned with the interpretation
of an exemption clause in a taxing statute, that clause must be, as far as possible, liberally
construed and in favour of the assessee, provided no violence is done to the language used".
It was also pointed out that "Taxes on agricultural income" formed a head of legislation
specified in item 46 of List II of the Seventh Schedule to the Constitution and should be
liberally construed, with the result that agriculture should be understood in the wider
significance of the term and all agricultural income derived from agriculture or so understood
should be included within the category. There was authority for the proposition that the
expression "agricultural land" mentioned in Entry 21 of List II of the Seventh Schedule to the
Government of India Act, 1935, should be interpreted in its wider significance as including
lands which are used or are capable of being used for raising any valuable plants or trees or
for any other purpose of husbandry.
Murugesa Chetty v. ChinnalhambiGoundan [1901] ILR 24 Mad. 421, 424 also was
concerned with section 117 of the Transfer of Property Act. The lease there was a lease of
land for the cultivation of betel and the Court held that such a lease was an agricultural lease
falling under section 117. BhashyamAyyangar, J., who delivered the main judgment of the
Court discussed the dictionary meanings of the term "agriculture" and stated that in section
117 of the Transfer of Property Act it was used in its more general sense as comprehending
the raising of vegetables, fruits and other garden products as food for men or beast, though
some of them may be regarded in England as products of horticulture as distinguished from
agriculture. The learned Judge considered the distinction between "agriculture" and
"horticulture" and observed :
"The distinction between agriculture when it is used otherwise than in its primary and more
general sense and horticulture is a fine one even in England, and in India, especially, it will
be impossible in the case of several products of the land to draw a line between agriculture
and horticulture according to English notions. The only practical distinction which I can
suggest and one which will give effect to the policy of the Legislature in exempting
 39

agricultural leases from the operation of section 107, etc. of the Transfer of Property Act is to
regard as agriculture, as distinguished from horticulture, not only all field cultivation by
tillage but also all garden cultivation for the purpose chiefly of procuring vegetables or fruits
as food for man or beast and other products fit for human consumption by way of luxury, if
not as an article of diet".
He then discussed the policy of exemptions setting out the observations of Cave, J., in Ellis &
Co. v. Hilse [1889] LR 23 QBD 24 : "The very object of this exemption is the well-known
one of favouring agriculture—an old object of English legislation in favour of a very
important industry", and stated:
"This observation of Mr. Justice Cave will apply with much greater force in this country
where the agricultural industry is more important than in England and is one that is common
to wet cultivation as to garden and dry cultivation, the object of all such cultivation being
chiefly to procure food for men and cattle and other products of the soil which are usually
consumed by the people as gentle stimulants or by way of luxury. Betel leaf is an article of
daily consumption with all classes in this country as tobacco leaf is with most classes and
betel vine is generally grown side by side with plantains, the products of which are among the
chief articles of vegetable food".
The lease in that case being one for the cultivation of betel was therefore held to be
agricultural lease and Shephard, J., agreed with this conclusion revising the opinion which he
had expressed earlier in Kunhayan Haji v. Mayan [1893] ILR 17 Mad. 98 :
In Raja of Venkatagiri v. Ayyappa Reddy [1913] ILR 38 Mad. 738 the question was whether
land usually fit only for pasturing cattle and not for cultivation, i.e., ploughing and raising
agricultural crops, was "ryoti" land, though it might have been "old waste" and a tenant of
such land was a "ryot" and any amount agreed to be paid for pasturing cattle was "rent"
within the definitions of section 3 of the Madras Estates Land Act (Mad. Act I of 1908). The
Court held that such land was not "ryoti" land inasmuch as it was not fit for ploughing and
raising agricultural crops. The ordinary meaning of "agriculture" was taken to be "the raising
of annual or periodical grain crops through the operations of ploughing sowing, etc". (Per
SadasivaAyyar, J., at p. 741).
Chief Commissioner of Income-tax, Madras v. Zamindar of Singam-patti [1922] ILR 45 Mad.
518 was a reference arising out of the assessment for income-tax under Act VII of 1918 of
the income derived by the Zamindar of Singampatti from forests and fisheries within the
ambit of his Zamindari. The assessee objected to the assessment (i) on the ground that the
income was agricultural income within the meaning of section 4 of the Act and, therefore, not
chargeable to income-tax ; (ii) that the assessment was illegal as contravening the terms of his
permanent sanad for the Zamindari and the provisions of Regulation XXV of 1802. The
Court held that where the peishkush of a permanently settled estate was fixed in commutation
not only of the rentals of the cultivated lands but also of all income which might be derived
from forests or fisheries, both under the terms of the sanad and section 1 of Regulation XXV
of 1802,these incomes were exempt from further taxation by the Government, and section 3
of the Income-tax Act did not abrogate this exemption. In view of this conclusion the Court
did not think it necessary to determine whether income from forests or fisheries came under
the definition of "agricultural income". The Court, however, pointed out that "a reference
to Murray's and Webster's Dictionaries shows that the word 'agriculture', while sometimes
used in the narrow sense of the art or science of cultivating the ground, is also used in a much
wider sense so as to include even 'forestry,' according to Webster. In which sense it was used
 40

by the framers of the Income-tax Act would be a matter for determination and to this end it
would not be out of place to consider the probable reason for the exemption of agricultural
income from income-tax. No other reason is suggested than the equity of exempting from
further burden income which had already paid toll to the State in the shape of land revenue".
The question therefore whether the income from forests would be "agricultural income"
within the meaning of section 4 of the Income-tax Act was thus left open, and the decision
that income from forests was not liable to income-tax was reached under the terms of the
sanad and of section 1 of Regulation XXV of 1802.
Kaju Mal v. Salig Ram [1919] PR No. 19 p. 237 was concerned inter alia with a field in
which tea was grown and the question was whether the land fell within the definition of
"agricultural income" or "village immoveable property" as given in section 3(1) and (ii) of
the Punjab Pre-emption Act, 1905. The Court held that fields planted with tea bushes were
fields used for agricultural purposes and this decision was affirmed by the Privy Council
in Kaju Mall v. Salig Ram [1923] ILR 5 Lah. 50. It was held that the words "agricultural
purposes" in section 2(iii) of the Punjab Alienation of Land Act, 1900, included the
cultivation of tea ; consequently land which was not occupied as the site of any building in a
town or village, and was occupied or let for the cultivation of tea was "agricultural land"
within the meaning of section 3(1) of the Punjab Pre-emption Act, 1905.
Emperor v. Probhat Chandra Barua [1924] ILR 51 Cal. 504 was a case under the Indian
Income-tax Act and the classes of income derived from pemanently settled estates were "1.
Income from fisheries. 2. Income from land used for stacking timber. 3. Income from
pasturage". The income from the first two heads was certainly not agricultural income or
income derived from "land which is used for agricultural purposes" within the meaning of
sections 2 and 4 of the Act. But income derived from pasturage was held to be agricultural
income which could not lawfully be charged with income-tax.
In Kesho Prasad Singh v. SheoPragash Ojha [1924] ILR 46 All. 831the Privy Council held
that a grove was not land "held for agricultural purposes" within the meaning of section 70 of
the Agra Tenancy Act, 1901, affirming the decision of the High Court of Allahabad that it
was impossible to hold that that section had any application whatever to such a property as
the grove in fact was.
Commissioner of Income-tax, Madras v. ManavedanTirumalpad [1930] ILR 54 Mad. 21was
also a decision under the Indian Income-tax Act (XI of 1922) and the assessee there was
assessed by the Income-tax Officer for the year 1928-29 on the amount received by the sale
of timber trees cut and removed from the forests. The question was whether these amounts
were liable as such to income-tax and the Court observed:
".........we are unable to distinguish between the income derived from the sale of paddy which
is grown on land and the income derived from the sale of timber cut in a forest ; but the
profits earned from the sale of paddy would be assessable to income-tax but for the special
exemption given to that income in the Income-tax Act by reason of its being agricultural
income. There is no such exemption in the case of income derived from the sale of timber".
There is no further discussion to be found in the judgment which would throw light on the
question whether such receipts by the assessee were agricultural income and as such exempt
from income-tax.
 41

The later decision of the Madras High Court in Chandrasekhara Bharathi

Swamigal v. Duraisami Naidu [1931] ILR 54 Mad. 900 however contains an elaborate
discussion as to the connotation of the term "agriculture". The case arose under the Madras
Estates Land Act (Mad. Act I of 1908) and the question which the Court had to consider was
whether growing casuarina trees, i.e., trees for fuel, was an agricultural purpose so as to make
the person who held the land for that purpose a "ryot" within the meaning of the Madras
Estates Land Act. The Court held that land held for growing casuarina trees was not land held
for purposes of agriculture and the person holding the land for that purpose was not a "ryot"
within the meaning of the Act.
In Commissioner of Income-tax, Burma v. Kokine Dairy, Rangoon [1938] 6 ITR 502, 509 the
question was whether income from a dairy farm and the milk derived from the farm is
agricultural income and exempt as such from income-tax. Roberts, C.J., who delivered the
opinion of the Court observed:
"Where cattle are wholly stall-fed and not pastured upon the land at all, doubtless it is trade
and no agricultural operation is being carried on : where cattle are being exclusively or
mainly pastured and are none the less fed with small amounts of oil-cake or the like, it may
well be that the income derived from the sale of their milk is agricultural income. But
between the two extremes there must be a number of varying degrees, and the task for the
Income-tax Officer is to apply his mind to the two distinctions and to decide in any particular
case on which side of the fence, if I may use the term, the matter falls".
He then referred to the case of Lean and Dickinson v. Ball [1925] 10 Tax Cas. 341 where
Lord Cullen had said that he proceeded on the footing that the case, which was one dealing
with poultry-farming, was one in which the poultry derived sustenance to a material extent
from the produce of the ground.
This method of approach was on a par with the one adopted by Lord Wright in Lord
Glanely v. Wightman [1933] AC 618, 638 where it was observed :
"If authority were needed, the provisions just quoted do at least show that profits of
'occupation' include gains from the animal produce as well as the agricultural, horticultural or
arboricultural produce of the soil;..........................equally it is obvious that the rearing of
animals, regarded as they must be as products of the soil—since it is from the soil that they
draw their sustenance and on the soil that they live—is a source of profit from the occupation
of land, whether these animals are for consumption as food (such as bullocks, pigs or
chickens), or for the provision of food (such as cows, goats or fowls), or for recreation (such
as hunters or race horses), or for use (such as draught or plough horses). All these animals are
appurtenant to the soil, in the relevant sense for this purpose, as much as trees, wheat crops,
flowers or roots though no doubt they differ in obvious respects. Nor is it now material
towards determining what are products of occupation that farming has developed in its use of
mechanical appliances and power, not only in such matters as ploughing, reaping, threshing,
and so forth, but in such ancient methods of preparing its products as making cream, butter or
cheese. The farmer is still dealing with the products of the soil, and Schedule B covers the
income".
The House of Lords were dealing with the profits of occupation of land not with income
derived from user of land for agricultural purposes and, therefore, not restricted in their
interpretation of the term "occupation" and all these activities which were described therein
might as well have been comprised within the scope of the taxing statutes. What we have,
however, to see is whether these activities fall within the connotation of the terms
 42

"agriculture" and "agricultural purpose" which are the only terms to be considered for
bringing the income derived therefrom within the definition of agricultural income in section
2(1)(a) of the Indian Income-tax Act.
A decision of the Nagapur High Court in Beohar Singh Raghubir Singh v. Commissioner of
Income-tax, U.P., C.P. and Berar [1948] 16 ITR 433 (delivered on September 4, 1946, but
reported in 1948), may be noted here. There also the income in question was derived by the
assessee from the sale of forest produce such as timber, tendu leaves, mohua flowers, harra
nuts etc., derived from a forest which was not a cultivated one but was of spontaneous
growth. The question was whether such income was agricultural income and as such exempt
from taxation under section 4(3)(viii) of the Indian Income-tax Act. The Court considered the
dictionary meanings of the term "agriculture" which included forestry within its compass but
observed that the essence of agriculture, even when it was extended to include "forestry", was
the application of human skill and labour ; without that it could neither be an art nor a science
and that was according to them the determining factor in such class of cases. The Court then
referred to the various decisions referred to above and cited with approval the following
passage from the judgment of the Federal Court in Meghraj v. Allah Rakhia [1942] FCR 53,
62 :
"Their Lordships confirmed a decision of the Punjab Chief Court to the effect that land used
as a tea garden was used for 'agricultural purposes'. In the judgment of the Chief Court
(which was generally approved by their Lordships) it was observed that 'the term
"agricultural land" is used in the Act of 1905 in its widest sense to denote all land which
is tilled'.......... The Chief Court had held that land covered by a natural forest was not
agricultural land, and this view also would seem to have been confirmed by the Judicial
Committee "
and they further proceeded to observe:
"We have underlined the word 'tilled' because, in our opinion, that brings out the distinction
which we have sought to draw between an agricultural and a non-agricultural purpose. The
decisions referred to are Kaju Mal v. Saligram and Kaju Mall v. Saligram [1919] PR No. 19
p. 237 and [1923] ILR 5 Lah. 50".
The Court came to the conclusion that it was essential that the income should be derived from
some activity which necessitated the employment of human skill and labour and which was
not merely a product of man's neglect or inaction except for the gathering in of the spoils. Not
only must the assessee labour to reap the harvest. But he must also labour to produce it, and
they accordingly held that the income in question was not agricultural income and was not
exempt from taxation under section 4(3)(viii) of the Indian Income-tax Act.
All these operations no doubt require the expenditure of human labour and skill but the
human labour and skill spent in the performance of the basic operations only can be said to
have been spent upon the land. The human labour and skill spent in the performance of
subsequent operations cannot be said to have been spent on the land itself, though it may
have the effect of preserving, fostering and regenerating the products of the land.
This distinction is not so important in cases where the agriculturist performs these operations
as a part of his integrated activity in cultivation of the land. Where, however, the products of
the land are of spontaneous growth, unassisted by human skill and labour, and human skill
and labour are spent merely in fostering the growth, preservation and regeneration of such
products of land, the question falls to be considered whether these subsequent operations
 43

performed by the agriculturist are agricultural operations and enjoy the characteristic of
agricultural operations.
It is agreed on all hands that products which grow wild on the land or are of spontaneous
growth not involving any human labour or skill upon the land are not products of agriculture
and the income derived therefrom is not agricultural income. There is no process of
agriculture involved in the raising of these products from the land. There are no agricultural
operations performed by the assessee in respect of the same, and the only work which the
assessee performs here is that of collecting the produce and consuming and marketing the
same. No agricultural operations have been performed and there is no question at all of the
income derived therefrom being agricultural income within the definition given in section
2(1) of the Indian Income-tax Act. Where, however, the assessee performs subsequent
operations on these products of land which are of wild or spontaneous growth, the nature of
those operations would have to be determined in the light of the principles enunciated above.
Applying these principles to the facts of the present case, we no doubt start with the finding
that the forest in question was of spontaneous growth. If there were no other facts found, that
would entail the conclusion that the income is not agricultural income. But then, it has also
been found by the Tribunal that the forest is more than 150 years old, though portions of the
forest have from time to time been denuded, that is to say, trees have completely fallen and
the proprietors have planted fresh trees in those areas, and they have performed operations for
the purpose of nursing the trees planted by them. It cannot be denied that so far as those trees
are concerned, the income derived therefrom would be agricultural income. In view of the
fact that the forest is more than 150 years old, the areas which had thus become denuded and
replanted cannot be considered to be negligible. The position therefore is that the whole of
the income derived from the forest cannot be treated as non-agricultural income. If the
enquiry had been directed on proper lines, it would have been possible for the Income-tax
authorities to ascertain how much of the income is attributable to forest of spontaneous
growth and how much to trees planted by the proprietors. But no such enquiry had been
directed, and in view of the long lapse of time, we do not consider it desirable to direct any
such enquiry now. The expenditure shown by the assessee for the maintenance of the forest is
about Rs. 17,000 as against a total income of about Rs. 51,000. Having regard to the
magnitude of this figure, we think that a substantial portion of the income must have been
derived from trees planted by the proprietors themselves. As no attempt has been made by the
Department to establish which portion of the income is attributable to forest of spontaneous
growth, there are no materials on which we could say that the judgment of the Court below is
wrong.
The appeal is accordingly dismissed with costs.
(iii) BuxaDooars Tea Co. Ltd. v CIT - 1962 AIR 186 1962 - AJIT K.
SENGUPTA AND BHAGABATI PRASAD BANERJEE, JJ.
Facts
The claim of the assessee-company that it was not liable to pay tax under the Assam Taxation
(On Goods Carried by Road or Inland Waterways) Act, 1954 was rejected by the State
taxation authorities and, accordingly, an assessment was made in respect of period ending on
30-9-1956 sometime in the year 1958. Subsequently, the Supreme Court declared the Act to
be void but the Assam Taxation (On Goods Carried by Road or Inland Waterways) Act,
1961, enacted with retrospective effect from 25-4-1954, was held to be valid in the year 1963.
Meanwhile, the assessee-company had filed a revision petition against the said assessment
 44

under the 1954 Act but the Commissioner of Taxes upheld the assessment as valid by his
order dated 2-1-1975. The assessee claimed deduction of the amount of tax payable in terms
of the order of the Commissioner of Taxes as business expenditure in its income-tax
assessment for the assessment year 1976-77 relevant to the calendar year 1975. The assessee
was following the mercantile system of accounting. It made a provision for this liability in the
calendar year 1976 relevant to the assessment year 1977-78 and also made an alternative
claim before the ITO that in case this liability was not allowed for any reason in the
assessment year 1976-77, it should be allowed in the year 1977-78. The ITO disallowed the
claim in both the years and the IAC confirmed the order of the ITO under section 144B(4) on
the ground that liability had accrued in 1958 and the assessee-company, having followed the
mercantile system, should have claimed deduction in the relevant year. The Commissioner
(Appeals) also rejected the claim on the ground that no provision was made by the assessee in
the accounts for the calendar year 1975. The Tribunal also upheld the decision of the lower
authorities on the ground that liability had arisen in 1958.
the following questions of law have been referred to this Court:
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in
holding that the liability to tax raised in 1958 under the Assam Taxation (On Goods Carried
by Road or Inland Waterways) Act, 1954, continued to be an ascertained liability for the year
in which it was ascertained notwithstanding the fact that the said Act of 1954 was struck
down as void and unconstitutional by the Hon'ble Supreme Court on the 26th September,
1960 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in
holding that the assessee was not entitled to claim deduction of its liability under the Assam
Taxation (On Goods Carried by Road or Inland Waterways) Act, 1954, in computing its
business income for the assessment year 1976-77?"
The assessee-company filed an appeal against the assessment made by the ITO for the said
year to the Commissioner (Appeals)-XV, Calcutta. The Commissioner (Appeals) by his order
dated 3-9-1985, again rejected the submissions of the assessee-company mainly on the
ground that no provision was made by the assessee-company in respect of such liability in its
accounts for the calendar year 1975.
On further appeal to the Tribunal, the Tribunal upheld the contention of the revenue that the
said liability arose in the year 1958 and that the assessee-company was not entitled to any
deduction in respect thereof in its assessment for the calendar year 1975 corresponding to the
assessment year 1976-77.
It may also be mentioned that the Tribunal, by its order dated 7-11-1986, passed in respect of
the assessment year 1977-78 has, inter alia, observed that the liability under the said Act
arose and accrued on 3-1-1975 for the first time.
7. At the hearing, Mr. Poddar, the learned counsel for the assessee, has contended that the
Tribunal took an inconsistent stand in this matter. For the assessment year 1976-77, the
Tribunal took the view that, since no provision was made in the accounts, such liability could
not be allowed although it was observed that the liability accrued in the year 1958 when the
Act came into force. But, for the assessment year 1977-78, when the assessee once again
claimed the said deduction after making a suitable provision in that behalf in the accounts, the
Tribunal did not allow the deduction on the ground that this claim pertained to the earlier
assessment year. In our view, the approach of the authorities below in rejecting the claim of
 45

the assessee is erroneous. Firstly, the admissibility of deduction does not depend on the
creation or making of a provision in the accounts. Reference may be made to the decision of
the Supreme Court in the case of Kedarnath Jute Mfg. Co Ltd.,. v. CIT [1971] 82 ITR 363.
There, the Supreme Court observed as follows :
"The main contention of learned Solicitor-General is that the assessee failed to debit the
liability in its books of account and, therefore, it was debarred from claiming the same as a
deduction either under section 10(1) or under section 10(2)(xv) of the Act. We are wholly
unable to appreciate the suggestion that if an assessee under some misapprehension or
mistake, fails to make an entry in the books of account and although, under the law, a
deduction must be allowed by the Income-tax Officer, the assessee will lose the right of
claiming or will be debarred from being allowed that deduction. Whether the assessee is
entitled to a particular deduction or not will depend on the provision of law relating thereto
and not on the view which the assessee might take of his rights nor can the existence or
absence of entries in the books of account be decisive or conclusive in the matter...." (p. 367)
8. Now, turning to the other contention in this case, the 1954 Act having been declared void
by the Supreme Court by its judgment delivered on 26-9-1960,all assessments made under
the said Act had become void ab initio. No assessment was ever made upon the assessee-
company under the 1961 Act and, therefore, the order dated 2-1-1975, passed by the
Commissioner of Taxes, Assam, upholding the assessments made under the 19S4 Act, in
view of the retrospective operation given by the 1961 Act, should be considered to be the
only order fixing and quantifying the liability of the assessee-company under the said Act and
since that order was passed in the calendar year 1975, relevant to the previous year
corresponding to the assessment year 1976-77, the deduction for such liability was clearly
admissible in making assessment on the assessee-company for the assessment year 1976-77,
notwithstanding that no provision for such liability was made in the books of the assessee-
company for the calendar year 1975. The assessee-company had all along disputed its
liability to be assessed under the said Act and this contention was' finally rejected by the
Commissioner of Taxes, Assam, by his order dated 2-1-1975.
9. Our attention has been drawn to the decision of this Court in CIT v. Orient Supply
Syndicate [1982] 134 ITR 12 . In that case, the assessee-firm, which followed the mercantile
system of accounting, claimed deduction of Rs. 29,000 for the "assessment year 1964-65 as
provident fund contribution made by the assessee under the Employees' Provident Funds Act,
.1952. The ITO and the AAC disallowed the claim on the ground that the contribution related
to earlier years. On further appeal, the Tribunal found that though this was a statutory liability
under the Employees' Provident Fund Act to make contributions, it was never enforced under
the Act in the earlier years and it was only in the year under appeal that the Regional
Provident Fund Commissioner called upon the assessee to make statutory contributions for
the entire period from November 1957 and that since the demand for the statutory
contribution was made by the authorities for the first time during the year under appeal, the
entire amount paid in that year was an allowable deduction. A letter addressed to the assessee
by the Regional Provident Fund Commissioner indicated that a decision was pending for
compliance with the statute for the period 1-11-1957 to 31-12-1960.
10. There the Court held that, in part, the statutory liability admittedly accrued in the year in
question and in part became real and enforceable in the year in question though referable to
the earlier years. The sum of Rs. 29,000 was, therefore, allowable as a deduction for the
assessment year 1964-65.
 46

11. It is not in all cases correct to say that a statutory liability discharged in a particular year
becomes eligible for deduction in the year in question under the mercantile system of
accounting. It depends on the facts and circumstances of the case and on the statutory
provisions.
12. In our view, the principles laid down in the aforesaid decision will apply to the facts of
this case. The proper year for deduction of such liability as business expenditure is the
assessment year 1976-77 as the liability became real and enforceable in that year after
revisional applications were rejected by the Commissioner of Taxes, Assam, upholding the
assessment for the period ending on 30-9-1956, under the 1954 Act.
13. For the reasons aforesaid, we answer both the questions in this reference in the negative
and in favour of the assessee and against the revenue.
14. There will be no order as to costs.
(iv) NagiReddi v CIT – (1984) 147 ITR 337 (Mad)
Facts
The assessee who was maintaining his accounts on mercantile system, collected sales tax but
did not pay to the Government as dispute relating to sales tax liability was pending before the
Supreme Court and stay had been granted. The question arose for consideration in the instant
appeal was whether sales-tax amount collected by the assessee was includible in his income.
Cases Referred
JonnallaNarashimharao& Co vs. CIT [1993] 200 ITR 588 (SC).
In this case there is only one question, namely, whether the sales tax amount collected by the
assessee is includible in the income of the assessee. As held by us in C.A. Nos. 2468 to 2471
of 1977 (JonnallaNarashimharao and Co. VS. CIT [1993] 200 ITR 588 (SC)), it is includible.
The appeal is allowed. No costs.
(v) K. Lakshmanan & Co. v. C.I.T. (1998) 9 SCC 537 - B.N. KIRPAL AND S.P.
KURDUKAR, JJ
The assessee was engaged in the activity of growing mulberry leaves and rearing silkworms.
It purchased silkworm eggs and when they were hatched, the worms were principally fed on
mulberry leaves. The mulberry leaves were plucked from the trees grown by the appellant
and these leaves were cut into strips which were fed to the silkworms. The worms wind
around themselves the saliva which oozes from their mouth and the hardened saliva forms the
protective cocoons. These cocoons were then sold in the market by the assessee. The
appellant claimed that the entire income which it derived from the growing of the mulberry
leaves and the sale of the cocoons was exempt from levy of income-tax as it was 'agricultural
income'. The ITO, however, concluded that part of the income which was attributable to
growing of mulberry leaves alone constituted agricultural income and was exempt from levy
of income-tax but the income derived from the rearing of silkworms on the leaves and selling
of the cocoons was not agricultural income. Therefore, the ITO estimated the income derived
from the process of growing silkworms and rearing of cocoons at 25 per cent of the total
income and subjected the same to tax in the assessment years involved.
 47

The AAC accepted the assessee's claim but the Tribunal allowed the revenue's appeal. The
High Court affirmed the order of the Tribunal.
Cases Referred
Dooars Tea Co Ltd.,v. CAIT [1962] 44 ITR 6 (SC) followed & relied upon
1. The short question which arises for consideration in this batch of appeals is whether or not
the income derived from the business of rearing silk- worms is 'agricultural income' as
defined under section 2(1) of the Income-tax Act, 1961 ('the Act').
2. The appellant is a partnership firm constituted for the purpose of carrying out agricultural
activities. During the course of its business it indulges in the activity of growing mulberry
leaves and rearing silk- worms. The assessee purchases silkworm eggs and when they are
hatched, the worms are principally fed on mulberry leaves. The mulberry leaves are plucked
from the trees grown by the appellant and these leaves are cut into strips which are fed to the
silkworms. The worms wind around themselves the saliva which oozes from their mouth and
the hardened saliva forms the protective cocoons. These cocoons are then sold in the market
by the appellant.
3. Before the ITO, the appellant claimed that the entire income which it derived from the
growing of the mulberry leaves and the sale of the cocoons was exempt from levy of income-
tax as it was 'agricultural income' within the meaning of that expression in section 2(1). The
ITO accepted the contention of the appellant only insofar as it related to the growing of the
mulberry leaves but did not accept the appellant's contention that the rearing of the worms
and the selling of the cocoons resulted in agricultural income. He, accordingly, concluded
that part of the income which was attributable to growing of mulberry leaves alone
constituted agricultural income and was exempt from levy of income-tax but the income
derived from the rearing of silkworms on the leaves and selling of the cocoons was not
agricultural income. Therefore, the ITO estimated the income derived from the process of
growing silkworms and rearing of cocoons at 25 per cent of the total income and subjected
the same to tax in the assessment years involved.
4. The AAC, in the appeals filed by the appellant accepted its contention and came to the
conclusion that income derived by it from growing mulberry leaves and from rearing of
silkworms and cocoons was exempt from tax under the Act.
5. The revenue then filed an appeal before the Tribunal which allowed the same and came to
the conclusion that even though mulberry leaves did not have a market, the case would still
not fall within the purview of section 2(1) inasmuch as the agricultural produce, viz., the
mulberry leaves, was not what was sold in the market and what in fact was sold were cocoons
which were not the agricultural produce of the appellant. At the instance of the appellant, the
Tribunal then stated the case and referred the following question of law to the High Court :
"Whether, on the facts and in the circumstances of the case, the Tribunal is justified in
holding that the income derived by the assessee from the process, i.e., the rearing of
silkworms, is not entitled to exemption under section 2(1)(b)(ii ) of the Income-tax Act, 1961
?"
6. The High Court in the impugned judgment has answered the question of law in favour of
the revenue as it came to the conclusion that feeding of mulberry leaves to silkworms was not
a process employed by the cultivator of mulberry leaves to make them marketable by way of
producing silk cocoons.
 48

7. On the basis of the facts found by the Tribunal, we do not find any infirmity in the
conclusion of the High Court. Section 2(1) of the Act defines the expression 'agricultural
income'. The relevant part of the definition reads thus :
"2. Definitions.—In this Act, unless the context otherwise requires,—
(1) 'agricultural income' means—

(a) ** ** **

(b) any income derived from such land by—

(i) agriculture; or

(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily

employed by a cultivator or receiver of rent-in-kind to render the produce raised or
received by him fit to be taken to market; or. . . ."

8. Eliminating the unnecessary words from the said definition, 'agricul-tural income' would
mean any income derived from such land by the performance by a cultivator of any process
ordinarily employed by him to render the produce raised by him fit to be taken to market. It is
clear from the reading of the aforesaid statutory provision that what is taken to the market and
sold must be the produce which is raised by the cultivator. Even though for the purpose of
making it marketable or fit for sale some process may have to be undertaken, the section does
not contemplate the sale of an item or a commodity which is different from what is cultivated
and processed. Had mulberry leaves been subjected to some process and sold in the market as
such, then certainly the income derived therefrom would be regarded as agricultural income
but the case of the appellant before the authorities and in this Court, has been that mulberry
leaves cannot be sold in the market and they can only be fed to the silkworms. The
agricultural produce of the cultivator will be mulberry leaves and by no stretch of imagination
can the silkworms and certainly not the silk cocoons, be regarded as the agricultural produce
of the cultivator.
9. The aforesaid view finds support from the following observations of this Court
in Dooars Tea Co. Ltd. v. CAIT [1962] 44 ITR 6 (SC) :
" . . .Section 2(1)(b ) consists of three clauses. Let us first construe clauses (ii) and (iii ).
Clause (ii) includes cases of income derived from the performance of any process therein
specified. The process must be one which is usually employed by the cultivator or receiver of
rent-in-kind; it may be simple manual process or it may involve the use and assistance of
machinery. That is the first requirement of this proviso. The second requirement is that the
said process must have been employed with the object of making the produce marketable. It
is, however, clear that the employment of the process contemplated by the second clause
must not alter the character of the produce. The produce must retain its original character and
the only change that may have been brought about in the produce is to make it marketable.
The said change in the condition of the produce is only intended to make the produce a
saleable commodity in the market. Thus, clause (ii) includes within the categories of income,
income derived from the employment of the process falling under that clause. As we have
just observed, the object of employing the requisite process is to make the produce
marketable but in terms the clause does not refer to sale and does not require that the income
 49

should be obtained from sale as such though in a sense it contemplates the sale of the
produce." (p. 12)
10. We are in respectful agreement with the aforesaid observations. The High Court, as we
have already observed, has rightly come to the conclusion that the income derived by the
appellant from the sale of the cocoons could not in law be regarded as agricultural income.
The question of law was, therefore, rightly answered in the affirmative and against the
appellant.
11. The appeals are, accordingly, dismissed. There will be no order as to costs.
Civil Appeal Nos. 4485, 4485A-4485C of 1995 :
These appeals having not been pressed are dismissed.
(vi) Anil Plantations (P.) Ltd. v. Principal Commissioner of Income Tax-2,Kolkata- [2017]
167 ITD 143 Kolkata Tribunal - N. V. VASUDEVAN, JUDICIAL MEMBER
AND WASEEM AHMED, ACCOUNTANT MEMBER
Facts

The assessee-company was engaged in the business of growing and manufacturing and selling
of tea. A portion of the assessee's tea plantation comprising of land together with tea gardens
thereon was acquired by the State Government for a public purpose viz., extension of Railway line.
The assessee received a compensation on compulsory acquisition of the land. Same was not offered
on grounds that the land in question was an agricultural land which was used for agricultural
purpose and, therefore, not a capital asset within the meaning of section 2(14). The assessee further
submitted that the compensation received on compulsory acquisition would be in the nature of
agricultural income within the meaning of section 10(1) and was therefore not liable to tax.

The Assessing Officer was satisfied with the claim of the assessee that the land which was
compulsorily acquired for which the assessee received compensation was an agricultural land and
such compensation would also assume the character of agricultural income and, therefore, not
chargeable to tax.

The Commissioner in exercise of his power under section 263 was of the view that order of the
Assessing Officer accepting the claim of the assessee was erroneous. According to the
Commissioner in the case of the assessee the agricultural land lost its character as agricultural land
after acquisition by the railways because they used the land acquired for non-agricultural purpose.
Therefore, the Assessing Officer ought not to have allowed exemption under section 10(1) on the
basis of the cases cited by the assessee before the Assessing Officer.

Cases Referred
CIT v. All India Tea & Trading Co. Ltd. [1979] 117 ITR 525 (Cal.) (para
5), CIT v. All India Tea & Trading Co. Ltd. [1996] 219 ITR 544/85 Taxman 391 (SC) (para
5), PydahSuryanarayan Murthy v. CIT [1961] 42 ITR 83 (AP) (para 8) and D.L.F Housing &
Construction (P.) Ltd. v. CIT [1983] 141 ITR 806/9 Taxman 207 (Delhi) (para 9).
The assessee filed its return of income for A.Y.2012-13 in which he did not compute and
offer to tax the capital gain on compulsory acquisition of its agricultural land. In the course of
 50

assessment proceedings, the AO specifically called upon the assessee to explain as to why
capital gain on compulsory acquisition of a portion of the tea estate was not offered to tax.
The assessee vide its letter dated 17.12.2014 explained that the land in question was an
agricultural land which was used for agricultural purpose and therefore not a capital asset
within the meaning of section 2(14) of the Act. The assessee further submitted that the
compensation received on compulsory acquisition will be in the nature of agricultural income
within the meaning of section 10(1) of the Act and was therefore not liable to tax. The
following was the reply of the assessee to the AO :—
'Agriculture income arose due to compensation received on acquisition of Agricultural Land
Rs. 1,32,74,986 - We submit that we have been engaged in cultivation, manufacturing and
selling of tea. Our tea estate is located at:—
Harishnagar Tea Estate
P.O. Harishnagar Via Bishalgarh
Village - Gokulnagar
District - Sepahijala
Tripura (West) - 799 102
During the year under assessment, Government of Tripura has acquired the land used by us
for agricultural purposes. At the time of requisition by Tripura Government and also earlier to
that, the land was used by us for agricultural purposes. Hence the compensation received
amounting to Rs.1,36t47,685/- by Government of Tripura is purely agricultural income in the
meaning of Section 10( 1) and therefore, not liable to tax. Your honour will appreciate that
the undernoted legal Judgements are squarely applicable in our present case :

(i) In CIT vs. All India Tea and Trading Co. Ltd. (1979) 117 ITR 525 (Cal),

It was held that as the land in question was agricultural land which was being used for
agricultural purposes, the amount or compensation paid on its acquisition was not
taxable under the head "Capital gains" as the said land was not a capital asset.

(ii) In CIT v. All India Tea & Trading Co. Ltd. (1996) 85 Taxman 391/219 ITR 544,
Hon'ble Supreme Court has held "Where land of assessee - tea company was
requisitioned by state Government and same was given to refugees and at the time of
requisition assessee was carrying on agricultural operation of land, compensation
received by assessee was to be treated as agricultural income since such compensation
clearly had the character of rent or, in any case, had to be regarded as revenue derived
from the land. Therefore compensation paid for acquisition of land by State
Government can only be regarded as agricultural income which admittedly is not
taxable."

In the light of above legal position, we submit that we have rightly claimed the compensation
received by state of Tripura on acquisition of our agricultural land amounting to
Rs.1,32,74,986 (Rs.1,36,47,685 less cost of land Rs.3,72,699) as not taxable under section
10(1) of I.T. Act, 1961.'
 51

4. The AO passed an order u/s 143(3) of the Act dated 18.12.2014 in which he did not bring
to tax any capital gain. It means that the AO was satisfied with the claim of the Assessee that
the land which was compulsorily acquired for which the Assessee received compensation was
an agricultural land and such compensation will also assume the character of agricultural
income and therefore not chargeable to tax.
5. The CIT in exercise of his powers u/s 263 of the Act was of the view that order of the AO
accepting the claim of the Assessee as stated in para-4 above was erroneous and prejudicial to
the interest of the revenue. The crux of the order of CIT is that the assessee in the course of
assessment proceedings before the AO took a stand that the amount received by it on
compulsory acquisition of land was not liable to tax under the head 'Capital gain' on the
ground that the Hon'ble Calcutta High Court in the case of CIT vs.All India Tea Trading
Ltd. [1979] 117 ITR 525 held that agricultural land which was used for agricultural purpose
and which are acquired and for which compensation is paid cannot be brought to tax under
the head 'capital gain' as agricultural land cannot be regarded as capital asset and the sum
received was in the nature of Agricultural income not chargeable to tax. The Hon'ble
Supreme Court also confirmed the view of the Hon'ble Calcutta High Court in the case
of CIT vs.All India Tea Trading Ltd. [1996] 219 ITR 544/85 Taxman 391 (SC). According to
the CIT in the decision rendered by the Hon'ble Supreme Court it was noticed by the Hon'ble
Supreme Court that refugees from Bangladesh had occupied agricultural land on which
agricultural operations were carried on. The Government acquired these lands and gave the
lands so acquired to the refugees who occupied those lands. The refugees also continued to
carry on agricultural operations over the land on which they encroached. Thus in this
circumstances the Hon'ble Supreme Court held that compensation received on compulsory
acquisition is not chargeable to tax under the head 'capital gain'. According to the CIT in the
case of the assessee the agricultural land lost its character as agricultural land after acquisition
by the railways because they used the land acquired for non agricultural purpose. The CIT
was therefore of the view that the AO ought not to have allowed exemption u/s 10(1) of the
Act on the basis of the cases cited by the assessee before the AO. The followed were the
relevant observations of CIT :—
"I have carefully considered the arguments of the assessee. Reliance placed by assessee on
the decision of Hon'ble Supreme Court in the case of vs.All India Tea Trading. Ltd. is of no
help, because the facts of this case are different. In the case of assessee, the character of the
land change after acquisition. Whereas in the case of vs.All India Tea Trading Ltd., the land
was being utilized for agricultural purpose both before and after its acquisition. Therefore, I
hold that exemption u/s. 10(1) has been incorrectly allowed by the A.O, thus making the
assessment order erroneous and prejudicial to the interest of revenue.
I, therefore, set aside the assessment order u/s. 263 and direct the A.O to complete the
assessment again after disallowing exemption u/s. 10(1).
After conducting the inquiries & verification as directed above, the AO should pass a
speaking order, providing adequate opportunity of being heard to the assessee.
The impugned order u/s.143(3) 18/12/2014 is accordingly, set aside and assessment should be
done as per above directions."
6. Aggrieved by the order of CIT the assessee has preferred the present appeal before the
Tribunal.
 52

7. We have heard the submissions of the ld. Counsel for the assessee, who submitted that
order of the AO accepting the claim of the assessee that compensation received by the
assessee on compulsory acquisition of its agricultural land is not chargeable to tax cannot be
termed as erroneous or prejudicial to the interest of the revenue. In this regard the ld. Counsel
pointed out that in the decision of the Hon'ble Supreme Court in the case of vs.All India Tea
Trading Ltd. (supra) the Hon'ble Supreme Court while dealing with the facts of the case
observed that the agricultural land which was being used for agricultural purpose even after
its being acquired, the amount of compensation paid on its acquisition was not chargeable
under the head 'capital gains' as the said land was not a capital asset. The Hon'ble Supreme
Court further observed that "It is clear, therefore, that at no point of time or at least till its
acquisition the land lost its character of agricultural land." The ld. Counsel submitted that the
above observations have been wrongly construed by CIT as a condition imposed by the
Hon'ble Supreme Court that the land acquired should continue to be agricultural land prior to
acquisition and after acquisition. It was submitted by him that this wrong approach adopted
by CIT has resulted in coming to the conclusion that order of the AO was erroneous and
prejudicial to the interest of the revenue. It was his submission that the Hon'ble Calcutta High
Court in its decision in the case of vs.All India Tea Trading. Ltd. (supra) has summarised its
opinion on this issue as follows :—

' Having discussed all the cases cited at the Bar, we will now summarise our opinions in
the following terms:

(i) The words "held by-an assessee" in Section 2(4A)of the 1922 Act include physical,
actual, constructive and also symbolic possession of a property of any kind;

(ii) A land is an agricultural land if it is used for agricultural purposes and, briefly
speaking, an income derived from such land by agriculture. is an agricultural income ;

(iii) Though ownership is a property, any land from which the income derived is an
Agricultural income is not a capital asset;

(iv) If no agricultural income. can be derived by an assessee from an agricultural land

in the accounting year or for some time for any reason beyond his control, such land
does not automatically cease to be an agricultural land;

(v) Where the assessee is the owner of an agricultural land and he uses it for
agricultural purposes and derives agricultural income from it, any profits or gains
arising from the sale, transfer, acquisition, etc., of such land is not taxable under the
head "Capital gains". for such land is not a capital asset;

(vi) Even where any person other than the assessee uses an agricultural land belonging
to the assessee for agricultural purposes with or without the consent of the assessee and
such person derives agricultural income from it, any profits or gains arising from the
sale, transfer, acquisition, etc., of such land is not taxable under the head "Capital
gains" in the hands of the assessee; and
 53

(vii) The land is a capital asset where it is not used for agricultural purposes, for there
cannot be any question of deriving any agricultural income from it, and any surplus
arising from its sale, transfer or acquisition, etc., is taxable under the head "Capital
gains",

We will now restate only those facts which are relevant for our purposes. The assessee
used those lands for agricultural purposes and derived agricultural income from those
land at the time of their requisition in'1949. Those lands were being used by the
landless people after requisition for agricultural purposes who were also deriving
agricultural income from those lands at the time of their acquisition in 1959.

Therefore, at all material times those lands were agricultural lands and they were held
by the assessee as their owner although it lost their physical possession in 1949 by
requisition. Though the assessee was prevented from EARNING any agricultural
income from those lands due 'to the aforesaid requisition, those landless people by
using those lands for agricultural purposes actually derived agricultural income from
those lands in 1949.

In these circumstances, at no point of time those agricultural lands became capital

assets in the hands of the assessee and, accordingly, the contentions of Mr. Sengupta
must fail.'

8. It was submitted by him that the proposition laid down in para 27 of its judgment by the
Hon'ble Calcutta High Court does not impose a condition that even after acquisition
compulsory acquisition that the land should continue to be used for agricultural purpose. It
was therefore submitted by him that order of the AO was neither erroneous nor prejudicial to
the interest of the revenue. The ld. DR relied on the order of CIT and in particular on the
decision of the Hon'ble Andhra Pradesh High Court in the case of PydahSuryanarayan
Murthy vs. CIT [1961] 42 ITR 83.
9. We have given a very careful consideration to the rival submissions. We are of the view
that the CIT was not justified in invoking his jurisdiction u/s 263 of the Act in the facts and
circumstances of the present case. It is not disputed that up to the date of acquisition of the
land it was used by the assessee for the purpose of agriculture. It is also not disputed that the
other condition for regarding the property of the assessee that was acquired by the
Government as agricultural land within the meaning of Sec.2(14)(iii) of the Act is satisfied.
As we have already noticed, the definition of a capital asset u/s 2(14) of the Act does not
include agricultural land. Therefore if any income accrues on compulsory acquisition of
agricultural land it is to be regarded as agricultural income and not chargeable to tax under
the Act under the head 'capital gain'. 10. The main contention of the CIT in the impugned
order is that the land should continue to retain the character of an agricultural land even after
acquisition. Those observations were made in the context of distinguishing the decision of the
Hon'ble Andhra Pradesh High Court rendered in the case of PydahSuryanarayan
Murthy (supra). In the case of PydahSuryanarayan Murthy's case, the facts were that land of
the Assessee was requisitioned for military purposes and compensation was paid for use and
occupation of the land so requisitioned. The question before the Hon'ble Court was whether
such compensation can be regarded as Agricultural Income or not. The Hon'ble Court held
that after requisition by the military purpose, the land requisitioned was not used for
Agricultural purpose and therefore damages for use and occupation cannot be regarded as
 54

"Agricultural Income". The Hon'ble Delhi High Court in the case of D.L.F Housing &
Construction (P.) Ltd. Vs. CIT [1983] 141 ITR 806/9 Taxman 207 has held that there exists
distinction between the expression "compensation given under an award for requisition of the
property" and "compensation payable under Land Acquisition Act". The former is as case of
payment for use and occupation whereas the latter is for compulsory transfer of the property.
From the aforesaid observations it is clear that there is a distinction between requisitioning of
properties and compensation payable for acquisition of a property under the Land Acquisition
Act. The payment for use of an occupation of a property cannot be equated with the payments
made for acquisition of the property. In the former case only right to use and enjoy is
transferred whereas in the later case there is a complete transfer of the whole interest over or
complete ownership over the property. We are therefore of the view that the approach
adopted by CIT in the present case was not proper in law. Since the order of the AO is not
erroneous the CIT was not justified in invoking the jurisdiction u/s 263 of the Act. We
therefore quash the order u/s 263 of the Act and allow the appeal of the assessee.
10. In the result the appeal of the assessee is allowed.

III. Person:
(i)CIT Vs. Calcutta Stock Exchange Association Ltd., 36 ITR (SC). -1958 - .P. SINHA, J. L.
KAPUR AND M. HIDAYATULLAH, JJ.
The facts of this case, upon which the decision of the appeal depends, may shortly be stated
as follows: The respondent is a limited liability company incorporated on June 7, 1933, with
a view to taking over the assets and liabilities of an unincorporated association called
"The Calcutta Stock Exchange Association " and to carrying on the affairs of the stock
exchange which had been founded by that association. The principal object of the respondent
company is to facilitate the transaction of business on the Calcutta Stock Exchange. In view
of that objective, the company had to make rules and by-laws, regulating the mode and the
conditions in, and subject to, which the business of the stock exchange had to be transacted.
The company is composed of "members" who may be either individuals or firms, who,
except in the case of parties who had been members of the unincorporated association have to
be elected as such, and upon such elections have to acquire a share of the company and pay
an entrance fee. The members have to pay a monthly subscription according to the by-laws of
the company. Under the by-laws of the respondent company, members with a certain
standing, are allowed to have "authorized assistants", up to a maximum of six in number.
Such authorized assistants are permitted the use of the premises of the association and to
transact business therein in the names and on behalf of the members employing them. The
members have to pay an admission fee for such authorized assistants according to the
following scale:

"(a) for the first two assistants Rs. 1,000

(b) for the third assistant Rs. 2,000

(c) for the fourth assistant Rs. 3,000

(d) for the fifth assistant Rs. 4,000

(e) for the sixth assistant Rs. 5,000

 55

(f) for replacement Rs. 1,000"

The last item of replacement fee of Rs. 1,000 is meant to cover the fee for substituting one
assistant by another. Before these by-laws were amended with effect from July 10, 1944, a
member could have more than six such assistants, but the number was limited to six by the
new amendment which also provided that "Members who have more than six assistants, at
present, shall not be allowed any replacement unless the number of assistants in their firms
has come down to six (maximum fixed)." Rule (5), as amended, is in these terms:
"Every candidate applying for admission as assistant to a member must serve at least for one
year as a probationer in the firm of that member. A probationer must apply to the committee
(through the member in whose office he will serve as probationer) in such form as may be
prescribed by the committee by paying Rs. 100 as probationer fee which will not be refunded
in any circumstances."
It would, thus, appear that the rules relating to the admission of members' assistants, confer
the benefit upon those members only—either individuals or firms—who are qualified
according to the by-laws to have such assistants, and who have paid admission fees and pay a
monthly subscription in respect of each of them, besides their own dues, to the company. The
number of such assistants has been sought by the by-laws to be limited up to a maximum of
six, by imposing a progressively enhanced admission fee, apparently, with a view to
discouraging the employment of a large crowd of such "authorized assistants". The by-laws
also provide that "an authorized assistant shall not enter into any contracts on his own behalf
and all contracts made by him shall be made in the name of the member employing him and
such member shall be absolutely responsible for the due fulfilment of all such contracts and
for all transactions entered into by the authorized assistant on his behalf." It is also
contemplated by the by-laws that tickets have to be issued to the authorized assistants,
besides the members' tickets. The by-laws also contemplate that a member shall give to the
prescribed authority of the company, an immediate notice in writing, of the termination of the
employment by him of any authorized assistant, and on such termination, the right of the
assistant to use the rooms of the associaiton shall cease, and he shall not be at liberty to
transact business in the name and on behalf of his employer. The by-laws also make
provision for the supervision of the work of the authorized assistants to see that they function
within the limits of their powers, and do not transact business on behalf of persons or firms
other than those employing them.
During the accounting year 1944-45 (assessment year 1945-46), the respondent company
received from its members the sum of Rs. 60,750 as entrance fees, and the sum of Rs. 15,687
as subscription in respect of the authorised assistants. The company also received during the
aforesaid year, a sum of Rs. 16,000 as fees for putting the names of companies on the
quotations list. Unless a particular company's name is placed on the quotations list, no
dealings in respect of the shares of that company are permitted on the stock exchange. An
application has to be made by a member to place on the quotations list any company not
already included in that list, and, on approval by the prescribed authority of the company, the
name of the company thus proposed is included in the list upon payment of a certain fee. The
companies themselves cannot apply to the associaiton for such enlistment. The application
has to be made by a member, and has to be accompanied by a fee of Rs. 1,000, and it is only
after the necessary scrutiny and investigation into the affairs of the proposed company have
been made, that the enlistment applied for is granted. That is another source of income to the
respondent company. It is no more necessary to refer to another item of income, which was
admitted, during the course of the assessment proceedings in their appellate stage, to be liable
 56

to the payment of tax. We are, thus, concerned in the present controversy with the aforesaid
sums of Rs. 60,750, Rs. 15,687 and Rs. 16,000, which were held by the Income-tax Officer,
by his order dated March 27, 1946, to be liable to income-tax. The Income-tax Officer
rejected the contention raised on behalf of the assessee company that the authorised assistants
aforesaid were themselves members of the company, and that, therefore, the moneys received
from them were exempt from taxation. He also held that though the respondent company was
a mutual association, each one of the three items of income, referred to above, was
remuneration definitely related to specific services performed, and was thus chargeable to tax
within the meaning of section 10(6) of the Act. On appeal, the Appellate Assistant
Commissioner, by his order dated June 30, 1947, considered the points at great length, and
came to the conclusion that the authorised assistants were not members or substitute
members. He held that the authorised assistants were more than representatives of the
members who employ them, and they transact business on their behalf, and that
the association had framed rules and by-laws regulating the admission, supervision and
discontinuance of such authorized assistants. For coming to this conclusion, he relied upon
the decision of the Bombay High Court in the case of Native Share
and Stock Brokers' Associaiton v. Commissioner of Income-tax [1946] 14 ITR 628 . The case
was then taken up in appeal to the Income-tax Appellate Tribunal, which dismissed the
appeal. The Tribunal agreed with the finding of the taxing authorities that the authorised
assistants were not members of the company within the meaning of the articles
of association of the company, and that their position was analogous to that of the "authorised
clerks in Native Share and Stock Brokers' Association at Bombay". In the course of its order,
the Tribunal observed as follows:
"The provision made in the regulations of the company by which a member can take
advantage of sending his authorized assistants to the company for transacting the business in
the member's name is nothing but giving extra facilities to the members. By controlling the
institution of authorized assistants the company renders specific services to the members and
in particular to the member whose assistants work for him. The amounts received by the
company from these sources are clearly covered by the provisions of section 10(6)."
At the instance of the assessee, the Tribunal stated a case and referred the following questions
of law to the High Court for its decision under section 66(1) of the Act:

"(1) Whether on the facts of this case the Income-tax Appellate Tribunal was right in
holding that authorized assistants were not members of the company and as such the
amounts of Rs. 15,687 and Rs. 60,750 received from them as subscriptions and
entrance fees respectively should be included in the assessable income?

(2) Were these amounts received for specific services performed by the association or its
members within the meaning of sub-section (6) of section 10 of the Indian Income-tax
Act?

(3) Whether the sums of Rs. 16,000 and Rs. 600 were remuneration definitely related to
specific services performed by the association for its members within the meaning of
sub-section (6) of section 10?"

The reference was heard by a Division Bench consisting of Sir Trevor Harries, C.J., and
Banerjee, J., of the Calcutta High Court. Before that Bench, certain concessions were made. It
was conceded by Dr. Pal, who also appeared before that Bench, that the authorized assistants
 57

were not members of the company. It was also agreed at the bar, on behalf of both the parties,
that the two sums of Rs. 60,750 and 15,687 were not received from the authorized assistants,
as suggested in the question formulated, and that it was common ground that they were
received from members of the association in respect of their authorized assistants. Therefore,
the High Court took the view that the questions framed by the Tribunal did not arise, and that
the Tribunal had proceeded on a wrong basis of facts. The High Court, therefore, re-cast the
questions in these terms:
"Whether in the facts and circumstances of this case the Income-tax Appellate Tribunal was
right in holding that

(a) the amounts of Rs. 15,687 and Rs. 60,750 received from the members of
the association as subscriptions and entrance fees in respect of authorized assistants,
and

(b) the amounts of Rs. 16,000 and Rs. 600 received as fees for enlisting names of newly
floated companies and for recognition of changes in the styles of firms respectively

should be included in the assessable income of the assessees."

The Tribunal was asked to re-state a case upon the questions as re-cast, extracted above.
Accordingly, the Tribunal drew up a fresh statement of the case and resubmitted it to the
High Court. On this re-statement of the case, the matter was heard by a Bench consisting of
Chakravartti, C.J., and Sarkar, J. The High Court considered the terms of section 10(6) of the
Act, and came to the conclusion that the case had not been brought within those terms. The
High Court, in the course of its opinion, observed that though the assessee was undoubtedly a
trade association, it did not perform any specific services for its members for remuneration. It
then examined in detail the decision of the Bombay High Court in the case of Native Share
and Stock Brokers' association v. Commissioner of Income-tax [1946] 14 ITR 628 relied upon
by the Department, and observed that the differences pointed out between the case in hand
and the case decided by the Bombay High Court were ''not vital, though they are not
immaterial", but it was not prepared to take the same view of the facts of this case, as had
been taken by the Bombay High Court in the case referred to above, or by the Travancore-
Cochin High Court in the case of Commissioner of Income-tax v. Chamber of Commerce,
Alleppey [1955] 27 ITR 535 . The High Court accepted the argument of Dr. Pali which is also
addressed to us, that the words. "performing specific services for" were far stronger and more
definite than the words "render service to", and that those words meant the actual doing of
definite acts in the nature of services. The court further observed that those words meant
"execute certain definite tasks in the interests and for the benefit of the latter (that is to say,
the members) under an arrangement of a direct character". It further observed that the words
"for remuneration" and "definitely related to those services" meant that "certain specific tasks
must be performed or functions of a specific character must be discharged for payment and
such payment is to be made to the association as wages for its labour in respect of those tasks
or functions." In this connection, it may be added that the High Court also made the
following observations bearing on the construction of the crucial words of section 10(6):
"When section 10(6) speaks of a trade, professional or other similar association performing
specific services for its members for remuneration, it contemplates, I think, services in regard
to matters outside the mutual dealings for which the association was formed and for the
transaction of which it exists as a mutual association. If performance of functions even in
 58

regard to matters within the objects of the association as a mutual association be performance
of specific service within the meaning of the sub-section, discharge of no function can be
outside it and everything done would be specific service performed. That, I do not think, is
what the sub-section means and intends."
It is. manifest that unless the assessee is brought within the terms of subsection (6) of section
10, the three items of income coming into the hands of the association, would not be
chargeable to income-tax. That sub-section is in these terms:
"(6) A trade, professional or similar association performing specific services for its members
for remuneration definitely related to those services shall be deemed for the purpose of this;
section to carry on business in respect of those services, and. the., profits, and gains
therefrom, shall be. liable to tax accordingly."
It has to be observed at the outset that the performing of the services of the description
mentioned in that sub-section, may not, but for the words of that section, have amounted to
carrying on business in respect of those services. The use of the word "deemed" shows that
the Legislature was deliberately using the fiction of treating something as business which
otherwise it may not have been. It is also noteworthy that the sub-section is couched in rather
emphatic terms. We have, therefore, to examine the terms of the sub-section to see whether
the three sums of money in question, or any of them, are or is within the ambit of those terms.
The words "performing specific services", in our opinion, mean, in the context, "conferring
particular benefits" on the members. The word "services" is a term of a very wide import, but
in the context of section 10 of the Act, its use excludes its theological or artistic usage. With
reference to a trade, professional or similar association, the performing of specific services
must mean conferring on its members some tangible benefit which otherwise would not be
available to them as such, except for payment received by the association in respect of those
services. The word "remuneration", though it includes "wages", may mean payment, which,
strictly speaking, may not be called "wages". It is a term of much wider import including
"recompense", "reward", "payment", etc. It, therefore, appears to us that the learned Chief
Justice was not entirely correct in equating "remuneration" with "wages". The sub-section
further requires that the remuneration should be "definitely related" to the specific services.
In other words, it should be shown that those services would not be available to the members
or such of them as wish to avail themselves of those services, but for specific payments
charged by the association as a fee for performing those services. After these observations
bearing on the interpretation of the crucial words, we shall now examine each of the three
items of income, separately, to determine the question whether they answer, or any of them
answers, the description of "services" contemplated by the sub-section.
Firstly, the sum of Rs. 60,750 has been realised from such members as applied for and
obtained permission of the association to have the use of authorized assistants within the
precincts ofstock exchange. There cannot be the least doubt that unless those members paid
the prescribed entrance fees for one or more authorized assistants up to a maximum of six,
they could not have the benefit thus conferred upon such members. Ordinarily, a member has
to transact business in the precincts of the association by himself or by his business partner if
there is a firm; but if that member is a very busy person, and wishes to avail of the services of
authorized assistants, he has to pay the prescribed fee. A member of the association, with the
advantage of mutuality, so long as he transacts business within the precincts of
the association, by himself or by his partner in the case of a firm, is not required to pay any
such entrance fee but only the fee payable by every member as such. The entrance fee, thus,
is clearly chargeable only from such of the members as avail themselves of the benefit
 59

conferred by the rules of the association in that behalf. The entrance fee is, thus, a price paid
for the services of the association in making suitable arrangements for an absentee member to
transact business on his behalf and in his name by his representative or agent. The entrance
fee in question, therefore, cannot but be ascribed to the specific services rendered by
the association in respect of authorized assistants who thus become competent to transact
business on behalf of their principal.
Coming next to the sum of Rs. 15,687 which was realised from the members by way of
subscription in respect of their authorized assistants, it is clear that this sum consists of the
contributions severally made by the members periodically, so as to continue to have the
benefit conferred by the association of having the use of their representative or agent even
during their absence. There cannot be the least doubt that this is a very substantial benefit to
those members who found it worth their while to engage the services of authorized assistants.
A member is not obliged, as indicated above, to have such an assistant, but the fact that he
chooses to have such an assistant on payment of the prescribed fee or subscription, itself, is
proof positive that a businessman, who ordinarily thinks in terms of money, has found it
worthwhile to have the services of an assistant by making an additional payment to
the association by way of recompense for the benefit thus conferred upon him.
Lastly, the sum of Rs. 16,000 represents fees received from members for allowing their
application for enlisting the names of companies not already on the quotations list, so that the
shares and stocks of these companies may be placed on the stock market. As already
indicated, it is not the company concerned which has directly to pay this fee, but the fee has
to be paid by the member who initiates the proposal and, apparently, finds it worth his while
to pay that prescribed fee to the association. He would not make the payment unless he found
it worth his while to do so. Apparently, such a member is interested in placing the stocks of
that company on the market. It cannot, therefore, be denied that that sum of money is
definitely related to the specific services performed by the association, namely, to permit
transactions in respect of the shares of the company concerned, which services would not
otherwise be available to the members as a body or to the individual member or members
interested in that company.
In our opinion, therefore, each one of the three sources of income to the association accrues
to it on account of its performing those specific services in accordance with its rules and by-
laws. Each one of the three distinct sources of revenue to the association is specifically
attributable to the distinct services performed by the association for its members or such of
them as avail themselves of those benefits. And each one of those services is separately
charged for, according to the rate or schedule laid down by the rules and by-laws of
the association. In our opinion, therefore, the requirements of sub-section (6) of section 10
have been fulfilled in the present case.
But we have yet to deal with the last argument accepted by the High Court, with reference to
the terms of sub-section (6) of section 10, namely, that the services contemplated therein have
reference to "matters outside the mutual dealings for which the association was formed". In
the first place, there is no warrant for limiting the application of the words used by the
Legislature, in the way suggested. Secondly, the mutuality of the association extends only to
such benefits as accrue to every member on the payment made by him to the association, but
even if additional items of payment have to be made for additional services to be performed
by the association only for such of the members as avail themselves of those benefits, it
cannot be said that the mutuality extends to those additional benefits also. It is, in our
opinion, equally wrong to suggest that the services in question should have been outside the
 60

objects of the association; If the association renders services to such of its members as avail
themselves of such services as are not within the scope of the business activities of
the association, those benefits, if any, would not be conferred by the association as such,
because the association has to function within the scope of its objects of incorporation.
Hence, on a true construction of the provisions of the sub-section in question, we have come
to the conclusion that the facts and circumstances of the present case bring the three items of
income of the association within the taxing statute. In our opinion, the decision of the Bench
of the Bombay High Court, consisting of Stone, C.J., and Kania, J. (as he then was), in the
case of Native Share and Stock Brokers' Association v. Commissioner of Income-tax [1946]
14 ITR 628 , is correct, and the facts of that case run very parallel to those of the case in
hand, though there may be minor differences in the rules and by-laws of the association then
before the Bombay High Court. In that lease, as in the present one, the rules of
the Stock Brokers' association (the Bombay Stock Exchange) contemplated a definite scheme
for allowing members to employ authorized clerks and for the admission, conduct, control
and supervision of those clerks, for the benefit primarily of the members who employed
them. It was held by the High Court that the income received by the association by way of
fees in respect of those authorized clerks was within the taxing statute and liable to income-
tax. After examining in detail the provisions of the rules and the bylaws of the association,
Stone, C.J., made the following observations (at page 633) which are equally applicable to
the rules and by-laws of the association in the present case:
"In my judgment these rules lay down a definite scheme and provide an organised
arrangement, controlled and supervised by the association for the benefit of its members. In
my opinion the carrying of their scheme into effect is performing services for its members by
the Associaiton. No doubt the benefit of the scheme would redound to the benefit of all
members since all would have the advantage of disciplined supervision exercised over the
authorised clerks and remisiers of the others. I do not think that because the payment for the
carrying of the scheme is provided for only by members who avail themselves of the use of
the authorised clerk it makes any difference. "
Kania, J. (as he then was), in a separate but concurring judgment, made the following very
pertinent observations (at page 634):
"A perusal of the rules referred to in the judgment of the learned Chief Justice shows that the
institution of authorised clerks exists for the benefit only of those who pay remuneration of
Rs. 100 instead of going to the market and carrying on their business themselves. Individual
members are permitted to work through an agent For that the-.charge is made. The rules
provide for the application and grant for such permission, registration of the authorised clerks
on the individuals being recognised as clerks of particular members, supervision over the
work of such clerks and particularly to; prevent them from registering contracts either in their
own name or in the name of another member; and a general supervision over their good
behaviour is contemplated..."
"A question was raised as to whether these are specific services to be performed for particular
members or whether the rules amount to performance of duties towards members in general.
It is true that several of the services to be rendered may be helpful to the other members for
their business. Taken as a whole I consider that as a performance of services by
the association for the benefit of members who pay the remuneration."
 61

We have made these copious quotations from the judgment of the Bombay High Court,
because, in our opinion, they truly apply the provisions of sub-section (6) of section 10
to associations like the one before us.
The other case to which our attention was drawn is Commissioner of Income-tax v. Chamber
of Commerce, Alleppey [1955] 27 ITR 535 . The facts of that case are not similar to those of
the case before us, but the ratio decidendi of that case are relevant. That case referred to the
Alleppey Chamber of Commerce. The Chamber inaugurated a produce section with the
object of promoting the interests of merchants in general, and of those engaged in the produce
trade, in particular; of acting as arbitrators and collecting and publishing information relating
to the produce trade. Members were admitted to the produce section on payment of admission
fees, monthly fees and contributions at certain prescribed rates. The question which was
referred to the High Court was whether the receipts by way of fees and contributions could be
chargeable under section 10(6) of the Act, and it was answered in the affirmative.
Though cases in England, by way of precedent for the decision of the case in hand, have not
been cited at the bar, apparently because the scheme of the income-tax law in England is
different and the words of the statute are not in parimateria, yet there are some cases which
throw some light on the controversy before us. For example, the case of Carlisle and Silloth
Golf Club v. Smith [1912] 6 Tax Cas 48 related to a golf club which was not incorporated. It
was admittedly a bona fide members' club, but under one of the terms of its lease, it had to
admit non-members to play on its course on payment of "green fees" at certain prescribed
rates. Those fees were paid by non-members. Receipts from those fees were entered in the
general accounts of the club, thus showing an annual excess of receipts over expenditure of
the club as a whole. It was held by Hamilton, J. (as he then was), that the club carried on a
concern or business in respect of which it received remuneration which was assessable to
income-tax. He pointed out that the receipts from non-members went to augment the funds of
the club, and the revenue thus received was applied for the purposes of the club—towards its
general expenditure. The case was taken up to the Court of Appeal, and the decision of that
court is reported in the same volume at page 198. The Court of Appeal affirmed the decision
and dismissed the appeal.
The judgment of the King's Bench Division in Liverpool Corn
Trade association Limited v. Monks [1926] 10 Tax Cas 442, was based on facts which are
similar to the facts of the present case. In that case, the Liverpool Corn
Trade association Limited was an incorporated body under the Companies Act, with the
object, inter alia, of protecting the interests of the corn trade, and of providing a clearing
house, a market, an exchange, and arbitration and other facilities to the trade. Membership of
the association was confined to persons engaged in the corn trade. Each member was required
to have one share in the company, and had to pay an entrance fee and an annual subscription.
Non-members could also become subscribers. Payments were made to the association by
members and others for services rendered through the clearing house, etc. The assessee was
taxed on the excess of its receipts over expenditure. On appeal to the Special Commissioner's,
they upheld the assessment. One of the points raised before the Special Commissioners was
that transactions with its members were mutual ones, and that any surplus arising from such
transactions was not a profit assessable to income-tax. On appeal, the High Court agreed with
the determination of the Special Commissioners, and held that any profit arising from
the association’s transactions with members was assessable to income-tax as part of the
profits of business, and that the entrance fees and subscriptions received from members must
be included in the computation of such profits.
 62

It was suggested that the service in this case, if any, was extremely trivial and the
remuneration which was large was for that reason not definitely related to the service. It was
held by Upjohn, J., in Bradbury (H. M. Inspector of Taxes) v. Arnold [1957] 37 Tax Cas
665,669, that the extent of the services was of no materiality. There, the question was being
dealt with under Case VI of Schedule D of the Income Tax Act, 1918. The learned Judge
observed:
"There is no doubt that a contract for services may, and clearly does, form a matter for
assessment under Case VI of Schedule D, and not the less so that the services to be rendered
are trivial or that they are to be rendered once and for all so that the remuneration may be
regarded as a casual profit arising out of a single and isolated transaction."
The same view was expressed by Harman, J., in Housden (Inspector of
Taxes) v. Marshall [1958] 3 All ER 639. In that case, a well-known jockey contracted with a
newspaper company to make available to its nominee "reminiscences of his life and
experiences on the turf for the purpose of writing a series of four articles", and to provide
photographs, press cuttings, etc. He was paid £ 750. The question was whether this amounted
to sale of property, or was a payment for services rendered. It was held that it was the latter,
and that it did not matter if the service rendered was trivial.
In view of what we have said above as to the nature of the service which
the association performed in respect of the assistants, the payment of the fee was definitely
related to that service. It is, therefore, plain that the case fell within section 10(6) of the Act.
It must, therefore, be held that the question referred to the High Court should have been
answered in the affirmative, and that the High Court was in error in giving its opinion to the
contrary.
The appeal must, accordingly, be allowed with costs here and below.
(ii)CIT Vs. Bombay Oilseeds & Oil Exchange Ltd., 202 ITR pp.198, 206, 210 (Bom.)-1993 -
DR. B.P. SARAF AND U.T. SHAH, JJ.
Facts
The assessee— Bombay Oil
Seeds & Oil Exchange Ltd., —is a company incorporated under section 26 of the Indian
Companies Act, 1913. It runs an Exchange for transacting business in oil, oil seeds, etc.
Under its Bye-law No. 331(1), it is entitled to charge on each transaction of sale 'lagas',
i.e., cess at the stipulated rates. Bye-law 331(f) authorises the Board, subject to the approval
of the general meeting, to decide the manner and method of distribution and/or utilisation
and/or apportionment and/or proportion of distribution of the money recovered as laga or
cess under these bye laws and other bye-laws and/or contract, terms or forms. In pursuance of
this power the general meeting of the members of the assessee held on 6-6-1959 resolved that
one-third of the amount of laga received be credited to the reserve fund of the Exchange, that
50 per cent of the remaining two-thirds be credited to Shubhkam Fund, that 25 per cent of the
two-thirds be paid to Patan Pinjra Pole. Article 105 of the Articles of Association of the
Company provides that the property, capital and income of the Exchange whensoever derived
shall be applied solely towards the promotion of the objects of the company and no portion
thereof shall be paid by way of bonus or otherwise to the members, except as provided in
articles 7 and 111 and except in the case of the winding up of the Exchange. Article 7 relates
to the deposits made by members. Clause (a) thereof provides for payment of interest at a rate
to be fixed by the Board not exceeding ½ per cent on the deposits made by members while
 63

sub-clause (2) provides that a member shall not be entitled to withdraw the deposit so long as
he continues to be a member of the Exchange. Article 111 provides that on the winding up of
the Exchange, if there are any surplus assets left after the payment and discharge of the debts
and liabilities of the Exchange, such surplus assets shall be equally divided amongst all
members, who had paid in full all the amounts due to the Exchange and who were on the
register of members on the day of the commencement of winding up.
Since the incorporation of the company till 9-1-1963, there was only one category of
membership. On 10-1-1963, the articles of the company were amended to add new classes of
members called associate members or special associate members. On 25-7-1963, the articles
were again amended so as to omit these additional categories of members. In the assessment
year 1963-64, there was no special associate member. There was one associate member who
had not paid any sum by way of laga. In the assessment years 1964-65 and 1965-66, there
was neither any associate member, nor any special associate member. The assessee received
by way of laga a total amount of Rs. 1,01,740, Rs. 71,645 and Rs. 90,461 in the three years
under consideration. In its assessment under the Act, the assessee claimed that
the laga receipts did not constitute its income on the principle of mutuality. The ITO did not
accept this contention of the assessee and held that the principle of mutuality was not
satisfied in the case of the assessee. He, therefore, assessed the laga receipts in the assessable
income of the assessee in all the three assessment years and subjected the same to tax.
At the instance of the revenue the Tribunal has referred the following three questions of law
to this Court for opinion:
"1. Whether, the Tribunal erred in holding that the decision of the Bombay High Court in the
assessee's own reference for the assessment year 1949-50 concluded the question of
assessability of laga receipts against the revenue?
2. Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding
that the test of mutuality was fully satisfied with regard to laga receipts?
3. Whether, on the facts and in the circumstances of the case, laga receipts were income
assessable to tax?"
The submission of counsel for the assessee, on the other hand, is that the decision of this
Court in the assessee's own reference for the assessment year 1949-50 is fully applicable to
the case of the assessee for the years under reference. According to him, the question whether
the laga receipts were liable to tax or not stands concluded by the above decision of this
Court, (Reference No. 33 of 1952). In the alternative, the submission of the counsel is that on
the facts the principle of mutuality is fully applicable to the assessee's case inasmuch as there
is a complete identity between the contributors to the fund and participators thereof. It was
pointed out that under the bye-laws of the assessee-company all the transactions put in by the
members through the Exchange (assessee) were liable to laga and in the event of dissolution
all the members without any reservation were entitled to share in the distribution of the
surplus. Article 111 of the Articles of the Association of the company was referred to in
support of this argument. It was, therefore, submitted by the counsel for the assessed that
even if it were to be assumed for the sake of argument that there were some members who
did not transact any business and, therefore, did not pay any laga, the fact remained that they
had a right to contribute laga by putting through the transactions and there was no
impediment in the way of their right to contribute laga by putting through the transactions.
He relied upon the decision of this Court in the case of Surat District Cotton Dealers'
Association (supra). Counsel submitted that the decision of this Court in East India Chamber
 64

of Commerce Ltd.'s case (supra) did not apply to the facts of the present case. He further
pointed out that the identity of the participators in the common fund has to be considered with
reference to the position prevailing at the time of the ultimate winding up of the company and
not with reference to the position obtaining at an interim stage. It was submitted that the
distribution of laga receipts to various funds was caused by common consent of all the
members and they were always free to cancel the same and pass a fresh resolution as they
liked. The use of the laga receipts for the various purposes set out in the resolution, according
to the learned counsel, in fact, amounted to notional receipt of the said fund by each member
individually and collective utilisation thereof by the members for the purposes laid down in
the resolution. Counsel further submitted that so long as the laga receipts were used with the
full consent of all the members, objection cannot be levelled that the participators were not
the members who contributed to the common fund. By way of alternative argument, the
learned counsel also submitted that the entire amount received by the assessee by way
of laga having been spent for various purposes already decided by the members by resolution
passed as far back as in the year 1959, there was a diversion of income by overriding title and
that being so, nothing was left with the assessee for the purpose of assessment even if it was
held that the receipts in question amounted to income in the hands of the assessee.
9. We have carefully considered the rival submissions. Before we deal with the principle of
mutuality, the essence thereof and the question as to whether the facts necessary for the
application of the said principle exist in the case of the assessee, it may be expedient to deal
with two other submissions, viz., the effect of the decision of this court in the assessee's own
reference for the assessment year 1949-50 and the contention based on diversion of income
by overriding title.
10. So far as the decision of this Court dated 6-3-1953 in the assessee's own case for the
assessment year 1949-50 (which is numbered as Reference No. 33 of 1952 and reported in
Unreported Income-tax Judgments of the Bombay High Court, Book One at page 211) is
concerned, we find that the said judgment has not laid down any law of general application. It
was rendered on the facts of the case before the Court. In that case, the limited question
before the Court was whether the sum of Rs. 1,76,097 received by the assessee byway
of laga was liable to tax under section 10(6) of the Indian Income-tax Act, 1922
[corresponding to section 28 (iii) of the 1961 Act]. It was noticed by this Court that in order
to bring the receipt by way of laga to tax under section 10(6) it was necessary for the
department to establish that the association performs specific services for its members for
remuneration and that the receipts in question related to such specific services rendered by
the association to its members. As in the aforesaid case the taxing authorities had failed to
find any specific service, it was held that resort cannot be had to section 10(6) of the 1922
Act. This judgment, thus, does not lay down any proposition of law of general application.
Besides, the question in the aforesaid case being limited to the applicability of section 10(6)
of the 1922 Act, the question whether the receipts otherwise amounted to income under the
general principles of law under section 10(1) of the 1922 Act [corresponding to section 28(i)
of the 1961 Act] did not arise for consideration and, as such, the same was not decided by the
Court. This view of ours also gets support from the later decision of this Court in East India
Chamber of Commerce Ltd.'s case (supra). In this case, this Court first considered the
question whether tax was payable on laga receipts under section 10(6) of the 1922 Act and on
perusal of the facts having come to a conclusion that the case did not fall under section 10(6),
considered the question whether the laga receipts were liable to tax under section 10(1) of the
1922 Act as business income and examined the same on the principle of mutuality.
 65

11. It is thus clear that the earlier decision of this Court in the assessee's own case did not
conclude the question of assessability of laga receipts in the case of the assessee in general.
The first question referred to us, therefore, has to be answered in the negative.
12. Next, we may consider the submission of the assessee regarding diversion of income by
overriding title. In the instant case there is no dispute that if the laga receipt constituted
income, it was received by the assessee. What the resolution of the members passed in the
General Meeting in 1959 purported to do was to decide how the amount received by the
assessee from laga had to be applied. It is well settled legal proposition that an obligation to
apply income which has accrued or arisen or has been received amounts merely to the
apportionment of the income and not to its diversion. An obligation to use the income in a
particular manner does not remove it from the category of income even if such obligation is
part of the original contract giving rise to the income. Once income has come into the hands
of the assessee, it will be liable to income-tax whatever may be its destination or to whatever
use it may be put. There is a clear distinction between an obligation to spend in a particular
manner attaching to an income and an obligation attaching to the source of an income. The
legal effects in the two circumstances are completely different. In the former, it will be an
application of income. In the latter, it is diversion. The object of the resolution passed by the
members in 1959 is to decide the manner of application of the laga receipts. It can be
modified or rescinded by the members at any time they like. This comes into force only when
the income is received by the assessee. It does not have the effect of diverting the income
before it reached the assessee. The principle of diversion of income by overriding title,
therefore, has no application to the facts of the present case.
13. We may now turn to the real controversy in the case before us. The controversy is
whether the amounts received by the assessee by way of laga constitute income of the
assessee under section 28(i ) of the Act. According to the assessee, it is not so because the
principle of mutuality applies. According to the revenue, the principle of mutuality has no
application. We have considered the principle of mutuality. The cardinal requirement to apply
the test of mutuality is that all the contributors to the common fund must be entitled to
participate in the surplus and that all the participators in the surplus must be contributors to
the common fund. In other words, there must be a complete identity between the contributors
and the participators. This Court in the case of Surat District Cotton Dealers'
Association (supra) considered the applicability of this principle to laga receipts by an
association of cotton dealers. It was observed:
"Now, with regard to the lagas, there can be no doubt on the facts that this is a mutual
association and mutuality has been established with regard to the lagas. The test of mutuality
...in that identity must be established between the persons contributing to a fund and the
persons entitled to the fund. Now.... it is true...........that the liability to pay lagas is only upon
the sellers, although......as far as the fund of the Association is concerned, it belongs to all the
members and all the members have the right to participate in it.... Now...........it is not
necessary for the purpose of this identity that there must be an actual contribution by all the
members. His sufficient if all the members have a right to make a contribution. From that
point of view, it is clear that every member of the Association may be a seller and can
be a seller, and if he is a seller he is bound to contribute to the fund. Therefore, it would not
be true to say that the right to participate in the fund by paying lagas is restricted to any
section of the Association..." (p. 129) [Emphasis supplied]
14. In the earlier decision of this Court is East India Chamber of Commerce Ltd.'s case
(supra) also, there was no dispute in regard to the tests applicable in such cases. Laga receipts
 66

in that case were held to be business income of the Chamber in view of the facts of the case,
which were entirely different. It was found in that case at page 802:
"...There is no subsisting right or subsisting obligation upon every member of this Chamber
to pay the laga. The obligation is only upon a certain class of members. With regard to the
others, the obligation to contribute to this fund would only arise provided they entered into a
transaction on behalf of a non-member. Therefore, they had to do something and some
condition had to be satisfied before they could become eligible to be contributors to this fund.
Therefore, at no time could it be said that all the members of the Chamber had a subsisting
right to be members of this fund or to be contributors to this fund. With regard to some there
was a subsisting right, with regard to others the right would only arise provided a particular
condition was satisfied. Let us look at it from another point of view. It is true that the
facilities afforded by this Chamber with regard to maintaining a ring, making arrangements
for delivery orders, etc., were open to all the members, but as far as the payment for these
facilities was concerned, it was only restricted to a section of the members. The other
members, although they availed themselves of the facilities, had no obligation to contribute to
this fund...." (p. 802)
It was in such circumstances that it was held by this Court at page 802:
"...Therefore, whichever way one looks at it, it is clear that the first essential of mutuality is
lacking in this case. Before we come to the question of participation in the fund, there must
be contribution by all the members to the fund in the sense in which we have just
indicated, viz., that there must be either an actual contribution or it should be open to every
member to make a contribution if he so intended and he could carry out his intention without
satisfying any condition or removing any impediment. Therefore, we are of the opinion that
the contention put forward by the assessee that the contributions received by its members and
which formed part of the laga fund could not be brought to tax on the ground that the
principle of mutuality came into play, cannot be accepted. In our opinion, it is a business
income of the Chamber under section 10(1) and to that extent we agree with the view of the
Tribunal...." (p. 802)
15. It is, thus, clear that there is no conflict between two decisions of this Court referred to
above. In the case of Surat District Cotton Dealers' Association (supra) the Court held
the laga receipts to be income as it found that all the members were not contributors to the
fund. It was on the basis of that finding that the conclusion regarding non-applicability of the
principle of mutuality and assessability of the laga receipts as income was arrived at by this
Court. In the latter decision, on perusal of the facts, this Court found that there was identity
between contributors and participators. It, therefore, held to the contrary. So far as the legal
principles are concerned, we do not find any conflict between the two decisions.
16. It may be expedient in this connection to refer to the decision of the Supreme Court
in CIT v. Kumbakonam Mutual Benefit Fund Ltd. [1964] 53 ITR 241. In this case, the Court
quoted with approval the cardinal requirement of principle of mutuality, as stated by Lord
Macmillan in Municipal Mutual Insurance Ltd. v. Hills [1932] 16 Tax. Cas. 430, that all the
contributors to the common fund must be entitled to participate in the surplus and that all the
participators in the surplus must be contributors to the common fund; in other words, there
must be complete identity between the contributors and the participators being satisfied. As in
the above case, on facts it was found that a shareholder in the assessee-company was entitled
to participate in the profits without contributing to the funds of the company, the Supreme
Court held that the test of mutuality was not satisfied.
 67

17. Reference may also be made to the decision of the Andhra Pradesh High Court
in CIT v. Merchant Navy Club [1974] 96 ITR 261 where a similar question came up for
consideration. In considering when the identity between contributors and the participators can
be said to be established, the Court said:
"...The contributors to the common fund and the participators in the surplus must be an
identical body. That does not mean that each member should contribute to the common fund
or that each member should participate in the surplus or get back from the surplus precisely
what he has paid. What is required is that the members as a class should contribute to the
common fund and participators as a class must be able to participate in the surplus. It is
immaterial whether the surplus is paid back to the members in cash or is put to reserve with
the club for its development and for providing better amenities to its members...." (p. 273)
18. We may now examine the facts of the present case in the light of the principles set out
above. In the instant case, it appears that bye-law 331(1) does not restrict the payment
of laga to a particular category of members only. This is clear from bye-law 331(a). Clause
(f) deals with the right of the members to decide the utilization of the receipts by way
of laga by the assessee. The said bye-law being relevant for the determination of the
controversy in the present case is set out below:
"331(a) Every member shall pay to the Exchange LAGA or CESS—
(i)On every hedge transaction of purchase and sale of all oil seeds of his constituent (whether
a member of the Exchange or not) at the rate of 5 paise per every transaction of purchase and
per every transaction of sale of 10 Metric Tonnes and every hedge transaction of purchase or
sale of Groundnut oil at the rate of 20 paise per 20 Metric Tonnes and every hedge
transaction of purchase or sale of Groundnut cake at the rate of 5 paise per 10 Metric Tonnes.
(ii)On every transaction (other than hedge) of purchase or sale of all oil seeds at the following
rates per every transaction of purchase and per every transaction of sale:
(a)50 paise per 25 Metric Tonnes.
(b)If less than 25 Metric Tonnes at 9 paise per every 50 bags or part thereof.
(f) The Board will, subject to the approval of the General Meeting, decide the manner and
method of distribution and/or utilization and/or apportionment and/or proportion of
distribution of the moneys recovered as Laga or cess under these bye-laws and under other
Bye-laws and/or contract terms or forms...."
It appears that in the instant case, the Tribunal, on consideration of the various submissions of
the assessee, recorded a definite finding of fact that all the members of the assessee in fact
contributed to the laga fund. That being so, it cannot be said that all the members were not
contributors. So far as participators are concerned, undisputed position is that all the members
of the exchange are the participators. Under the circumstances, evidently there is a clear
identity between the two - the contributors and the participators. On the fact of this finding of
the Tribunal, it is difficult to hold that there was no identity and that the principle of
mutuality did not apply. Moreover, whether all the members were contributors or not is
evidently a question of fact which has to be decided in each case by the authorities
concerned. In the instant case, there is a clear finding of the Tribunal to that effect which has
not been challenged. In that view of the matter it is not necessary to decide the question
whether all the members had the right to contribute or not because that will be purely
academic.
 68

19. In view of the foregoing discussion, we are of the opinion that the Tribunal was right in
holding that the test of mutuality was satisfied with regard to laga receipts in the case of the
assessee for the years under consideration and that in that view of the matter the said receipts
did not constitute income of the assessee, assessable to tax.
20. In the result we answer that first question referred to us in the negative, that is, in favour
of the revenue and against the assessee. We also answer second and third questions in the
negative but in favour of the assessee and against the revenue.
21. Under the facts and circumstances of the case, we make no order as to costs.
(iii)CIT Vs. Adarsh Co-operative Housing Society Ltd., 213 ITR pp.677, 694 (Guj.)-1995 –
SUSANTA CHATTERJI AND RAJESH BALIA, JJ.
Facts
It transpires from the material on record that the assessee is a co-operative society registered
under the Bombay Co-operative Soceities Act, 1925 ('the Act') . The said society acquired
from the Government of Bombay a licence of land extending to about 20 acres. In the year
1950 the said society itself had purchased about 37 acres of land. All the said land were fully
developed by the society laying roads and making provisions for various civic amenities.
The society allots plots of land and leases out the same to its members for a period of 998
years. Certain amount was collected from the individual members when they executed the
lease deeds in favour of the assessee Co-operative society. In appropriate cases
the society permitted disposition or devolution of the lease of any plot with any building
thereon under its regulations from any existing member to another who registered himself as
a member of the society. On such transfer of lease the existing member to whom the plot was
leased had to pay the society half of the premium amount, if any, received by him from the
purchaser. During the previous year relevant to the assessment year 1971-72, the assessee
received a sum of Rs. 23,600 on allotment of plots by lease to members and a sum of Rs.
40,335 being the half share of the excess received by members on transfer of the lease from
themselves to others. Returns and revised returns were filed for the assessment year and the
ITO concerned brought the aforesaid amounts to tax. It was found, inter alia, that the co-
operative society was carrying on the business of providing houses to its members which
involved incidental activities like buying and selling of land, transfer of land, providing loans
to members for construction of houses, the society itself constructing the houses, etc. The
activity of transfer of lease resulting in half the excess being received by the assessee also
constituted part of the societ’s business. It was interpreted as income of the society under the
head 'Other sources'.
The AAC, however, accepted the claim of the assessee as to the non- taxability and allowed
the appeals finding that the land was purchased long back some time in 1960 and the plots
were leased out for 998 years and the society is taking lump sum amount fixed by the
Managing Committee from time to time. Technically the ownership remains with the society.
Against the judgment of the appellate authority an appeal was preferred before the Tribunal.
The Tribunal by a detailed judgment after referring to several reported decisions, held that
any receipt arising out of capital asset will not be liable to tax as a revenue receipt. It was
found by the Tribunal that the society eager to retain and continue all its members as
members can scarcely forecast when a member would transfer his lease to another or whether
he would ever do so; that there is no certainty that the transfer would result in an excess and
not a deficit for the transferor. Both types of receipts were found not taxable in the hands of
 69

the assessee. The appeals preferred by the revenue authorities were dismissed. In the back-
ground of such facts and circumstances, the above questions have been referred for the
opinion of the High Court.
Questions before High Court

Whether, on the facts and in the circumstances of the case, the Tribunal was right in
coming to the conclusion that the assessee can be regarded as a mutual body and that
as such its income is not liable to tax ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in
coming to the conclusion that the amount received by the assessee from its members
on allotment of lands by lease was not liable to be taxed on the principles of
mutuality ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in
coming to the conclusion that the amount received by the assessee being 50 per cent
of the excess amount from its members on transfer of lands by such members was not
liable to be taxed as income of the assessee ?"

Mr. Mihir Thakore, the learned counsel appearing for the applicant- revenue, has argued at
length that on the facts and circumstances of the case the Tribunal has committed a grave
error in not appreciating the principles of law which can be applicable to the facts of the case
for effective adjudication of the matter in dispute. Our attention has been drawn to the
decision in the case of Municipal Mutual Insurance Ltd v. Hills (H. M. Inspector of Taxes) 16
Tax Cases 430. At page 444, it has been considered that the question at issue was whether the
annual surplus arising from employer's liability insurance or miscellaneous insurance
business done with fire policy holders forms profits and gains subject to income-tax. So far as
the facts of that case are concerned, it will appear that the main business of the company was
that of fire insurance but since 1913 a progressively increasing miscellaneous business had
been undertaken. In 1918, the company started the business of employers' liability insurance
which had developed on an extensive scale. It is stated that they were exempted by the Board
of Trade from the statutory deposit in respect of the latter business on satisfying the Board
that their business under this head was that of mutual insurance of the members. By 1922, the
annual net premiums both from the miscellaneous business and from the employers' liability
business exceeded those from the fire business. Thereafter about one-half of the policies
issued by the company were held by fire policyholders on the fire policy register and one-half
by other persons, and about one-quarter of the total net premium received by the company
was paid in respect of fire policies. In view of such facts it was held that the surplus on
employers' liability and miscellaneous business done with fire policyholders did not arise
from mutual insurance.
6. Mr. Mihir Thakore, by reference to the said decision, developed his argument that the facts
of the present case do not indicate the existence of 'mutuality'. The original contributor
making the contribution walks out; that there is cession of 'mutuality'. While developing his
points of submissions he has relied upon the decision in the case of CIT v. Kumbakonam
Mutual Benefit Fund Ltd. [1964] 53 ITR 241 (SC). In the said case the assessee, a mutual
benefit fund, was a company incorporated under the Companies Act, 1882, and was limited
by shares. Since 1938, the nominal capital of the assessee was Rs. 33 lakhs divided into
shares of Re. 1 each. It carried on banking business restricted to its shareholders, i. e. , the
 70

shareholders were entitled to participate in the various recurring deposit schemes of the
assessee or to obtain loans on security. Out of the interest released by the assessee on the
loans which constituted its main income, interest on the recurring deposits aforesaid was paid
as also all the other outgoings and expenses of management and the balance was divided
among the members pro rata according to their shareholdings after making provision for
reserves, etc. , as required by the memorandum of articles. The shareholders who were, thus,
entitled to participate in the profits need not have either taken loans or have made recurring
deposits. The question was whether the assessee was a banking concern assessable under
section 10 of the Indian Income-tax Act, 1922. It was held that it would be difficult to hold
that Styles v. New York Life Insurance Co. [1889] 2 Tax Cases 460 applies to the facts of the
said case. It was found that a shareholder in the assessee-company was entitled to participate
in the profit without contributing to the funds of the company by taking loans. He was
entitled to receive his dividend as long as he held a share. He was not to fulfil any other
condition. His position was in no way different from a shareholder in a banking company,
limited by shares. It was observed that the position of the assessee was no different from an
ordinary bank except that it lends money to and receives deposits from its shareholders; this
does not by itself make its income any-the-less income from business within section 10.
Accordingly, the answer to the question referred to the High Court was given in the
affirmative and the income was not exempt from taxation.
7. By referring to the decision in the case of English & Scottish Joint Cooperative
Wholesale Society Ltd. v. CIT [1948] 16 ITR 270 (PC), it was argued that the principle
of Styles' case (supra) cannot be applied to an association, society or company which grows
produce on its own land or manufactures goods in its own factories, using either its own
capital or capital borrowed whether from its members or from others and sells its produce or
goods to its members exclusively. Our attention has been drawn to the said case in depth and
details. In the said case, the appellant, the English and Scottish Joint Co-
operative Wholesale Soceity Ltd. , incorporated in the United Kingdom under the Industrial
and Provident Societies Act, 1893, had its objects the carrying on the business of planters,
growers, producers, merchants and manufacturers and brokers of tea. The soceity consisted of
two members and it owned a tea estate where tea was grown and manufactured. Except a
small portion of the produce, the Soceity’s output of tea was sold to its two members at
market rates. Each year the members paid to the society, by way of advances, sums of money
to meet the cost of tea to be supplied and the market prices of tea supplied to them were
debited against these payments. The supplies were recorded as sales to the members. Out of
the proceeds from the sales, the expenses of production and management and the interest on
loans were paid or provided. Under the rules of the Society, its net profits were applied (a) in
depreciation of land, building, live and rolling stock; (b) payment of interest not exceeding 6
per cent per annum on the share capital; (c) appropriation to a reserve fund; (d) appropriation
to a special fund for making grants as determined in general meeting; (e) payment of a
dividend to members rateable in proportion to the amount of purchases made by them from
the society; and (f) the remainder, if any, carried forward to the next account. The contention
of the society was that it was a mutual association whose transactions with its members were
incapable of producing a profit and it was not, therefore, liable to be assessed under the
Assam Agrl. Income-tax Act. On the aforesaid facts it was held that the society was not
exempt from liability to Assam Agrl. income-tax in respect of profits from the sale to its
members of tea cultivated or manufactured at its estate. Our specific attention is drawn to the
observations made on page 280 of the aforesaid judgment where, the case
of Thomas v. Richard Evans & Co. Ltd. [1927] 1 KB 33 was held by Rowlatt, J. , to fall
within the principle of Styles' case (supra) . The association was a purely mutual assurance
 71

association and the contributors and the assured persons were identical bodies; any surplus of
contributions over-payments to policyholders was ultimately returned to contributors.
Rowlatt, J. has observed as under :
" 'Where all that a company does is to collect money from a certain number of people - it
matters not whether they are called members of the company or participating policyholders -
and apply it for the benefit of those same people, not as shareholders in the company, but as
the people who subscribed it, then as I understand Styles 'case [1889] 14 App. Cas. 381, there
is no profit. If the people were to do the thing for themselves, there could be no profit, and the
fact that they incorporate a legal entity to do it for them makes no difference; there is still no
profit. This is not because the entity of the company is to be disregarded; it is because there is
no profit, the money being simply collected from those people and handed back to them, not
in the character of shareholders, but in the character of those who have paid it'. " (p. 280)
8. Mr. Mihir Thakore, the learned counsel, has emphasised that the principle of Styles' case
(supra) which has been quoted in depth and details in the case of CIT v. Shree Jari
Merchants Association [1977] 106 ITR 542, by the Division Bench of this Court has
considered that the leading and often quoted case on the subject of 'mutuality' is the English
case of Styles' case (supra) . The ratio of the said decision is stated by Lord Normand
in English & Scottish Joint Co-operative Wholesale Soceity Ltd. 's case (supra) . Relying on
the said decisions it was found by the Division Bench of this Court in the aforesaid case that
Shree Jari Merchants Association, Surat, the assessee, was an association registered as a trade
union under the Trade Unions Act, 1926. The association was not a trading association. It
was only a trade association which did not work for profit but did work for common good of
its members and for preservation of the business interest of Jari industry. For the assessment
years 1962-63 to 1964-65, the Tribunal held that the assessee was a 'mutual concern' and the
annual subscription and entrance fee received by it from its members did not fall within the
ambit of the definition of the word 'income' and since the surplus of the assets of the assessee
after deducting the expenditure was to be returned to the members, the said surplus was not
liable to tax. On a reference at the instance of the revenue, it was held that a mutual
association is an AOP who agree to contribute funds for some common purpose mutually
beneficial and receive back the surplus left out of those funds in the same capacity in which
they made the contribution. Thus, they received back what was already their own. They
contribute not with an idea to trade but with an idea of rendering mutual help. The receipt
which comes back in their hands is not a profit, because no man can make a profit out of
oneself. Thus, the main test of mutuality is complete identity of the contributors with the
recipients. If such a mutual concern receives any income, the surplus of which goes back to
those who contributed the said income, it is not liable to tax because, on account of
the operation of the principle of mutuality, the income remains, in reality, the income of the
contributors. According to rule 38 of the Constitution of the assessee-association, the surplus
assets of the assessee shall, at the time of its dissolution, be used in the manner proposed in
the resolution passed by the association. Apparently, any resolution which might come up for
consideration in future would not necessarily provide for the distribution of the surplus assets
only amongst the members of the association. In case the assets of the association are not
liable to be returned to the members, the identity between the contributors and the recipients
would be lost. This would militate against the very basic principle of mutuality. This was,
therefore, not a case which would be governed by the principles of Styles' case (supra) . The
assessee was not a mutual concern and could not claim exemption from tax on that ground.
9. By referring to the aforesaid decisions and the facts of the present case, the contention of
the learned counsel for the revenue is that no relief is available to the assessee as found by the
 72

Tribunal and the appellate authority. It is submitted that looking to the principles
of Styles' case (supra) and the applicability of the same to the facts of the present case, as
found in the case of Shree Jari Merchants Association (supra) there is no mutuality and the
relief sought for by the assessee cannot be granted.
10. Mr. learned advocate general, appearing on behalf of the respondent- assessee, has
advanced a very lengthy argument indeed. He has submitted that the principle of law should
not be considered in a narrow sense of the term. The very principle as found by the reported
decisions should be considered on the facts and background of each case and in proper
perspective. By referring to the decision in the case of Thomas (supra), it was argued that in
the said case, the respondent-association was incorporated under the Companies Act as a
company limited by guarantee for the purpose of indemnifying its members (who are all coal
owners) and its members only, against liability for compensation in respect of fatal accidents
to workmen in their employment and for this purpose it had powers to accumulate funds.
There were no shareholders, but the members of the company, viz. , those protected by it,
were each liable to contribute a sum not exceeding 25 pounds in the event of its being wound
up. The funds of the association were built up from contributions made by its members in
proportion to the wages respectively paid by them. 'Ordinary calls' which are made annually
upon the members are paid into the general fund, which is the primary fund for the payment
of the company's liabilities for compensation and other expenses and each year the surplus in
that fund was transferred to the reserve fund to which 'extraordinary calls' made upon the
members were also credited. When recourse was necessary to the reserve fund, that fund was
to be deemed to belong to the members in the proportion of their respective contributions
thereto computed as prescribed, and the share in this fund of a member is returnable to him in
whole or part on the winding up of the company or his own retirement. The rights of a
member could not be transferred except to a person succeeding to or taking over a protected
mine or works, and a member remains liable for claims which accrued before he actually
retired. The association was assessed to income-tax under Schedule D in respect of the
surplus of the calls received from members and the income from its investments, over its
outgoings by way of indemnity payments and reinsurance and other expenses, but the Special
Commissioners on appeal discharged the assessment. The respondent-company in the first
case therein was a member of the association and claimed a deduction in arriving at its
business profits for income-tax purposes of the full amount of the calls paid by it to the
association. The Special Commissioners on appeal allowed the deduction. In those
circumstances it was held (1) in the Court of Appeal, that the payments made to the
association by members were entirely premiums for insurance and were admissible
deductions in computing the members' profits for assessment to income-tax, notwithstanding
that such payments were partly applied in accumulating a fund which might in certain events
be returnable to them wholly or in part. (2) In the House of Lords, that the surplus of the
association's income from calls on its members and from its investments over its expenditure
in meeting claims and reinsuring its risks did not constitute profit arising from a trade carried
on by the association and that it was accordingly not liable to income-tax in respect thereof.
In the said case also the decision in Styles' case (supra) was followed.
11. The learned counsel for the respondent-assessee has taken this Court to the orders of the
AAC and the order of the Tribunal and has also taken this Court through the principles
enunciated in the aforesaid cases and also referred to a decision in the case of CIT
v. Apsara Co-operative Housing Soceity Ltd. [1993] 204 ITR 622 (Cal.) . The Division
Bench of the Calcutta High Court, after considering the decisions in the cases
of CIT v. Madras Race Club [1976] 105 ITR 433 (Mad.), Shree Jari Merchants
Association (supra) , CIT v. Darjeeling Club Ltd. [1985] 153 ITR 676 (Cal.) and the Full
 73

Bench decision of the Patna High Court in CIT v . Bankipur Club Ltd. [1992] 198 ITR
261 observed, in connection with the transfer fee realised by the society for transfer of plots
by the Co-operative Housing Society, that the persons have to first become members of
the society before they can be entitled to get flats transferred in their names or become liable
to pay transfer fee and that the transfer fee realised is for the benefit of the members of
the society. The Soceity is a 'mutual concern' and the transfer fee is not income liable to tax.
In that case the assessee, a Co-operative Housing Society, which provided residential
apartments to the members of the society received a transfer fee amounting to Rs. 45,870 for
transfer of flats in the assessment year 1984-85. The Assessing Officer held that the receipt
was taxable as income and after deducting the administrative expenditure of the assessee,
estimated at Rs. 5,000, he included a sum of Rs. 40,870 as the assessee's income under the
head 'Income-tax other sources'. The Commissioner (Appeals) held that persons became
members of the Co-operative Housing Society first before they were entitled to get the flats
transferred in their names or were liable to pay the transfer fees, that there was an element of
mutuality in respect of the transfer fees and that, therefore, the receipt could not be subjected
to tax. The Tribunal upheld the order of the Commissioner (Appeals) on the ground that there
was no profit element in the transaction, that the assessee-society, under its regulations or
bye-laws, realised transfer fee from a member when the member intended to transfer the flat
to any other person, member or otherwise and the transfer fee was meant for the benefit of the
members of the society and not for business purposes. On a reference being made, the
Calcutta High Court held that in the said case the members formed themselves into a Co-
operative Housing Society for the purpose of having a Co-operative Housing Society and
there was no question of any profit element in such an association or in having a transfer fee.
The assessee- Co-operative Society was a mutual concern. Therefore, the transfer fee
received by the assessee for transfer of flats was not taxable income of the assessee.
According to the learned counsel appearing for the respondent-assessee, the facts of the
present case are very much similar to the facts of the case in the case of Apsara Co-operative
Soceity Ltd. (supra) before the Calcutta High Court, wherein the Calcutta High Court also
considered the decisions in the case of Shree Jari Merchants Association (supra) and,
accordingly, the answers had been given.
12. The entire spirit of the arguments of the learned counsel for the respondent-assessee is
that in the case of Co-operative Housing Soceity there is a mutual concern and by making the
contribution there is no walk out of the original member and by applying the principle
of Styles' case (supra), there may be on liquidation the consequence thereof as one of the
factors but such a factor does not stand in the way of looking into the features of each and
every case to appreciate the scope of 'mutuality'. Mutuality never ceases to exist and the tax
relief as sought for by the assessee is justified on the ground that the principle of Styles' case
(supra) is squarely applicable to the facts of the present case.
13. We have heard the learned counsels for the respective parties. To appreciate the question
in proper perspective we find the principle as to the 'mutuality' in the English cases is
effective. The decision in the case of Styles (supra), the ratio of this decision is stated by Lord
Normand in English & Scottish Joint Co-operative Soceity Wholesale Society Ltd's case
(supra) . For proper appreciation the ratio of the decision is quoted herein- below :
"From these quotations it appears that the exemption was based on (1) the identity of
contributors to the fund and the recipients from the fund, (2) the treatment of the company,
though incorporated, as a mere entity for the convenience of the members and policy-holders,
in other words as an instrument obedient to their mandate, and (3) the impossibility that
 74

contributors should derive profits from contributions made by themselves to a fund which
could only be expended or returned to themselves. " (p. 279)
This ratio in the English dealing case has been reviewed by the Supreme Court in the case
of CIT v. Royal Western India Turf Club Ltd. [1953] 24 ITR 551. In the said case, the
principle of law and/or ratio of the decision in Styles' case (supra) was accepted and in view
of the facts and circumstances of the case the principle of Styles 'case (supra) could not be
applied to the incorporated company which carried on the business of horse racing and
realised money both from members and from non-members for the same consideration,
namely, by giving of the same or similar facilities to all alike in course of one and the same
business carried on by it. In appreciating the principle laid down in Styles' case (supra), the
Supreme Court observed that the appellant in that case was an incor-porate company. The
company issued life policies of two kinds, namely, participating and non-participating. There
were no shares or shareholders in the ordinary sense of the term but each and every holder of
a participating policy became ipso facto a member of the company and as such became
entitled to a share in the assets and liable for a share in the losses. A calculation was made by
the company of probable death rate among the members and the probable expenses and
liabilities and calls in the shape of premia were made on the members accordingly. An
account used to be taken annually and the greater part of the surplus of such premia over the
expenditure referable to such policies was returned to the members, i. e. , (holders of
participating policies) and the balance was carried forward as fund in hand to the credit of the
general body members. The question was whether the surplus returned to the members was
liable to be assessed to income-tax as profits or gains. The majority of the Law Lords
answered the question in the negative. It will be noticed that in that case the members had
associated themselves together for the purpose of insuring each other's life on the principle of
mutual assurance, that is to say, they contributed annually to a common fund out of which
payments were to be made, in the event of death, to the representatives of the deceased
members. Those persons were alone the owners of the common fund and they alone were
entitled to participate in the surplus. It was, therefore, a case of mutual assurance and the
individuals insured and those associated for the purpose of meeting the policies when they
fell in and receiving the surplus, were identical and it was said that the identity was not
destroyed by the incorporation of the company. Lord Watson even went to the length of
saying that the company in that case did not carry on any business at all, which perhaps was
stating the position a little too widely as pointed out by Viscount Cave in a later case; but be
that as it may, all the noble Lords who formed the majority, were of the view that what the
members received were not profits but were their respective shares of the excess amount
contributed by themselves.
14. By looking at the principles laid down in Styles' case (supra), a leading English case, and
the acceptance of the said principles by the Supreme Court in the case of Royal Western India
Turf Club Ltd. (supra) we have to find out as to whether on the facts and circumstances of the
present case the test of 'mutuality' is satisfied or not and in that light the questions referred to
this Court will have to be answered.
We have also considered the scope of section 115 of the Gujarat Cooperative Societies Act,
1961, as is applicable in the present case. Section 115, which is relevant, is quoted hereunder
:
"115. Any surplus assets, as shown in the final report of the liquidator of a society which has
been wound up, shall not be divided, amongst its members but shall be devoted for any object
or objects provided in the bye-laws, of the society, if they specify that such a surplus shall be
 75

utilised for the particular purpose. Where the society has no such bye-law, the surplus shall
vest in the Registrar, who shall hold it in trust and shall transfer it to the reserve fund of a
new society registered with a similar object, and serving more or less an area which
the society to which the surplus belonged was serving :
Provided that, where no such society exists or is registered within three years of the
cancellation of the registration of the society whose surplus is vested in the Registrar, the
Registrar may distribute the surplus in the manner he thinks best, among any or all of the
following :

(a) an object of public utility and of local interest as may be recommended by the
members in general meeting held under section 114 or where the society has ceased to
function and its record is not available or none of its members is forthcoming, as the
Registrar thinks proper;

(b) a federal society with similar objects to which the cancelled society was eligible for
affiliation or, where no federal society exists, the Gujarat State Federal society; and

(c) any charitable purpose as defined in section 2 of the Charitable Endowments Act,
1890. "

15. The question comes up for consideration whether there is any statutory bar and/or
impediment to the concept of 'mutuality' in the cooperative society. However, we are not
called upon to consider this aspect having its large impact. Confining ourselves to the scope
of the facts of the present case and the questions referred to this Court in the present
reference, we find that section 115 indicates, inter alia, that any surplus assets, as shown in
the final report of the liquidator of a society which has been wound up, shall not be divided
amongst its members but shall be devoted for any object or objects provided in the bye-laws
of the society if they specify that such a surplus shall be utilised for the particular purpose.
Where the society has no such bye-law, the surplus shall be vested in the Registrar who shall
hold the same in trust and shall transfer it to the reserve fund of a new society registered with
a similar object and serving more or less an area which the society to which the surplus
belonged was serving. The scope as emphasised under section 115 gives room for various
consequences at the time of liquidation of the cooperative society. The fund may be expended
for the benefits of the members. If the scheme is considered in proper perspective, we may
appreciate that the principle that no one can make a profit out of himself is true enough but
may in its application easily lead to confusion. This aspect has been well considered in the
case of Kumbakonam Mutual Benefit Fund Ltd. (supra) . In distinguishing the facts of the
case in Royal Western India Turf Club Ltd (supra), the Supreme Court has laid down the
following principle :
"The principle that no one can make a profit out of himself is true enough but may in its
application easily lead to confusion. There is nothing per se to prevent a company from
making a profit out of its own members. Thus, a railway company which earns profits by
carrying passengers may also make a profit by carrying its shareholders or a trading company
may make a profit out of its trading with its members besides the profit it makes from the
general public which deals with it but that profit belongs to the members as shareholders and
does not come back to them as persons who had contributed them. Where a company collects
money from its members and applies it for their benefit not as shareholders but as persons
who put up the fund, the company makes no profit. In such cases where there is identity in
 76

the character of those who contribute and of those who participate in the surplus, the fact of
incorporation may be immaterial and the incorporated company may well be regarded as a
mere instrument, a convenient agent for carrying out what the members might more
laboriously do for themselves. But it cannot be said that incorporation which brings into
being a legal entity separate from its constituent members is to be disregarded always and
that the legal entity can never make a profit out of its own members. "
If the principle of law as to mutuality as found in Styles' case (supra) is considered in broader
horizon and the scheme under section 115 as stated above, is looked into, the scope for
reconciliation with the consequences after the dissolution or liquidation would be constituted
as one of the main factors but the same is not to be construed as a sine qua non to hold about
mutuality and in particular in the background of the facts and circumstances of the present
case.
16. Looking at the position of law as discussed above, the law appears to be well-settled that
where the assessee is found to be a mutual concern, the income which it receives from its
members is not liable to tax. This is founded on the principle that no one can make profit by
transacting with oneself. The primary condition of mutuality between the assessee and its
members is that the assessee who collects money from its members, must apply the same for
their benefit not as shareholders having interest in its profit but as a persons themselves who
have put up the fund by contributing to it. There must be a thread of agency for acting for the
contributors for achieving the objectives. In this connection the observations of the Supreme
Court in the case of Royal Western India Turf Club Ltd. (supra) are very much relevant.
17. For arriving at any conclusion as to the question of 'mutuality' between the assessee and
its members, the consistent tests applied since the Styles' case (supra) has already been
summarised. What is really required is that all the participants must contribute to the fund as
against merely entitled to contribute. It is also not necessary that the participants to surplus
need be the same individuals who have contributed but must bear the same character, namely,
contributor-member. A person who transfers his interest in the land acts while he is member.
It is only in his character as member he incurs liability to contribute to the society’s fund to
the extent provided in the bye-laws, subject to which only he was entitled to derive benefits.
The contribution on happening of the event is a must and is not mere entitlement to contribute
at his discretion. Therefore, the argument that contribution is not by a member who could
participate in surplus is of no consequence and deserves to be rejected. It is to be noticed at
pain of repetition that the identity of individuals as contributors and participants is not
essential but what is essential is the identity of character of contributors and participants.
When a person transfers his interest in land, the transferor goes out after paying the
contribution and purchaser enters as member in his place to derive the benefit of expenses
incurred by the society. It is to be appreciated in this connection that there is room for change
of the name of the member not only at the time of transfer but also in the case of devaluation
after demise of the original member. What is to be reckoned is that the character of the
contributor does not cease to exist in view of the nature of the enactment vis-a-vis the scheme
of the Act and the principle of 'mutuality' as propounded in the Styles' case (supra) , a leading
English case, as discussed earlier. Though it is contended that there is no participation in
surplus by the members because the surplus, remaining with the society in case of its
cancellation, does not return to contributors but is to be utilised for public purposes, the
question which arises is : what is meant by 'return' of what has been contributed to a common
fund ? Does it mean return of corpus of the fund or includes retention of control over corpus
to be used in consonance with the statute regulating the association, company or society, as
the case may be ? It is to be noticed that as per the findings of the revenue authorities the
 77

amount which is contributed by the outgoing member is in turn utilised by the society for
extending common amenities to the members. Thus, according to this finding the surplus of
any particular assessment year is utilised for extending amenities to members in succeeding
years. That is to say, such surplus during the existence of society returns to members by way
of deriving benefit from amenities provided by the society to its members by expending the
surplus. If inquiry is limited to the assessment year concerned, the test of return of surplus to
contributors, viz. , members, is satisfied on the revenue authority's own finding which is not
in dispute.
18. Our attention has been drawn to section 52 of the Bombay Co-operative Society’s Act
Act and section 115 of the Gujarat Co-operative Society’s Act which prohibits division of
surplus assets amongst its members. That is to say, corpus of fund is not divisible as such pro
rata between the members on the winding up of the society. However, that statute also
provides that such surplus shall be devoted to any object or objects provided in the bye-laws
of the society if they specify that such a surplus shall be utilised for a particular purpose.
Under bye-law No. 71, such surplus as is available after paying encumbrances is to be used
for public purposes as resolved by the general meeting called for the purpose and as approved
by the Registrar.
19. From the scheme of the Gujarat Co-operative Society’s Act, contained in sections 114
and 115 and bye-law No. 71, it is apparent that the control and power to use the surplus left
after paying the encumbrances remains with the members contributing. It is only on their
failure to exercise such power that the surplus vests in the Registrar for being used for some
public purpose and not otherwise. The phrase 'return of the surplus to contributors' in the
context of regulatory provisions as opposed to voluntary act of parties, cannot be construed in
the narrow sense of division of corpus, where the body of the members as a whole retains the
power and control over utilisation of surplus left at the time of dissolution or winding up,
though division of corpus is prohibited. It is return of corpus to members for its use. It is not
the requirement that return of corpus to members must be only for the purpose of division.
The fact that the members may in future abandon their power and may allow the surplus to be
vested in the Registrar cannot be a decisive factor in determining the present status of
'mutuality'. What is of the essence is: what is the ordinary consequence envisaged by
members within the framework of statute to deal with the surplus ? The right of the members
to deal with surplus is not destroyed but is only restricted to the extent that instead of dividing
the corpus, pro rata, it has been confined to utilisation or expending of the surplus for the
objectives as per their own decision. This does not detract from the concept of return of
surplus to members which they have contributed in making that fund. Although much
emphasis was laid on the decision in the case of Shree Jari Merchants Association
(supra), the facts are quite distinguishable. In that case, the members have voluntarily, by
framing bye-law No. 38, opened the possibility of division of surplus, in the case of
dissolution, amongst non-members, namely, non-contributors also. Thus, it was a case where
division of corpus was made open amongst non-contributors as well by voluntary act of
members themselves. Apart from above, the question as to what is the meaning of 'return of
surplus' was neither raised nor decided by the Court. It proceeded on the assumption that
'return of surplus' relates to 'return of corpus' to be shared by the members, pro rata. In that
view of the matter the principles of Styles' case (supra) was not applied and on the facts of
the said case the Court ruled out the application of principle of 'mutuality'. We find that the
facts of the present case do not attract the ratio of the decision in the case of Shree Jari
Merchants Association (supra) .
 78

20. We have considered the view taken by the Calcutta High Court in the case of Apsara Co-
operative Housing Society’s Ltd. (supra) wherein the decision in the case of Shree Jari
Merchants Association (supra) was also referred to. In all matters where the scope of
'mutuality' has to be considered, the particular case and the provisions of law as applicable
should not be lost sight of. With all anxiety and with great patience we have appreciated the
arguments advanced by the learned counsels for the respective parties. We have tried to
appreciate the facts of the present case and the provisions of law and the ratio of the various
decisions, as discussed above. Taking a broader view and regard being had to the facts of the
present case, we are of the opinion that the claim of 'mutuality' as per the arguments advanced
by the learned counsel for the respondent- assessee are more plausible and acceptable.
21. For the foregoing reasons we find that the view taken by the Tribunal is neither contrary
to nor inconsistent with the materials on record and the provisions of law as attracted thereby.
We, accordingly, answer question No. 1 in the affirmative, i. e. , in favour of the assessee and
against the revenue. Question Nos. 2 and 3 will follow the consequence and we, accordingly,
answer question Nos. 2 and 3 in the affirmative, i. e. , in favour of the assessee and against
the revenue. This reference, accordingly, stands disposed of with no order as to costs.
(iv) CIT Vs. Delhi Gymkhana Club Ltd., 155 ITR p.373 (Delhi)-2010 - A.K.
SIKRI AND MS. INDERMEET KAUR, JJ.
Facts

The assessee-company was running a recreational club for its members. It was allowed
exemption of income earned from its members on the basis of 'doctrine of mutuality'. The
case of the assessee was that the income from FDRs in bank, dividend income, income from
the Government securities and profit on sale of investments, etc., would also attract the
'doctrine of mutuality' and, therefore, no tax was payable thereupon. The Assessing Officer as
well as the Commissioner (Appeals) rejected the submission of the assessee. On second
appeal, the Tribunal held that the 'doctrine of mutuality' would apply even on the aforesaid
income.
2. After hearing the learned counsel for both the parties at length, we are of the opinion that
the aforesaid finding of the Tribunal is correct on facts and in law, which does not call for
any interference. The issue, in fact, stands covered by at least three judgments of this Court,
which are as under :
"(i) The DIT v. All India Oriental Bank of Commerce Welfare Society [2003] 130 Taxman
575 (Delhi). In this case, the members of the welfare society, who were the employees of the
Oriental Bank of Commerce had earned interest income on deposits made out of contribution
from the members of the society, i.e., the contributions which were given by the members of
the society, were kept in the bank and interest was earned therefrom. The revenue had
contented that as far as this interest income is concerned, the principle of mutuality would not
be attracted and that income would be exigible to tax. The Tribunal had negatived the
aforesaid contention of the revenue relying upon the judgment of the Supreme Court in the
case of Chelmsford club v. CIT [2010] 109 Taxman 215. This Court in the aforesaid
judgment had dismissed the appeal of the revenue thereby affirming the decision of the
Tribunal. The following para from the said judgment brings out the ratio of the case:
 79

"3. The issue with regard to the concept and principle of mutuality has been elaborately
examined by the Apex Court in Chemsford cLUB v. CIT [2000] 243 ITR 89. Their Lordships
have held that where a number of persons combine together contribute to a common fund for
the financing of some venture or object and in this respect have no dealings or relations with
any outside body, then any surplus generated cannot in any sense be regarded as profits
chargeable to tax. It has been observed that what is required to be seen is whether there is
complete identity between the contributors and participators. Once the identity of the
contributor to the fund of the recipients of the funds; the treatment of the company, though
incorporated as a mere entity for the convenience of the members, in other words as an
instruments obtained to their mandate; and the impossibility that the contributors should
derive profits from contributions made by themselves to a fund which could only be
expended or returned to themselves is established, the doctrine of mutuality is established."
There are three conditions for applicability of the principle of mutuality, which are discerned
from the aforesaid are as follows :

(a) Where a number of persons combine together contribute to a common fund for the
financing of some venture or object;

(b) They have no dealings or relation with any outside body; and

(c) Surplus generated are not spent for any other purpose accepting for the welfare of the
principles.

On this basis, the Court clearly held that even if there was an income earned by the society in
the form of interest by keeping the funds generated from the members in the bank, such
interest will not be treated as income allowable for tax.
(ii) CIT v. Talangang Cooperative Group Housing Society Ltd. [2010] 195 Taxman 110
(Delhi). In this case, the assessee was a cooperative housing society and its preliminary
activity was to collect money from their members for construction of flats/houses and
subsequently allot the same to them. There was no issue that on these contributions from the
members, no tax was payable and principles of mutuality would be applicable. However, it
was found by the Assessing Officer that certain income was derived from other than
construction activities, viz., equalization charges from new members, maintenance fund and
entry fee from power of attorney holders, interest on delayed payments and more
significantly (which would be relevant for our purposes) interests from bank from FDRs. All
these were not treated as taxable income by the Assessing Officer. This order of the
Assessing Officer was upheld by the CIT (A), but the Tribunal reversed the aforesaid orders
after applying the principle of mutuality and deleted the additions made by the Assessing
Officer. The Department filed an appeal against the order of the Tribunal in the Court, which
was dismissed.
Insofar as the income generated from bank deposits as well as FDRs is concerned, this Court
relied upon the judgment in the case of All India Oriental Bank of Commerce Welfare
Society (supra ) and held that the principle of mutuality would get attracted. It was also
observed that there was nothing on record to show that the amount collected by the assessee
had been diverted for any other purpose.
 80

(iii) CIT v. Standing Conference of Public Enterprises (SCOPE) [2010] 186 Taxman 142
(Delhi). In this case again, apart from income generated by the SCOPE from its members, it
was also found that the assessee had income in the form of deposits with banks and also in
the form of rent from house of convention centre and from letting out of the part of the
premises of the building occupied by it. Question arose as to whether the tax is payable on the
aforesaid income or that would be exempted on the application of principle of mutuality. The
Court held that the principle of mutuality would be attracted and no tax was payable even on
the income accrued to the assessee in the form of interest from deposit with bank or rent
charged from house of convention centre or from letting out on part of the premises. In the
process, this Court relied upon the judgment of the Supreme Court in the case
of Chemsford Club (supra) and All India Oriental Bank of Commerce Welfare
Society (supra ). In addition, number of other judgments were referred to and the principle of
mutuality was discussed and explained in depth. Following discussion from that judgment is
quoted herein :
"17. In Chelmsford Club [2000] 243 ITR 89 , the Supreme Court clarified that even if such a
association is an incorporated company, that would be immaterial if there is identity in
character of those who contribute and those who participate in surplus. They can be traced
out from the following observations :
"... where there is identity in the character of those who contribute and of those who
participate in the surplus, the fact of incorporation may be immaterial and the incorporated
company may well be regarded as a mere instrument, a convenient agent for carrying out
what the members might more laboriously do for themselves. Their Lordships have laid down
the three test before the principle of mutuality can be applied. In a nutshell, these tests are:

1. The identity of the contributors to the fund and the recipients from the fund.

2. The organization exists only for mutual benefit.

3. The funds can be expended for mutual benefit or returned to the contributors."

18. At this stage, we may also take note of the judgment of Gujarat High Court in the case
of Sports Club of Gujarat v. CIT where the Court held that the principle of mutuality is not
destroyed by the presence of transaction, which are non-mutual in character. This principle
can, in such case, be confined to transactions with members. The two activities, in
appropriate case be supported and the profits derived from non-members, can be brought to
tax.
19. In the present case, as already noted above, the respondent is incorporated as a society
and the main objective is to improve the purpose of public enterprises. The membership of
the society is open to public sector enterprises of Central/State Governments. It is, thus,
performed for the benefit of its members, which are public sector enterprises. It is not
indulging in any "commercial activities" in traditional sense, but is catering to the needs of its
members. In its building at Lodhi Road, New Delhi, it has convention centre which is
normally given to its members for functions. Likewise, other part of the premises are
available to the members for their use. Of course, for using convention centre as well as other
parts of the building, these members pay some charges which becomes additional source of
income. That by itself cannot be treated as commercial activity of the assessee.
In Bankipur club (supra), the Supreme Court held that if the dealings as a whole disclose the
 81

profit earning motives and are alike tainted with commerciality, only then principle of
mutuality would cease to apply. The principle in this behalf was discerned as under :
"We understand these decisions to lay down the broad proposition - that, if the object of the
assessee-company claiming to be a "mutual concern" or "club", is to carry on a particular
business and money is realised both from the members and from non-members, for the same
consideration by giving the same or similar facilities to all alike in respect of the one and the
same business carried on by it, the dealings as a whole disclose the same profit earning
motive and are alike tainted with commerciality. In other words, the activity carried on by the
assessee in such cases, claiming to be a "mutual concern" or "Members' club " is a trade or an
adventure in the nature of trade and the transactions entered into with the members or non-
members alike is a trade/business/transaction and the resultant surplus is certainly profit -
income liable to tax."
20. Thus, such company claiming to be mutual concern or club whose object is to carry on
particular business or where the income is generated from members and non-members
through the business carried on by it, then only it would be treated as tainted with
commerciality. Profit earning has to be the prime motive behind such activities, which are
business like activities. Obviously in the present case, this cannot be attributed to the
assessee. The Assessing Officer got influenced by the fact that the assessee had let out part of
the premises to its members and was receiving rents and also giving the convention centre to
non-members. That is not sufficient to clothe the activity of the assessee as commercial
activity, which is not the object with which the assessee-society is formed. Predominant
object is to render appropriate assistance and help to its members for improving their
performance and role. Thus, all the three ingredients laid down by the Supreme Court in
Chelmsford club would be applicable in the present case.
21. We may also refer to the judgment of the Calcutta High Court in the case of Dalhousie
Institute v. Asstt. Commissioner, Service Tax Cell, 2006 (3) STR 311. Though it was a case
where 'mandap' facilities were provided by the club to its members and the question of
service tax had arisen, the Calcutta High Court applied the principle of mutuality holding that
the aforesaid facilities provided by the club to its members for such functions cannot be
termed as commercial activity. Following observations are to be noted in this behalf :
"The principle of mutuality in this case is also squarely applicable, as going by the definitions
of mandap, mandap keeper and the taxable service, in this case the facility of use of the
premises to the members by its club cannot be termed to be a letting out nor the members of
the club using the facility of any portion of the premises for any function can be termed to be
a client. The services rendered by any person to his client presupposes the element of
commerciality and obviously this transaction must be involved with the third parties, as
opposed to the members of the club ."
Similar question was answered in the case of Saturday club Ltd. v. Asstt. Commissioner,
Service Tax Cell (2006) 3 STR 305 in the following manner :
"So far as the merit is concerned, law is well-settled by now that in between the principal and
agent when there is no transfer of property available question of imposition of service tax
cannot be made available. It is true to say that there is a clear distinction between the
'members club ' and 'proprietary club '. No argument has been put forward by the
respondents to indicate that the club is a proprietary club. Therefore, if the club space is
allowed to be occupied by any member or his family members or by his guest for a function
by constructing a mandap, the club cannot be called as mandap keeper, because the club is
 82

allowing his own member to do so who is, by virtue of his position, principal of the club . If
any outside agency is called upon to do the needful it may raise a bill along with the service
tax upon the club and the club as an agent of the members, is supposed to pay the same. The
authority cannot impose service tax twice once upon the people carrying out the business of
'mandap keeper' as well as the members' club for the purpose of using the space for
constructing or using it as 'mandap'. Therefore, apart from any other question possibility of
double taxation cannot be ruled out. If I explain my first query as above it will be crystal
clear that if a person being an owner of the house allows another to occupy the house for the
purpose of carrying out any function in that house it will not be construed as transfer of
property. But if such person calls upon a third party 'mandap keeper' to construct a 'mandap'
in such house then in that case such 'mandap keeper' can be able to raise bill upon the user of
the premises along with the service tax. Therefore, I cannot hold it good that
members' club is covered by the Finance Act, 1994 for imposition of service tax to use its
space as 'mandap'. So far as the other point is concerned whether the ratio of the judgments
can be acceptable herein or not I like to say 'yes it is applicable'. Income-tax is applicable if
there is an income. Sales tax is applicable if there is a sale. Service tax is applicable if there is
a service. All three will be applicable in a case of transaction between, two parties. Therefore,
principally there should be existence of two sides/entities for having transaction as against
consideration. In a members' club there is no question of two sides. 'Members' and ' club '
both are same entity. One may be called as principal when the other may be called as agent,
therefore, such transaction in between themselves cannot be recorded as income, sale or
service as per applicability of the revenue tax of the country. Hence, I do not find it is prudent
to say that members' club is liable to pay service tax in allowing its members to use its space
as 'mandap'."
3. Hence, in view of the aforesaid judgment of this High Court which binds us, we are of the
opinion that no question of law arises for consideration.
4. This appeal is accordingly dismissed.
(v) The Citizens Cooperative Society Ltd vs. ACIT Section 80p 2017 - A.K.
SIKRI AND ASHOK BHUSHAN, JJ.
FACTS

The assessee was a co-operative society. For relevant assessment year 2009-10, it was denied the
benefit of section 80P on the ground that it was carrying on the banking business for public at large
and for all practical purposes it was acting like a co-operative bank governed by the Banking
Regulation Act, 1949, and its operations were not confined to its members but to outsiders as well.
Hence, the Assessing Officer applied section 80P(4) to deny deduction and was of the view that
benefit of deduction, as contemplated under the said provision is, inter alia, admissible to those co-
operative societies which carry on business of banking or providing credit facilities to its members.

On appeal, the Commissioner (Appeals) following assessee's own case in assessment years 2007-08
and 2008-09 rejected the claim for deduction thereby upholding the order of the Assessing Officer.

On second appeal, the Tribunal upheld the order of the Assessing Officer.

On further appeal, High Court ruled in favour of the revenue.

 83

4. Section 80P was amended by the Finance Act, 2006 with effect from April 01, 2007 and
sub-section (4) was inserted thereto. This sub-section (4) reads as under:
'(4) The provisions of this section shall not apply in relation to any co-operative bank other
than a primary agricultural credit society or a primary co-operative agricultural and rural
development bank.
Explanation.— For the purposes of this sub-section, -

(a) "co-operative bank" and "primary agricultural credit society" shall have the meanings
respectively assigned to them in Part V of the Banking Regulation Act, 1949 (10 of
1949);

(b) "primary co-operative agricultural and rural development bank" means a society
having its area of operation confined to a taluk and the principal object of which is to
provide for long-term credit for agricultural and rural development activities.'

5. As would be seen from the facts hereafter, the appellant is a co-operative society.
However, it has been denied the benefit of Section 80P on the ground that it is a co-operative
society of the nature covered by sub-section (4) of Section 80P and, therefore, becomes
disentitled to get the benefit. The question, therefore, is as to whether the appellant is barred
from claiming deduction in view of Section 80P(4) of the Act. In order to ascertain the
answer to this question, relevant facts are enumerated hereinbelow:

(i) The assessee was established on May 31, 1997 initially as a Mutually Aided Co-
operative Credit Society having been registered, under Section 5 of Andhra Pradesh
Mutually Aided Co-operative Societies Act, 1995 with Registration No.
AMC/RR/DCO/9714 by Registrar of Mutually Aided Co-operative Societies, Ranga
Reddy. As operations of assessee over the years had increased manifold and as its
operations were spread over States of erstwhile Andhra Pradesh, Maharashtra and
Karnataka, the assessee got registered under the Multi State Co-operative Societies
Act, 2002 in terms of certificate dated July 26, 2005 issued by Office of Central
Registrar of Co-operative Societies, Krishi Bhawan, New Delhi.

(ii) The assessee is being assessed to income tax since its inception. It has been claiming
exemption under Section 80P of the Act which was being allowed by the Income Tax
Authorities. As per the assessee, in course of its operations, members deposit cash into
their accounts with the society and they withdraw the same. It is claimed that earlier,
none of Income Tax Authorities had pointed out that acceptance of deposits from its
members in cash and withdrawal thereof by them in cash would violate the provisions
of Sections 269SS and 269T of the Act. Sections 269SS and 269T of the Act relate to
mode of taking or accepting certain loans and deposits and their repayment
respectively.

(iii) The assessee as Co-operative Society and assessee under PAN No. AAAAT3952F had
filed return of income before Assistant Commissioner of Income Tax, Circle-9(I),
Hyderabad for the Assessment Year 2009-10, for the year ending March 31, 2009 on
 84

September 30, 2009 declaring NIL income. In the return filed for the Assessment Year
2009-10, year ending with March 31, 2009, the assessee claimed a sum of
Rs.4,26,37,081/- as deduction under Section 80P of the Act. Return filed by the
assessee was taken up for scrutiny under CASS (Computer Assisted Selection of Cases
for Scrutiny) and notice under Section 143(2) of the Act was issued. In response
thereto, books of account were produced by the assessee society and information called
for was submitted. The Assessing Officer had arrived at Rs.19,57,32,920/- as the net
amount of tax payable by the assessee in terms of his order dated December 19, 2011
by working out as hereunder:

Income Returned by the assessee : Rs. Nil

(After claiming deduction u/s 80P)

Add: Disallowance u/s 68 as : Rs.38,53,72,794/-

discussed in para no.2, 2.1 and 2.2
above

Add: Disallowance of deduction : Rs.4,26,37,817/-

claimed u/s 80P

Total assessed income : Rs.42,80,09,880/-

Tax there on : (as per computation Form

enclosed).

Tax payable : Rs.19,57,32,920/-

6. It may be pointed out that in the appeal before Commissioner of Income Tax (Appeals)
(CIT(A)), the order of the Assessing Officer making disallowance under Section 68 of the
Act was reversed and that addition was deleted. Therefore, we are not concerned with that
aspect of the mater which has attained finality.
7. Insofar as disallowance of deduction claimed under Section 80P of the Act is concerned,
the CIT(A) rejected the claim for deduction thereby upholding the order of the Assessing
Officer. While doing so, the CIT(A) followed the order of the Income Tax Appellate Tribunal
(ITAT) in the case of the appellant itself in respect of Assessment Years 2007-08 and 2008-
09. CIT(A) quoted the following discussion from the said order of the ITAT:
'22. For Assessment Year 2007-08 and 2008-09, we have to consider the amendment brought
out to the section with effect from 1.4.2007 by Finance Act, 2006 whereby section 80P(4)
was inserted. The amendment clearly barred all the cooperative banks other than primary
agricultural credit society or a primary cooperative agricultural and rural development banks
from claiming exemption under the section. The primary activity of the society is to provide
banking facilities to its members. The Society is dealing like a bank while accepting deposits
from its members. This issue was examined by the ITAT in the assessee's own case while
deleting the penalty u/s. 27ID and 27IE. The ITAT held as under:
"If the carrying on baking business is not approved by the RBI or the assessee is not having
requisite license to carry out the banking business, the authorities could have taken action
 85

against the society or stop the society activity. Once the assessee is allowed to carry on the
banking business, then the assessee is bound by the relevant provisions of the Banking
Regulations Act. The bank for all its banking activities is strictly governed by the Banking
Regulations Act, 1949."
23. The Society is carrying on the banking business and for all practical purpose it acts like a
co-op bank. The ITAT observed that the society is governed by the Banking Regulations Act.
Therefore, the Society being a co-op bank providing banking facilities to members is not
eligible to claim the deduction u/s. 80P(2)(i)(a) after the introduction of sub-section (4) to
Section 80P.
24. In view of the above, we are of the opinion that the society is not eligible to claim
deduction u/s. 80P(2)(a)(i). Therefore, we are of the opinion that the assessee is not entitled
for deduction u/s. 80P(2)(a)(i) for Assessment Year 2006-07, 2007-08 and 2008-09 and
allowed the ground raised by the Revenue and dismiss the ground taken by the assessee on
this issue.
5.2 The facts in the present appeal being identical, respectfully following the decision of the
ITAT in the assessee's own case for the preceding years, the appeal of the assessee is
dismissed on the issue of deduction u/s. 80P.'
8. Further appeal to the ITAT met the same fate as ITAT also referred to its aforesaid order
and dismissed the appeal of the appellant. Undeterred, the appellant approached the High
Court in the form of appeal under Section 260A of the Act. This appeal has been dismissed
by the High Court with the observations that there is no illegality or infirmity in the order
passed by the ITAT.
9. Referring to the provisions of Section 80P of the Act, Mr. V. Shekhar, learned senior
counsel appearing for the appellant, made a passionate plea to the effect that the entire
purport and objective to enact the said provision was to encourage and promote growth of co-
operative sector in the economic life of the country in pursuance of the declared policy of the
Government. This is so recognised by various judgments of this Court firmly laying down the
rule that a provision for direction, exemption or relief should be interpreted liberally,
reasonably and in favour of the assessee and it should be so construed as to effectuate the
object of the legislature and not to defeat it. He referred to the objects for which the assessee
society has been established and submitted that the principal object of the society is to
promote interest of all its members to attain their social and economic betterment through self
help and mutual aid in accordance with the co-operative principles and keeping in view the
same the assessee society can engage in certain specified forms of business stipulated in the
objective clause of the society. The purpose, therefore, was to promote the interest of its
members and, therefore, it cannot be said that primary object of the assessee is transaction of
banking business.
10. The learned senior counsel drew the attention of the Court to Section 5(b) of the Banking
Regulation Act, 1949, which defines 'banking business' as under:
'(b) "banking" means the accepting, for the purpose of lending or investment, of deposits of
money from the public, repayable on demand or otherwise, and withdrawable by cheque,
draft, order or otherwise.'
11. Predicated on the aforesaid definition, he submitted that banking business means
accepting for the purpose of lending or investment of deposits of money from the public
 86

repayable on demand or otherwise which is withdrawable by cheque, draft, order or

otherwise. According to him, the assessee was not accepting any money from the public,
except its members. Therefore, it was totally wrong on the part of the authorities below to
come to a conclusion that assessee was doing banking business as stipulated in the Banking
Regulation Act. It was also argued that in any case the assessee was not authorised and
competent to carry on any banking business without possessing a licence from the Reserve
Bank of India. He, thus, sought to draw the distinction between a co-operative bank and a co-
operative society in the following manner:

CO-OPERATIVE CO-OPERATIVE SOCIETY

BANK

Nature of 1. As defined in 1. As per bye laws of the

business Section 6 of Banking cooperative society.
Regulation Act.
2. Society is bound by rules
2. Banks are bound to issued by Reserve Bank of
follow the rules, India and regulations as
regulations and specified by (RBI), if any
directions applicable.

Inspection RBI has the power to Registrar has the power to

inspect accounts and inspect accounts and overall
overall functioning of functioning of the bank.
the bank.

Part V Part V of the Banking Part V of the Banking

Regulation Act is Regulation Act is not
applicable to applicable to cooperative
cooperative banks. societies.

Use of The word 'bank', The word 'bank', 'banker',

words 'banker', 'banking' can 'banking' cannot be used by a
be used by a cooperative society.
cooperative bank.

It was also pointed out that even Central Board of Direct Taxes – CBDT – vide circular No.
133/2007 dated 9.5.2007 had clarified that Section 80P(4) of the Act provides that deduction
shall not allowable to any Co-operative Bank other than Agricultural Credit Society or
Primary Co-operative Agricultural and Rural Development Bank. Submission was that since
the assessee does not fall within the meaning of Co-operative Bank as defined in Part-V of
the Banking Regulation Act, 1949 and Section 80P(4) will not, therefore, apply to the
assessee.
12. Continuing with the aforesaid line of argument, Mr. Shekhar further submitted that courts
below ought to have appreciated that purpose of exemption under Section 80P is to provide
employment of as much capital as possible for financing and extending the scope of fundings
etc. The true test for applying deduction under Section 80P of the Act is whether income
earned is attributable to the utilisation of circulating capital of the cooperative society
engaged in the activity of business of banking. Once the assessee had earned income from the
 87

loans advanced to various members, the income so related to the banking activities is liable
for exemption under Section 80P(2)(a)(i) of the Act. He submitted that this interpretation is
supported by various decisions of this Court. For this purpose, he referred to the decision of
this Court in CIT v. Bangalore Distt. Coop. Central Bank Ltd. [1998] 233 ITR 282/99
Taxman 404 wherein it was held that interest on Government securities and dividends earned
by a Co-operative Society engaged in banking business is eligible for deduction under
Section 80P of the Act, though said income was not earned from the credit facility provided
to its members. Also, in CIT v. Nawanshahar Central Cooperative Bank Ltd. [2012] 349 ITR
689/210 Taxman 263/25 taxmann.com 237 this Court held that a Co-operative Society
carrying a business of banking would be entitled for deduction under Section 80P of the Act.
Plea of the appellant was that if the intention of legislature was not to grant deduction under
Section 80P(2)(a)(i) to the cooperative societies carrying on the business of providing credit
facilities to its members, said provision would have been deleted from the Statute. According
to the learned senior counsel, the new proviso to Section 80P(4) which was brought onto
Statute Book is applicable only to cooperative banks and not to credit cooperative societies.
The intention of the legislature in bringing the cooperative banks into the taxation structure
was mainly to bring them on par with commercial banks.
13. Taking aid of the principle of mutuality, it was submitted that the assessee is a mutual
concern. Income derived by it from its operations is distributed among members. The
members are entitled to participate in the surplus, thereby creating an identity. Facilities are
provided only to members of the society, who provide funds to it and their identity with the
funds and their participation in the surplus arising from the said fund is unmistakably found
and thus principles of mutuality will apply. In order to apply principle of mutuality, there
must be complete identity between contributors and participators and requirement of law
bring that contributors of the common fund and participators in the surplus must be an
identical body. What is essential is that members of the assessee as a class must be able to
participate in the surplus. It is immaterial whether surplus is paid back to the members or is
put to reserve with the society for development and for providing better amenities to the
members. There is complete identity between the contributors and the participators of the
assessee.
14. On the basis of the aforesaid arguments, Mr. Shekhar pleaded that the appellant be held
entitled to the benefit of Section 80P of the Act.
15. In reply, Mr. Radhakrishnan, learned senior counsel appearing for the Revenue, submitted
that the findings arrived at by the authorities below to the effect that the activity/business of
the appellant, in essence, was that of a co-operative bank was based on the material on record
and needed no interference. In this behalf he not only relied upon the findings of the Tribunal
as per the discussion contained therein, but also submitted that these are findings of fact. The
Assessing Officer scrutinised the bye-laws of the appellants and in particular those bye-laws
which deal with the liability of membership etc. as well as provisions of Mutually Aided Co-
operative Societies Act, 1995 (MACSA) under which the appellant is registered. The
Assessing Officer found that the Act does not accept a person to be member of more than one
co-operative for the same services. Moreover, Section 19 of MACSA does not accept every
co-operative to be a panacea for all problems facing an entire population in an area and leaves
it to the members to decide how big they wish to grow and how much they can handle. After
analysing these provisions, following discussion ensued in the order passed by the Assessing
Officer:
 88

"As per the above provisions governing the conduct of the assessee, the assessee cannot
admit nominal members and deal with them. The main activities of the assessee are in
violation of the above provisions, as seen under:

(i) As per the information furnished, it was found that the assessee caters to two distinct
categories of people.

(ii) The first category is that of resident members or ordinary members.

(iii) The second category is that of nominal members, who make deposits with the assessee
for the purpose of obtaining loans etc.

(iv) This category of persons is neither members nor nominal/associate members.

(v) As noticed, the assessee accepts deposits mostly from the second category these
deposits are mostly kept in FDs.

(vi) With banks to earn maximum returns, a portion of these deposits are utilized to
advance gold loans etc. to members of the first category.

(vii) It is noticed that the assessee has fixed deposits of Rs.541699504.39 of Rs. As on
31.3.2007.

Therefore, the fixed deposits in banks are mostly out of funds received as deposits
from the second category of persons referred above.

(viii) As a class, the depositors and borrowers are quite distinct and the activity is finance
business and cannot be termed as cooperative activity.

(ix) The assessee is also engaged in the activity of granting loans to general public etc.
which has nothing to do with cooperation amongst members. It is plain business and
any willing buyer can utilize the services of the assessee.

(x) As understood, the assessee has not obtained any approval from the Registrar of
Societies either to accept deposits from nominal members (who are actually non-
members as the provisions of law referred above) as well as for conducting the
business of sale of stamps etc.

(xi) Therefore, both in form and substance, the activity is in violation of the Cooperative
Societies Act and Cooperative Society Rules.

(xii) Apart from the above, a cooperative credit society is not entitled for deduction u/s
80P(2)(a)(i) on the income from investment of surplus funds as per decision of IT at
Hyderabad Bench in ITA No. 1141/Hyd/2007 in the case of SBI Staff Mutually Aided
 89

Cooperative Society Ltd."

16. He submitted that there was a clear finding of the Assessing Officer, which was
consistently approved by the higher authorities as well, that provisions of Section 80P(2)(i)(a)
were grossly violated as the appellant Society was found not dealing with its members only
but also with general public as well. On that basis, further submission of Mr. Radhakrishnan
was that the principle of mutuality was missing in this case, which aspect was also discussed
in detail by the Assessing Officer. He, thus, contended that in view of the aforesaid findings,
no case for interference was made out by the appellant.
17. We have considered the submissions of the counsel for the parties with reference to the
record of this case.
18. We may mention at the outset that there cannot be any dispute to the proposition that
Section 80P of the Act is a benevolent provision which is enacted by the Parliament in order
to encourage and promote growth of co-operative sector in the economic life of the country.
It was done pursuant to declared policy of the Government. Therefore, such a provision has
to be read liberally, reasonably and in favour of the assessee (See – Bajaj Tempo
Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480 (SC). It is also trite that such a provision has
to be construed as to effectuate the object of the Legislature and not to defeat it (See –
CIT v. Mahindra & Mahindra Ltd. [1983] 144 ITR 225/15 Taxman 1 (SC). Therefore, it
hardly needs to be emphasised that all those co-operative societies which fall within the
purview of Section 80P of the Act are entitled to deduction in respect of any income referred
to in sub-section (2) thereof. Clause (a) of sub-section (2) gives exemption of whole of the
amount of profits and gains of business attributable to anyone or more of such activities
which are mentioned in sub-section (2).
19. Since we are concerned here with sub-section (i) of clause (a) of sub-section (2), it
recognises two kinds of co-operative societies, namely: (i) those carrying on the business of
banking and; (ii) those providing credit facilities to its members.
20. In the case of Kerala State Cooperative Marketing Federation Ltd. v. CIT [1998] 231 ITR
814/98 Taxman 313, this Court, while dealing with classes of societies covered by Section
80P of the Act, held as follows:
"6. The classes of societies covered by Section 80-P of the Act are as follows:
(a) Engaged in business of banking and providing credit facilities to its members;

** ** **

7. We may notice that the provision is introduced with a view to encouraging and promoting
growth of cooperative sector in the economic life of the country and in pursuance of the
declared policy of the Government. The correct way of reading the different heads of
exemption enumerated in the section would be to treat each as a separate and distinct head of
exemption. Whenever a question arises as to whether any particular category of an income of
a cooperative society is exempt from tax what has to be seen is whether income fell within
any of the several heads of exemption. If it fell within any one head of exemption, it would be
free from tax notwithstanding that the conditions of another head of exemption are not
satisfied and such income is not free from tax under that head of exemption..."
 90

21. In the case of CIT v. Punjab State Co-operative Bank Ltd. [2008] 300 ITR 24/169
Taxman 290, while dealing with an identical issue, the High Court of Punjab and Haryana
held as follows:
"8. The provisions of section 80P were introduced with a view to encouraging and promoting
the growth of the co-operative sector in the economic life of the country and in pursuance of
the declared policy of the Government. The different heads of exemption enumerated in the
section are separate and distinct heads of exemption and are to be treated as such. Whenever
a question arises as to whether any particular category of an income of a co-operative society
is exempt from tax, then it has to be seen whether such income fell within any of the several
heads of exemption. If it fell within any one head of exemption,.... It means that a co-
operative society engaged in carrying on the business of banking and a co-operative society
providing credit facilities to its members will be entitled for exemption under this sub-clause.
The carrying on the business of banking by a cooperative society or providing credit facilities
to its members are two different types of activities which are covered under this sub-clause.

13. So, in our view, if the income of a society is falling within any one head of exemption, it
has to be exempted from tax notwithstanding that the condition of other heads of exemption
are not satisfied. A reading of the provisions of section 80P of the Act would indicate the
manner in which the exemption under the said provisions is sought to be extended. Whenever
the Legislature wanted to restrict the exemption to a primary co-operative society, it was so
made clear as is evident from clause (f) with reference to a milk co-operative society that a
primary society engaged in supplying milk is entitled to such exemption while denying the
same to a federal milk co-operative society."
22. The aforesaid judgment of the High Court correctly analyses the provisions of Section
80P of the Act and it is in tune with the judgment of this Court in Kerala State Cooperative
Marketing Federation Ltd. (supra).
23. With the insertion of sub-section (4) by the Finance Act, 2006, which is in the nature of a
proviso to the aforesaid provision, it is made clear that such a deduction shall not be
admissible to a co-operative bank. However, if it is a primary agriculture credit society or a
primary co-operative agriculture and rural development bank, the deduction would still be
provided. Thus, co-operative banks are now specifically excluded from the ambit of Section
80P of the Act.
24. Undoubtedly, if one has to go by the aforesaid definition of 'co-operative bank', the
appellant does not get covered thereby. It is also a matter of common knowledge that in order
to do the business of a co-operative bank, it is imperative to have a licence from the Reserve
Bank of India, which the appellant does not possess. Not only this, as noticed above, the
Reserve Bank of India has itself clarified that the business of the appellant does not amount to
that of a co-operative bank. The appellant, therefore, would not come within the mischief of
sub-section (4) of Section 80P.
25. So far so good. However, it is significant to point out that the main reason for disentitling
the appellant from getting the deduction provided under Section 80P of the Act is not sub-
section (4) thereof. What has been noticed by the Assessing Officer, after discussing in detail
the activities of the appellant, is that the activities of the appellant are in violations of the
provisions of the MACSA under which it is formed. It is pointed out by the Assessing Officer
that the assessee is catering to two distinct categories of people. The first category is that of
 91

resident members or ordinary members. There may not be any difficulty as far as this
category is concerned. However, the assessee had carved out another category of 'nominal
members'. These are those members who are making deposits with the assessee for the
purpose of obtaining loans, etc. and, in fact, they are not members in real sense. Most of the
business of the appellant was with this second category of persons who have been giving
deposits which are kept in Fixed Deposits with a motive to earn maximum returns. A portion
of these deposits is utilised to advance gold loans, etc. to the members of the first category. It
is found, as a matter of fact, that he depositors and borrowers are quiet distinct. In reality,
such activity of the appellant is that of finance business and cannot be termed as co-operative
society. It is also found that the appellant is engaged in the activity of granting loans to
general public as well. All this is done without any approval from the Registrar of the
Societies. With indulgence in such kind of activity by the appellant, it is remarked by the
Assessing Officer that the activity of the appellant is in violation of the Co-operative
Societies Act. Moreover, it is a co-operative credit society which is not entitled to deduction
under Section 80P(2)(a)(i) of the Act.
26. It is in this background, a specific finding is also rendered that the principle of mutuality
is missing in the instant case. Though there is a detailed discussion in this behalf in the order
of the Assessing Officer, our purpose would be served by taking note of the following portion
of the discussion:
"As various courts have observed that the following three conditions must exist before an
activity could be brought under the concept of mutuality;
that no person can earn from him;
that there a profit motivation;
and that there is no sharing of profit.
It is noticed that the fund invested with bank which are not member of association welfare
fund, and the interest has been earned on such investment for example, ING Mutual Fund [as
said by the MD vide his statement dated 20.12.2010]. [Though the bank formed the third
party vis-a-vis the assessee entitled between contributor and recipient is lost in such case. The
other ingredients of mutuality are also found to be missing as discussed in further
paragraphs].
In the present case both the parties to the transaction are the contributors towards surplus,
however, there are no participators in the surpluses. There is no common consent of
whatsoever for participators as their identity is not established. Hence, the assessee fails to
satisfy the test of mutuality at the time of making the payments the number in referred as
members may not be the member of the society as such the AOP body by the society is not
covered by concept of mutuality at all."
27. These are the findings of fact which have remained unshaken till the stage of the High
Court. Once we keep the aforesaid aspects in mind, the conclusion is obvious, namely, the
appellant cannot be treated as a co-operative society meant only for its members and
providing credit facilities to its members. We are afraid such a society cannot claim the
benefit of Section 80P of the Act.
28. This appeal, therefore, fails and is hereby dismissed with costs.
 92

CIT Vs. Royal Western India Turf Club Ltd., 1954 AIR 85, 1954 SCR 289 - Sastri,
M. Patanjali (Cj), Das, Sudhi Ranjan, Bose, Vivian, Hasan, Ghulam, Bhagwati,
Natwarlal H.
Facts

The assessee, the Royal Western India Turf Club Ltd. Wasformed inter alia for thepurpose of
carrying on thebusiness of a race course company in all its branches and toestablish clubs,
hotels and other convenience in connectionwith the property of the company. It had two
classes ofmembers, club members, whose number was limited to 350 andstand
members who were elected by ballot. Every member Paidan entries fee and an annual
subscription. The liability ofthe members was limited by guarantee and if there wasany
surplus on winding up, it was to be paid to the members inequal shares. An admission fee
was levied from the membersfor admission to the Members' Enclosure, and from non-
members for admission to the other Enclosures, and in eachEnclosure there was a
totalisator. The money’s receivedfrom members as well as non-members were included in
onepool and distributed amongst the holders of the winningtickets. In each Enclosure
refreshments were supplied onpayment. The company admitted that moneys
realisedfromnon-members were receipts from business and taxable, butcontended
that the following items of receipts received frommembers were not assessable to income-tax,
viz., (1) seasonadmission tickets from members, (2) daily admission gatetickets from member
10(1) ors. 10(6) of the Income-tax Act and were therefore nottaxable, but item 4 fell
within s. 10(1) and s. 10(6) andwas taxable. The Commissioner of Income-tax
appealedfollowing two questions for the opinion of the Bombay High Court, namely:

(1) whether on the facts found or admitted in the case, The Royal Western India Turf Club
Ltd., Bombay, received the sums of Rs. 23,635, Rs. 51,777, Rs. 21,490 and Rs. 82,490 from a
business carried on by it with the members within the meaning of section 10(1) of the Indian
Income,- tax Act?

(2) whether on the facts found or admitted in the case, The Royal Western India Turf Club
Ltd., Bombay, received the sums of Rs. 23,635, Rs. 51,777 and Rs. 21,490 [and Rs. 82,490
with regard to which sum the Tribunal did not consider the applicability of section 10(6)] as a
trade, professional or similar association performing services for its members for
remuneration definitely related to those services within the meaning of section 10(6) of the
Indian Income-tax Act?

On the first point our attention is drawn to the objects of the company as set forth in its
memorandum of association. It appears that the objects of the company are, inter alia, to carry
on the business of a Race Course company in all its branches and to carry on the business of
Hotel Keepers, tavern keepers, licensed victuallers and refreshment purveyors. Although this
circumstance may not be decisive, it cannot ,it the same time be overlooked altogether. It has
to be noted as one of the material facts. Then we have the fact that so far as non-members are
concerned the company does carry on a horse racing business and the moneys it realises from
nonmembers for admission into the First and Second Enclosures to watch the races from an
unreserved seat therein and for the use of the totalisator and other amenities are income,
profits or gains of that business. It is also to be noted that the rates of daily admission fee
charged on the non-members for ad- mission into the First Enclosure and for the railway
tickets are exactly the same as those charged from the members for admission into the
 93

Members' Enclosure. Finally, it has been declared by the High Court by the order under
appeal-and it is now accepted by the company-that the company derived the sum of Rs.
82,490 (the fourth item mentioned above) from the horse racing business carried on by it with
its members within the meaning of section 10(1) of the Act. If this sum of Rs. 82,490
received from members represents, as held by the High Court, a part of the income of the
horse racing business, why are not the first three items of receipts also parts of the income,
profits or gains of that very business? On what principle or authority are those three items to
be excluded from the computation of the total business, income of the company?

In support of its claim for exemption from tax liability in respect of these three items the
company relies on the principles laid down by the House of Lords in the much dis- cussed
case of The New York Life Insurance Co. v. Styles (Surveyor of Taxes)(1). The appellant in
that case was an incorporated company. The company issued life policies of two kinds,
namely, participating and non-participating. There were no shares or shareholders in the
ordinary sense of the term but each and every holder of a participating policy became ipso
facto a member of the company and as such became entitled to a share in the assets and liable
for a share in the losses. A calculation was made by the company of the probable death rate
among the members and the probable expenses and liabilities and calls in the shape of premia
were made on the members accordingly. An account used to be taken annually and the
greater part of the surplus of such premia over the expenditure referable to such policies was
returned to the members i.e., (holders of participating policies) and the balance was carried
forward as fund in hand to the credit of the general body of members. The question was
whether the surplus returned to the members was liable to be assessed to income-tax as
profits or gains. The majority of the Law Lords answered the question in the negative. It will
be noticed that in that case the members had associated themselves together for the purpose
of insuring each other's life on the principle of mutual assurance, that is to say, they
contributed annually to a common fund out of which payments were to be made, in the event
of death, to the representatives of the deceased members. Those persons were alone the
owners of the common fund and they alone were entitled to participate in the surplus. It was,
therefore, a case of mutual assurance and the individuals insured and those associated for the
purpose of meeting the policies when they fell in and receiving the surplus, were identical
and it was said that that identity was not destroyed by the incorporation of the company. Lord
Watson even went to the length of saying that the company in that case did not carry on any
business at all, which perhaps was stating the position a little too widely as pointed out by
Viscount Cave in a later case; but, be that as it may, all the noble Lords who formed the
majority were of the view that what the members received were not profits but were their
respective shares of the excess amount contributed by themselves.

The cases of The Cornish Mutual Assurance Co. Ltd. v. The Commissioners of Inland
Revenue(1) and Jones v. South (1) [1926] A.C. 281; 12 Tax Cas. 841.

Wales Lanacashire Coal Owners' Association Ltd.(1), both of which were cases of mutual
assurance companies with the liability of the members limited by guarantee carry the mater
no further. Indeed, the decision in the Cornish case as to the surplus of the contributions over
the expenses would have been the same as in Styles' case (supra) but for the special
provisions of section 52(2)(b) according to which profit was made to include in the case of
mutual trading concerns the surplus arising from transactions with members. Jones' case also
shows that the fact that under the rules the surplus was not distributable except on the
winding up of the company makes no difference in the application of the principle laid down
in Styles' case (supra).
 94

Municipal Mutual Insurance Ltd. v. Hillswas relied on by the learned Attorney-General as

showing the real ground on which Styles' case (supra) was decided. The appellant there was
an incorporated company. It was formed by the representatives of various local authorities by
co- operation to insure against fire on favourable terms. Effective control was in the hands of
the fire policy holders who alone were entitled, on winding up of the company, to participate
in the surplus assets. In course of time the company undertook an extensive business in
employers' liability and miscellaneous insurance. The Crown admitted that fire insurance
business which was a mutual business was not taxable. The company admitted that the
employers' liability and miscellaneous insurance business done with outsiders were liable to
tax. The question was whether the employers' liability and miscellaneous insurance business
done with fire policy holders who were members of the company were liable to be brought to
charge. It was held by Rowlatt J. that they were and this decision was upheld by the Court of
Appeal and the House of Lords. The argument in that case was that where the person with
whom employers' liability or miscellaneous insurance business was done happened to be also
a fire policy holder, the profit or surplus arising from that operation came back into a body of
which he himself was a member. This circumstance, it was claimed, made it mutual and as
such exempt from taxation under Styles' case. This argument was repelled by Rowlatt J. on
the ground, inter alia, that there was not the slightest distinction between what was made out
of a member in respect of non-fire business and what was made out of a non-member out of
non-fire business, for qua that business the member was a stranger. In other words, there was
no identity in character of the contributor and the participator. Said Viscount Dunedin in the
House of Lords:-

"In so far as the surplus arises from a fire policy they are really entitled to the money as being
those who contributed it and accordingly it has been admitted that any profit made on the fire
policies is governed by the New York case. But as regards employers liability business and
miscellaneous business it does not go to the contributors for, as fire policy holders in a body,
they have not contributed and therefore the business is in the same position as business with
complete outsiders, the surpluses in which are admitted to be profit. "

Lord, Macmillan said at page 447 of the report in Tax Cases: -

"The cardinal requirement is that all contributors to the common fund must be entitled to
participate in the surplus and that all the participators in the surplus must be contributors to
the common fund; in other words there must be complete identity between the contributors
and the participators. If this requirement is satisfied, the particular form which the association
takes is immaterial."

Styles' case (supra) has recently been examined and explained by the Judicial Committee
in English & Scottish Joint Co-operative Wholesale Society Ltd. v. Commissioner of
Agricultural Income-tax, Assam [[1948] A.C. 405; 75 I.A. 196; 16 I.T.R. 270.] After
referring to various passages from the speeches of the different Law Lords in Styles' case,
Lord Normand, who delivered the judgment of the Board, summarised the grounds of the
decision in Styles' case as follows:

"From these quotations it appears that the exemption was based on (1) the identity of the
contributors to the fund and the recipients from the fund, (2) the treatment of the company,
though incorporated as a mere entity for the convenience of the members and policy holders,
in other words, as an instrument obedient to their mandate and (3) the impossibility that
 95

contributors should derive profits from contributions made by themselves to a fund which
could only be expended or returned to themselves."

The Judicial Committee held that none of these grounds was available on the special facts of
the case before them and, therefore, the principles laid down in Styles' case (supra) were
wholly inapplicable to that case.

It is clear to us, taking the facts admitted or found in the case before us, that the principles of
Styles' case, as explained by subsequent decisions noted above, can have no application to
this case. Here there is no mutual dealing between the members inter se in the nature of
mutual insurance, no contribution to a common fund put up for payment of liabilities
undertaken by each contributor to the other contributors and no refund of surplus to the
contributors. There being no mutual dealing the question as to the complete identity of the
contributors and the participators need not be raised or considered. Suffice it to say that in the
absence, as there is in the present case, of any dealing between the members inter se in the
nature of mutual insurance the principles laid down in Styles' case and the cases that followed
it can have no application here. The principle that no one can make a profit out of himself is
true enough but may in its application easily lead to confusion. There is nothing per se to
prevent a company from making a profit out of its own members. Thus a railway company
which earns profits by carrying passengers may also make a profit by carrying its
shareholders or a trading company may make a profit out of its trading with its members
besides the profit it makes from the general public which deals with it but that profit belongs
to the members as shareholders and does not come back to them as persons who had
contribued them. Where a company collects money from its members and applies it for their
benefit not as shareholders but as per- sons who put up the fund the company makes no
profit. In such cases where there is identity in the character of those who contribute and, of
those who participate in the surplus, the fact of incorporation may be immaterial and the
incorporated company may well be regarded as a mere instrument, a convenient agent for
carrying out what the members might more laboriously do for themselves. But it cannot be
said that incorporation which brings into being a legal entity separate from its constituent
members is to be disregarded always and that the legal entity can never make a profit out of
its own members. What kinds of business other than mutual insurance may claim exemption
from tax liability under section 10(1) of the Act under the principles of Styles' case need not
be here considered; it is clear to us that those principles cannot apply to an incorporated com-
pany which carries on the business of horse racing and realises money both from the
members and from non-members for the same consideration, namely, by the giving of the
same or similar facilities to all alike in course of one and the same business carried on by it.

Learned counsel for the company then contends that the carrying on of the business of horse
racing is not the only function or activity of the company. It also runs a club, that is to say, an
association of persons who co-operate to provide for themselves social, sporting and similar
amenities. If the contributions from the members of the club exceed the cost of providing the
amenities and if the surplus is held for the benefit of the members such surplus, according to
him, is not taxable. For this purpose no distinction, it is said, can be made between the
entrance fees or the periodical subscriptions or any other sum (e.g., ad- mission fee, daily or
seasonal) paid by the members for the right to make use of the amenities provided by the
club. For the purposes of this argument it is said to be immaterial whether the club is an
incorporated company or an unregistered association. Finally it is urged that the fact that
a club has business dealings with the public in respect of which tax is payable does not render
the club liable to tax in respect of the difference between the cost of providing amenities for
 96

its members and the contribution towards this cost which the club takes from its members
either by way of subscription or of charges for the use of club amenities. The advantage of a
member, it is pointed out, is that he can meet his fellow members in the Members' Enclosure
without having to rub his shoulders with the members of the public who have no right of
entry in the Members' Enclosure and he cart also have the various other amenities provided
ex- clusively for members which are listed in the supplementary statement of the case.
Reference is made by learned counsel to several club cases, English and Indian, and other
cases in support of his contentions. Styles' case and other cases of mutual dealing have
already been dealt with and need not be referred to again. It will suffice now to examine the
club cases.

The earliest club case cited before us is that of Carlisle and Silloth Golf Club v. Smith. In that
case the club was an unincorporated association of members who paid subscription and
became entitled to play on the golf links of the club. There was no question of division of
profits. Under the lease between the club and its lessors the club was bound to admit visitors
on payment of "green fees". The only question was whether the profits arising out of the
"green fees" collected from outsiders were taxable. In course of his judgment Buckley L. J.
referred to Styles' case and said that a man could not make a profit or loss out of himself and,
that that was the ground of decision in Styles' case. It should not, however, be overlooked that
the question whether the profits arising out of the members' subscription were assessable or
not was not in issue in that case at all. That decision, therefore, does not help the company in
this case.

In the Royal Calcutta Turf Club v. Secretary of State(1) the assessee was an unincorporated
club. It was held that the club carried on business within the meaning of the Excess Profits
Duty Act (X of 1919) and was liable to pay tax in respect of money received from the public
by way of entrance fees to the stand, entry fees for race horses, book makers' license fees and
percentages of the totalisator. There, as in the Carlisle and Siiloth Golf Club case (supra), no
question was raised as to the taxability of moneys paid by the members of the clubs.

The case of the United Services Club, Simla v. The Crown(1) has been strongly relied on by
learned counsel for the company. There the club was an incorporated company. it had no
dealings with outsiders and derived no profit from outsiders. The question was directly raised
as to whether the income derived from its members was taxable profit. It was held, on the
authority of Styles' case and the Carlisle &Silloth Golf Club case. that under the English law
the in- come derived by a society or club from its members was not liable to tax and that the
same principle should be followed in India. The proposition so broadly stated overlooks the
real grounds of the decision in Styles' case as explained in later cases and cannot be accepted
as an accurate statement of the English law. In Carlisle &Silloth Golf Club case as in the
Royal Calcutta Turf Club case, as already stated, the question of the moneys received from
members was not in issue at all. In this case, namely, in the United Services Club case, there
was no dealing between the company and the outside public at all and the surplus was derived
by the club only out of its dealings with its members. There was no mutual dealing between
the members inter se and there was no question of distribution of any surplus amongst the
members and, therefore, there could be no question of identity of contributors and
participators and as such the company could not claim exemption from tax under the
principles of either of the two cases relied on by Martineau J. His decision can only be
supported on the ground that the club did not really carry on any business with its members
with a view to earning profits and, therefore, the surplus of receipts from the members over
the expenditure could not be said, to be profit of any business which could be assessed to tax.
 97

The next case is what is known as the Eccentric Club case(1). In that case a company limited
by guarantee carried on a social club, its objects being to promote social intercourse amongst
gentlemen connected (directly or indirectly) with literature, art, music, the drama, the
scientific and liberal professions, sports and commerce, to establish a club and generally to
afford to members the usual privileges and advantages of a club, to sell and deal in or arrange
for supply of all kinds of provisions and refreshments. By its memorandum of association the
profits made by it were not distributable among its members either before or even after its
winding up. Payments were made by the members for services they received at the club
premises, e.g., the provision of meals etc. The company's account showed a surplus of
income over expenditure. There was no receipt in the nature of trade from non-members. It
was held by the Court of Appeal that the company was not carrying on any undertaking of a
similar character to that of a trade or business within the meaning of section 53(2)(h) of the
Finance Act, 1920. Warington L.J. observed at pages 421-422 of the report in the Law
Reports series: "The club proprietor, whether an individual or a company, carries on a
business with a view to profit as an ordinary commercial concern. This the present company
certainly does not do. I think the proper mode of regarding the company in the present case is
as a convenient instrument for enabling the members to conduct a social club, the objects of
which are immune from every taint of commerciality, the transactions of sale and purchase
being purely incidental to the attainment of the main object. What is in fact being carried on,
putting technicalities aside, is a members club and not a proprietary club nor any undertaking
of a similar character. "

There was in that case no carrying on of any business with any outsider. The dealings with
members were really not in the way of any trade or business and it is only on that basis that
the profits were held not to fall within the Finance Act. The position of the company in the
United Services Club case (supra) was similar and, as already stated, that decision can be
supported only on this principle.

The case of Dibrugarh District Club Ltd., v. Commissioner of Income-tax, Assam(1), is, if
anything, against the company. There an incorporated company carried on a club for the
benefit of such persons as might become members. Under the articles of association no
shareholder was entitled to the benefits and privileges of the club unless he was elected as a
member. All shareholders were not members and all members were not shareholders. Profits
were distributable only amongst the shareholders every year. It was held that the company
was assessable on the full amount of its profits derived from shareholder members as well as
from non-share- holder members as the company was not a mutual trading society making
quasi profits by trading with its own members and returning such profits to its members. The
absence of identity between the contributors and participators was quite obvious. The case of
The Maharaj Bag Club Ltd. v. Commissioner of Income-tax, C.P. & Berar(2) follows the
Dibrugarh Club case and carries the matter no further. In Commissioners of Inland Revenue v.
Stonehaven Recreation Ground Trustees a recreation ground with facilities for tennis, bowls
etc. was held on lease and managed. by 9 trustees. Admission to the ground was by daily,
fort- nightly, monthly or season tickets issued to any applicant. Of the 9 trustees 6 were
elected by the season ticket holders and the remaining by the Local Town Council. The
trustees were held assessable as carrying on a trade. The position of the trustees was akin to
that of the owner 'of a proprietary club who carried on the club with a view to earning profits.

National Association of Local Government Officers v. Watkins was concerned with an

unregistered trade union having for its object the protection of the interest of employees in
Local Governments and the promotion of the physical and social welfare of its members. The
 98

Association 2purchased an existing holiday camp to provide cheap holiday facilities for its
members. Bookings were, however, for a short time accepted from non-members who had
previously used the camp. By its rules the property of the Association belonged to the
members and its profits earned for all members as a whole and not only for those members
who used the camp. The Association contended that its liability should be confined to the
profits made from non-members. The Crown claimed, on the other hand, that as the users of
the camp were not identifiable with the whole membership there was no mutual trading and
the whole of the profits had been properly assessed. Finley J. gave effect to the contentions of
the Association. The learned Judge laid emphasis on the fact that the Association was not a
registered body and that, therefore, the property was the property, not of the Association but
of the members themselves and that as the members owned the whole they had a right to
participate in the whole and, therefore, there could not be any trade between the Association
and a member or any sale to a member. The two decisions of the Judicial Commissioners'
Court, namely, Commissioner of Income-tax, Bombay v. Karachi Chamber of Commerce(1)
and Commissioner of Income-tax, Bombay v. Karachi Indian Merchants Association(1) were
concerned with mutual dealings between members who had put up money for their mutual
benefit. The surplus went to them not as shareholders but as persons who had contributed in
excess and was in no sense a profit and could not, therefore, be brought to charge. (1) (1934)
18 Tax Cas. 499, (2) I.L.R. (1940) Ear. 140; [1939] 7 I.T.R. 675. (3) A.I.R. 1939 Sind 56;
[1939] 7 I.T.R. 595. L/B(D)2SCI-6(a) As already stated, in the instant case there is no mutual
dealing between the members inter se and no putting up of a common fund for discharging
the common obligations to each other undertaken by the contributors for their mutual benefit.
On the contrary, we have here an incorporated company authorised to carry on an ordinary
business of a race course company and that of licensed victuallers and refreshment purveyors
and in fact carrying on such a business. There is no dispute that the dealings of the company
with non-members take place in the ordinary course of business carried on with a view to
earning profits as in any other commercial concern. It is further admitted that some of the
dealings of the company with its members take place in the ordinary course of business and
the profits arising out of those dealings, e.g, the fourth item of receipt of Rs. 82,490, are
taxable. The company gives to its members the same or similar amenities as it gives to non-
members, namely, the use of an unreserved seat in a stand, the facility to watch the races and
to bet on the horses in the races, use of the totalisator in that stand and the facility for
refreshment. In fact the daily ticket fee for admission into the Members' Enclosure is exactly
the same as that for admission into the First Enclosure to which the public have access. The
only difference is that a separate enclosure with a separate totalisator is provided for the
members where they can meet their fellow members and not be disturbed by the intrusion of
non-members. This privilege is referable to their membership of the company for which they
pay an entrance fee on their election as members and for which they pay the periodical
subscriptions both of which are not sought to be brought to charge. The rest of the facilities
mentioned above which the members get are in substance the same as those enjoyed by the
public. Those facilities are given to members and non-members alike for a price. The
character of the charge made on members is precisely the same as or is similar to that of the
charges made on non-members, for the company receives moneys from both members and
non-members in return for the same or similar facilities given to both in the course of one and
the same business. The dealings in both cases disclose the same profit earning motive and are
alike tainted with com- merciality. In the circumstances, all the four items of receipts from
members must be taken into account in com- puting the total income of the company. In fact
that the company has so long enjoyed exemption from taxation is neither here nor there, for
there can be no question of acquiring any prescriptive right to exemption from taxation. The
second question need not detain us long. The answer to that question depends on a true
 99

construction of section 10(6) of the Act. What is the meaning of "a trade or professional or
similar association"? Does this company come within any of those descriptions? It is
certainly not a professional association. Learned counsel for the company contends that a
"trade association" is not the same thing as a "trading association". According to Webster's
New Inter- national Dictionary, 2nd Edn., page 264 the meaning of a "trade association" is an
association of tradesmen, businessmen or manufacturers for the protection and advancement
of their common interest. In our view the company before us is not a "trade association" in
this sense although it carries on a business. In this view of the matter it is unnecessary to
discuss the further question whether the facilities or amenities given by the company to its
members may be regarded as "services" within the meaning of section 10(6). We are of
opinion that section 10(6) has no application, for the company is not a trade or professional or
similar association within the meaning of that sub-section.

The result, therefore, is that we hold that all the items of receipts from members referred to in
the questions were received by the company from business with its members within the
meaning of section 10(1) and that none of them was received by the company as a trade,
professional or similar association within the meaning of section 10(6). In our judgment the
High Court should have answered question No. I in the affirmative and question No. 2 in the
negative.

The appeal is allowed and we award to the Commissioner of Income-tax the costs of this
appeal and those of the proceedings in the High Court.

vii) New Noble Educational Society v. Chief Commissioner of Income Tax, 2022 SCC
OnLine SC 1458, decided on 19.10.2022
Bench: Hon'Ble The Justice, S. Ravindra Bhat, Pamidighantam Sri Narasimha

In a knowledge based, information driven society, true wealth is education – and access to it.
Every social order accommodates, and even cherishes, charitable endeavour, since it is
impelled by the desire to give back, what one has taken or benefitted from society. Our
Constitution reflects a value which equates education with charity. It is not to be treated as
business, trade, nor commerce.”
Supreme Court: The 3-judge bench of UU Lalit, CJI and S. Ravindra Bhat* and PS
Narasimha, JJ has held that the charitable institution, society or trust etc., to ‘solely’ engage
itself in education or educational activities, and not engage in any activity of profit, means
that such institutions cannot have objects which are unrelated to education. Where the
objective of the institution appears to be profit-oriented, such institutions would not be
entitled to approval under Section 10(23C) of the Income Tax Act, 1961.
“The interpretation of education being the ‘sole’ object of every trust or organization
which seeks to propagate it, through this decision, accords with the constitutional
understanding and, what is more, maintains its pristine and unsullied nature.”
The Court, however, made clear that since it has deviated from the long-standing meaning of
the term ‘solely’, in order to avoid disruption, and to give time to institutions likely to be
affected to make appropriate changes and adjustments, the judgment will operate
prospectively.
 100

Background
The Court was dealing with the appeal against Andhra Pradesh High Court judgment relating
to the rejection of an Education Society’s claim for registration as a fund or trust or institution
or any university or other educational institution set up for the charitable purpose of
education, under the Income Tax Act, 1961 on the ground that the Society/Trust was not
created ‘solely’ for the purpose of education, and also that it was not registered under the
Andhra Pradesh Charitable and Hindu Religious Institutions and Endowments Act, 1987
(A.P. Charities Act) as condition precedent for grant of approval.
Provisions in Question
Section 2 (15) of the IT Act that defines ‘charitable purpose’ and includes ‘education’
i.e., imparting formal scholastic learning.
Section 10(23C) of the IT Act that exempts from the field of taxation any income
received by any person on behalf of any university or other educational institution
existing solely for educational purposes and not for purposes of profit, and which is
wholly or substantially financed by the Government
Issues
The Supreme Court was called upon to decide the following questions:
the correct meaning of the term ‘solely’ in Section 10 (23C) (vi) which exempts income of
“university or other educational institution existing solely for educational purposes and not
for purposes of profit”.
the proper manner in considering any gains, surpluses or profits, when such receipts accrue to
an educational institution, i.e., their treatment for the purposes of assessment, and
in addition to the claim of a given institution to exemption on the ground that it actually
exists to impart education, in law, whether the concerned tax authorities require satisfaction
of any other conditions, such as registration of charitable institutions, under local or state
laws.
Ruling
Stating that all objects of the society, trust etc., must relate to imparting education or be in
relation to educational activities, the Supreme Court held that:
The requirement of the charitable institution, society or trust etc., to ‘solely’ engage itself in
education or educational activities, and not engage in any activity of profit, means that such
institutions cannot have objects which are unrelated to education.
Where the objective of the institution appears to be profit-oriented, such institutions would
not be entitled to approval under Section 10(23C) of the IT Act. At the same time, where
surplus accrues in a given year or set of years per se, it is not a bar, provided such surplus is
generated in the course of providing education or educational activities.
The seventh proviso to Section 10(23C), as well as Section 11(4A) refer to profits which may
be ‘incidentally’ generated or earned by the charitable institution. In the present case, the
same is applicable only to those institutions which impart education or are engaged in
activities connected to education.
 101

The reference to ‘business’ and ‘profits’ in the seventh proviso to Section 10(23C) and
Section 11(4A) merely means that the profits of business which is ‘incidental’ to educational
activity – as explained in the earlier part of the judgment i.e., relating to education such as
sale of text books, providing school bus facilities, hostel facilities, etc.
While considering applications for approval under Section 10(23C), the Commissioner or the
concerned authority as the case may be under the second proviso is not bound to examine
only the objects of the institution. To ascertain the genuineness of the institution and the
manner of its functioning, the Commissioner or other authority is free to call for the audited
accounts or other such documents for recording satisfaction where the society, trust or
institution genuinely seeks to achieve the objects which it professes. The observations made
in American Hotel suggest that the Commissioner could not call for the records and that the
examination of such accounts would be at the stage of assessment. Whilst that reasoning
undoubtedly applies to newly set up charities, trusts etc. the proviso under Section 10(23C) is
not confined to newly set up trusts – it also applies to existing ones. The Commissioner or
other authority is not in any manner constrained from examining accounts and other related
documents to see the pattern of income and expenditure.
Wherever registration of trust or charities is obligatory under state or local laws, the
concerned trust, society, other institution etc. seeking approval under Section 10(23C) should
also comply with provisions of such state laws. This would enable the Commissioner or
concerned authority to ascertain the genuineness of the trust, society etc. This reasoning is
reinforced by the recent insertion of another proviso of Section 10(23C) with effect from
01.04.2021.

IV. Residential Status of Individual, Company:

(i)V.V.R.N.M. SubbayyaChettiar v. C.I.T. AIR 1951 SC 101 - FAZL
ALI, MUKHERJEA AND CHANDRASEKHARA AIYAR, JJ.

Facts
The circumstances of the case may be briefly stated as follows. The appellant is the karta of a
joint Hindu family and has been living in Ceylon with his wife, son and three daughters, and
they are stated to be domiciled in that country. He carries on business in Colombo under the
name and style of the General Trading Corporation, and he owns a house, some immovable
property and investments in British India. He has also shares in two firms situated at
Vijayapuram and Nagapatnam in British India. In the year of account, 1941-42, which is the
basis of the present assessment, the appellant is said to have visited British India on seven
occasions and the total period of his stay in British India was 101 days. What he did during
this period is-summarised in the judgment of one of the learned Judges of the High Court in
these words:—
"During such stays, he personally attended to a litigation relating to the family lands both in
the trial Court and in the Court of appeal. He was also attending to income-tax proceedings
relating to the assess ment of the family income, appearing before the Income-tax authori ties
at Karaikudi and Madras. On one of these occasions, he obtained an extension of time for
payment of the tax after interviewing the authority concerned…………"
The other facts relied upon by the Income-tax authorities were that he did not produce the file
of correspondence with the business in Colombo so as to help them in determining whether
 102

the management and control of the business was situated in Colombo and he had started two
partnership businesses in India on 25th February, 1942, and remained in India for some time
after the commencement of those businesses.
Upon the facts so stated, the Income-tax Officer and the Assistant Commissioner of Income-
tax held that the appellant was a resident within the meaning of Section 4A(b) of the Income-
tax Act, and was therefore liable to be assessed in respect of his foreign income. The Income-
tax Appellate Tribunal however came to a different conclusion and held that in the
circumstances of the case it could not be held that any act of management or control was
exercised by the appellant during his stay in British India and therefore he was not liable to
assessment in respect of his income outside British India. This view was not accept ed by a
Bench of the Madras High Court consisting of the learned Chief Justice and Patanjali Sastri,
J. They held that the Tribunal had misdirected itself in determining the question of the
"residence" of the appellant's family and that on the facts proved the control and management
of the affairs of the family cannot be held to have been wholly situated outside British India,
with the result that the family must be deemed to be resident in British India within the
meaning of Section 4A(b) of the Income-tax Act.
Questions
In this appeal, the appellant has questioned the correctness of the High Court's decision.
Section 4A(b) runs thus : -
"For the purposes of this Act-—
A Hindu undivided family, firm or other association of persons is resident in British India
unless the control and management of its .affairs is situated wholly without British India."
It will be noticed that Section 4A deals with "residence" in the taxable territories, of (a)
individuals (b) a Hindu undivided family, firm or other association of persons, and (c) a
company. In each of these cases, certain tests have been laid down, and the test with which
we are concerned is that laid down in Section 4A(b). This provision appears to be based very
largely on the rule which has been applied in England to cases of corporations, in regard to
which the law was stated thus by Lord Loreburn in De Beers v. Howe [1906] 5 Tax Cas.
193:—
"A company cannot eat or sleep, but it can keep house and do business. We ought, therefore,
to see where it really keeps house and does business……………..The decision of Chief
Baron Kelly and Baron Huddleston in The Calcutta Jute Mills v. Nicholson [1876] 1 Tax
Cas. 83and The Cesna Sulphur Company v. Nicholson [1876] 1 Tax Cas. 88, now thirty years
ago, involved the principle that a company resides, for purposes of income-tax, where its real
business is carried on. Those decisions have been acted upon ever since. I regard that as the
true rule; and the real business is carried on where the central management and control
actually abides."
It is clear that what is said in Section 4A(b) of the Income-tax Act is what Lord Loreburn
intended to convey by the words "where the central management and control actually abides."
The principles which are now well-established in England and which will be found to have
been very clearly enunciated in Swedish Central Railway Company
Limited v. Thompson [1925] 9 Tax Cas. 342, which is one of the leading cases on the subject,
are :—
 103

(1) that the conception of residence in the case of a fictitious "person", such as a company, is
as artificial as the company itself, and the locality of the residence can only be determined by
analogy, by asking where is the head and seat and directing power of the affairs of the
company. What these words mean have been explained by Patanjali Sastri, J., with very great
clarity in the following passage where he deals with the meaning of Section 4A(b) of the
Income-tax Act :—
"Control and management signifies in the present context, the controlling and directive
power, the head and brain as it is sometimes called, and situated implies the functioning of
such power at a particular place with some degree of permanence, while wholly would seem
to recognize the possibility of the seat of such power being divided Between two distinct and
separated places."
As a general rule, the control and management of a business remains in the hand of a person
or a group of persons, and the question to be asked is wherefrom the person or group of
persons controls or directs the business.
(2) Mere activity by the company in a place does not create residence, with the result that a
company may be "residing" in one place and doing a great deal of business in another.
(3) The central management and control of a company may be divided, and it may keep
house and do business in more than one place, and, if so, it may have more than one
residence.
(4) In case of dual residence, it is necessary to show that the company performs some of the
vital organic functions incidental to its existence as such in both the places, so that in fact
there are two centres of management,
It appears to us that these principles have to be kept in view in properly construing Section
4A(b) of the Act. The words used in this provision clearly show firstly, that, normally, a
Hindu undivided family will be taken to be resident in the taxable territories, but such a
presumption will not apply if the case can be brought under the second part of the provision.
Secondly, we take it that the word "affairs" must mean affairs which are relevant for the
purpose of the Income-tax Act and which have some relation to income. Thirdly, in order to
bring the case under the exception, we have to ask whether the seat of the direction and
control of the affairs of the family is inside or outside British India. Lastly the word "wholly"
suggests that a Hindu undivided family may have more than one "residence" in the same way
as a corporation may have.
The question which now arises is what is the result of the application of these principles to
this case, and whether it can be held that the central control and management of the affairs of
the assessee's family has been shown to be divided in this case.
It seems to us that the mere fact that the assessee has a house at Kanadukathan, where his
mother lives, cannot constitute that place are seat of control and management of the affairs of
the family. Nor the we inclined in the circumstances of the present case to attach much
importance to the fact that the assessee had to stay in British India for 101 days in a particular
year. He was undoubtedly interested in the litigation with regard to his family property as
well as in the income-tax proceedings, and by merely coming out to India to take part in
them, he cannot be said to have shifted the seat of management and control of the affairs of
his family, or to have started a second centre for such control and management. The same
remark must apply to the starting of two partnership businesses, as mere "activity" cannot be
 104

the test of residence. It seems to us that the learned Judges of the High Court have taken
rather a narrow view of the meaning of Section 4A(b), because they seem to have proceeded
on the assumption that merely because the assessee attended to some of the affairs of his
family during his visit to British India in the particular year, he brought himself within the
ambit of the rule. On the other hand, it seems to us that the more correct approach to the case
was made by the Appellate Assistant Commissioner of Income-tax in the following passage
which occurs in his order dated the 24th February, 1944 :—
"During a major portion of the accounting period (year ending 12th April, 1942) the appellant
was controlling the businesses in Burma and Saigon and there is no evidence that such
control was exercised only from Colombo. No correspondence or other evidence was
produced which would show that any instructions were issued from Colombo as regards the
management of the affairs in British India especially as it was an unauthorized clerk who was
looking after such affairs. The presumption therefore is that whenever he came to British
India the appellant was looking after these affairs himself and exercising control by issuing
instructions………………It has been admitted that there are affairs of the family in British
India. Has it been definitely established in this case that the control and management of such
affairs has been only in Colombo? I have to hold it has not been established for the reasons
already stated by me."
There can be no doubt that the onus of proving facts which would bring his case within the
exception, which is provided by the latter part of Section 4A (b), was on the assessee. The
appellant was called upon to adduce evidence to show that the control and management of the
affairs of the family was situated wholly outside the taxable territories, but the
correspondence to which the Assistant Commissioner of Income-tax refers and other material
evidence which might have shown that normally and as a matter of course the affairs in India
were also being controlled from Colombo were not produced. The position therefore is this.
On the one hand, we have the fact that the head and karta of the assessee's family who
controls and manages its affairs permanently lives in Colombo and the family is domiciled in
Ceylon. On the other hand, we have certain acts done by the karta himself in British India,
which, though not conclusive by themselves to establish the existence of more than one
centre of control for the affairs of the family, are by no means irrelevant to the matter in issue
and therefore cannot be completely ruled out of consideration in determining it. In these
circumstances, and in the absence of the material evidence to which reference has been made,
the finding of the Assistant Commissioner that the onus of proving such facts as would bring
his case within the exception had not been discharged by the assessee and the normal
presumption must be given effect to, appears to us to be a legitimate conclusion. In this view,
the appeal must be dismissed with costs, but we should like to observe that as this case has to
be decided mainly with reference to the question of onus of proof, the decision in this appeal
must be confined to the year of assessment to which this case relates, and it would be open to
the appellant to show in future years by proper evidence that the seat of control and
management of the affairs of the family is wholly outside British India.
(ii)Narottam and Parekh Ltd. v. C.I.T., Bombay City AIR 1954 Bom. 67 - CHAGLA, CJ.
AND TENDOLKAR, J.
Facts
The assessee-company was a subsidiary company of ‘S’ and its business was stevedoring in
Ceylon. Its registered office was in Bombay. The meeting of the board of directors were held
in Bombay and also the meetings of the shareholders. In the return filed by the assessee, for
 105

the relevant assessment years, the assessee was declared to be resident and ordinarily resident
in British India by the authorities below.
B.R. Naik v. CIT [1945] 13 ITR 124 (Bom.), S. Chettiar v. CIT [1951] 19 ITR
168 (SC), Swedish Control Railway Company Ltd. v. Thompson [1925] 9 Tax. Cas. 342 (HL)
and CIT v. Talipatagala Estate [1950] 18 ITR 320 (Mad.).
Chagla, CJ.—The question that arises in this reference is whether the assessee company is a
resident company. The assessment years are 1944-45 and 1945-46. The company is a
subsidiary company of the Scindia Steam Navigation Co. Ltd. and its business is stevedoring
in Ceylon. It is registered in Bombay and its registered office is also in Bombay. The
meetings of the board of directors are held in Bombay and also the meetings of the
shareholders.
In order that a company should be resident it is necessary that the control and management of
its affairs should be situated wholly in the taxable territories or its income earned in the
taxable territories should exceed its income without the taxable territories in that year. In this
case we are not concerned with the second part of the definition because the income of this
company in India was Rs. 3,791 whereas its total world income was Rs. 3,28,108, the bulk of
which was earned in Ceylon by the business which it did. In order to construe Section 4A(c)
of the Income-tax Act, it is important to bear in mind, that this section deals with residence
and it deals with residence of individuals, Hindu undivided family, firms and other
association of persons and of a company, and therefore the central idea underlying this
section is the idea of residence, and what has got to be determined is where a particular
company is resident. Sub-clause (c) tells us what in the eye of the law is residence with
regard to a company, and as far as the first part is concerned, in order that a company's
income should be subjected to tax as a resident, it has got to be established that the control
and management of its affairs is situated wholly in the taxable territories. As we shall
presently point out, "control and management" is a compendious expression which has
acquired a definite significance and connotation. It is also necessary that the control and
management of the affairs of the company should be situated wholly in the taxable territories.
Therefore if any part of the control and management is outside the taxable territories then the
company would not be resident. In this connection it is perhaps necessary to look at the
converse definition for a Hindu undivided family, firm or other association of persons. In
their case they are resident unless the control and management of its affairs is situated wholly
without the taxable territories. Therefore, whereas in the case of a Hindu undivided family or
firm or association of persons any measure of control and management within the taxable
territories would make them resident, in the case of a company any measure of control and
management of its affairs outside the taxable territories would make it non-resident. In
construing the expression "control and management" it is necessary to bear in mind the
distinction between doing of business and the control and management of business. Business
and the whole of it may be done outside India and yet the control and management of that
business may be wholly within India. In this particular case considerable emphasis is placed
upon the fact that the whole of the business of the company is done in Ceylon and the whole
of the income which is liable to tax has been earned in Ceylon. But that is not a factor which
the Legislature has emphasised. It is entirely irrelevant where the business is done and where
the income has been earned. What is relevant and material is from which place has that
business been controlled and managed "Control and management" referred to in Section
4A(c) is, as we shall presently point out on the authorities, central control and management.
The control and management contemplated by this sub-section is not the carrying on of day
to day business by servants, employees or agents. The real test to be applied is, where is the
 106

controlling and directing power, or rather, where does the controlling and directing power
function or to put it in a different language there is always a seat of power or the head and
brain, and what has got to be ascertained is, where is this seat of power, or the head and brain.
A company or for the matter of that a firm or an undivided Hindu family has got to work
through servants and agents, but it is not the servants and agents that constitute the seat of
power or the controlling and directing power. It is that authority to which the servants,
employees and agents are subject, it is that authority which controls and manages them,
which is the central authority, and it is at the place where the central authority functions that
the company resides. It may be in some cases that like an individual a company may have
residence in more than one place. It may exercise control and management not only from one
fixed abode, but it may have different places. That would again be a question dependent upon
the circumstances of each case. But the contention which Mr. Kolah has most strongly
pressed before us is entirely unacceptable that a company controls or manages at a particular
place because its affairs are carried on at a particular place and they are carried on by people
living there appointed by the company with large powers of management. A company may
have a dozen local branches at different places outside India, it may send out agents fully
armed with authority to deal with and carry on business at these branches, and yet it may
retain the central management and control in Bombay and manage and control all the affairs
of these branches from Bombay and at Bombay. It would be impossible to contend that
because there are authorised agents doing the business of the company at six different places
outside India, therefore the company is resident not only in Bombay but at all these six
different places. When we turn to the facts of the case before us, what has been emphasised
by Mr. Kolah is that two managers under two powers-of-attorney look after all the affairs of
the assessee company in Ceylon and our attention has been drawn to these two powers-of-
attorney, and we agree with Mr. Kolah that the widest possible power and authority has been
conferred upon these two managers under these powers-of-attorney. But it is equally clear
from the minutes of the meetings of the board of directors which are also before us that the
central management and control has been kept in Bombay and has been exercised by the
directors in Bombay. The minutes deal with various matters which are delegated to these two
managers and yet the directors from a proper sense of responsibility to the company have
retained complete control over these matters and have from time to time given directions to
the managers as to how things should be done and managed. The real fallacy underlying Mr.
Kolah's argument is to confuse the doing of business with the central control and
management of that business. It is perfectly true that these two managers do all the business
of the company in Ceylon and in doing that business naturally a large amount of discretion is
given to them and a considerable amount of authority. But the mere doing of business does
not constitute these managers the controlling and directing power. Their power-of-attorney
can be cancelled at any moment, they must carry out any orders given to them from Bombay,
they must submit to Bombay an explanation of what they have been doing, and throughout
the time that they are working in Ceylon a vigilant eye is kept over their work from the
directors' board room in Bombay. The correspondence which has also been relied upon
between the company here and its office in Colombo also goes to show and emphasises the
same state of affairs. Mr. Kolah is right again when he puts emphasis upon the fact that what
we have to consider in this case is not the power or the capacity to manage and control, but
the actual control and management, or, in other words, not the de jure control and
management but the de facto control and management, and in order to hold that the company
is resident during the years of account it must be established that the company it
facto controlled and managed its affairs in Bombay. Mr. Kolah says that the two powers-of-
attorney go to show that whatever legal or juridical control and management the company
might have had, in fact the actual management was exercised by the two managers in Ceylon.
 107

In our opinion this is not a case where the company did nothing with regard to the actual
management and control of its affairs and left it to some other agency. As we said before, the
two managers were the employees of the company acting throughout the relevant period
under the control and management of the company, and therefore in the case we are
considering there was not only a de jure control and management, but also a de facto control
and management.
Turning to the authorities on which Mr. Kolah has relied, first, there is a judgment of this
Court in B.R. Naik v. Commissioner of Income-tax, Bombay [1945] 13 ITR 124. In that case
Sir Leonard Stone, Chief Justice, and Mr. Justice Kania were really dealing with a question of
construction of Section 4A(b) and the question that presented itself for decision before that
Bench was whether the control and management contemplated by that sub-section was a de
facto or a de jure control. In that case one Naik carried on business in South Africa. In 1912
he returned to India leaving his business in the hands of three managers. In 1937 he executed
a partnership deed by which he admitted these three managers as partners. Under the
partnership deed he retained to himself the full control of the business and even the right to
dismiss any of the three partners. The Income-tax Appellate Tribunal found that the firm was
resident in British India as the legal right to control and manage vested in Naik and he was
resident in British India and it was not shown that he had not exercised any control. The
Court remanded the matter to the Tribunal taking the view that what they were concerned
with was actual events which would go to show where the actual control and management of
the affairs was de facto situated, and as the Tribunal had merely held that on the legal aspect
of the partnership deed there were not sufficient facts on which they could express an
opinion. It is rather important to note that Mr. Setalvad who appeared for the Commissioner
attempted to argue that the position in the case was not materially different from that of a
man owning a business and having employees, and the learned Chief Justice dealt with that
argument as being "destructive of the whole reference, which proceeds on the basis that we
are dealing with a partnership firm, as indeed is the case when the partnership deed is
concerned". Therefore the learned Chief Justice was at pains to draw a distinction between
the case of a partner and the case of an agent or an employee, and inasmuch as in that case
the business was being managed by the partners of Naik in South Africa, the question of de
facto management had to be considered. Mr. Justice Kania at p. 129 states that the question
whether the assessee is resident within the meaning of Section 4A is a question of fact, and he
goes on to say, "As it is difficult to apply the test of physical residence to an association of
persons or a firm, the test is held to be : 'where the central control and management actually
abides'". Therefore the learned Judge holds that the expression "control and management"
means where the central control and management actually abides.
The other case relied on is a Madras case, Talipatigala Estate v. Commissioner of Income-
tax, Madras [1950] 18 ITR 320. There the question that arose was whether the assessee firm
had any part of the control and management within British India. There a rubber estate in
Ceylon was managed by the assessee firm consisting of two partners, one of whom was
resident in British India, and the estate was managed by an agent holding a power-of-attorney
from the partners, and the Court held that not only the right to exercise control and
management over the firm's affairs in Ceylon rested with the partner resident in British India
but some amount of control and management of the firm's affairs was actually exercised in
British India and the assessee firm was therefore resident in British India within the meaning
of Section 4A. The Court was concerned to determine whether any part of the control and
management was within British India, and notwithstanding the fact that the rubber estate was
managed by an agent holding a power-of-attorney, it was found that there was the exercise of
control and management by the partners from British India.
 108

The third decision relied on is a decision of the Supreme Court

in SubbayyaChettiar v. Commissioner of Income-tax, Madras [1951] 19 ITR 168. That was a
case of a Hindu undivided family and the Supreme Court has laid down certain important
tests for determining what is control and management within the meaning of Section 4A of
the Act. Mr. Justice Fazl Ali in his judgment accepts the rule which has been applied in
England to cases of corporations in order to determine their residence, and he quotes with
approval Lord Loreburn's dictum in De Beers v. Howe [1906] 5 Tax Cas. 198, "A company
cannot eat or sleep, but it can keep house and do business. We ought, therefore, to see where
it. really keeps house and does business". He also lays down four principles which are
enunciated in the case of Swedish & Central Railway Company Ltd. v. Thompson [1926] 9
Tax Cas. 342. With regard to the first principle he accepts a passage of Mr. Justice Patanjali
Sastri : "Control and management signifies, in the present context, the controlling and
directive power, the head and brain as it is sometimes called, and situated implies the
functioning of such power at a particular place with some degree of permanence, while
wholly would seem to recognise the possibility of the seat of such power being divided
between two distinct and separated places". The second principle is that the mere activity by
the company in a place does not create residence. The third is that the central management
and control of a company may be divided, and it may keep house and do business in more
than one place. Finally, in case of dual residence, there may be two centres of management.
But the important principle which applies to the present case is the one that has been first set
out and which emphasises the fact that what we have to consider in order to determine the
residence of a company is as to where its head and brain is, and the head and brain of the
company will be where its controlling and directive power functions. Mr. Kolah has relied on
what Mr. Justice Fazl Ali says at p. 172 : "Secondly, we take it that the word 'affairs' must
mean affairs which are relevant for the purpose of the Income-tax Act and which have some
relation to income". Mr. Kolah says that it is not any business that the company does which
has got to be considered, but the affairs of the company in the sense in which Mr. Justice Fazl
Ali has explained that expression. With respect, that is perfectly correct. In order to determine
the head and brain of the company we are not to concern ourselves with any other work that
the company does except its business which yields profits, and in this particular case we have
got to consider where the head and brain of the company is with regard to the stevedoring
business in Ceylon which has yielded the income. But even applying that test, as already
pointed out, we do come to the conclusion that the head and brain of the company with regard
to this particular business or with regard to its affairs was in Bombay and not in Ceylon.
The question, therefore, which has been submitted to us must be answered in the affirmative.
IV. Revenue Receipt and Capital Receipt

National Cement Mines Industries Ltd. v CIT (1961) 42 ITR 69 (SC) - Shah, J.C.

Facts

DewarkhandKaranpura Mines and Industries Ltd. hereinafter called the " Karanpura
Company "-had obtained three leases on November 29, 1930, first for mining limestone from
Maharaja Pratap NarainUdai Nath Shah Deo from limestone beds in certain villages in
Dewarkhand, second from Maharaj Kumar Nand Kishore Nath Shah Deo of the surface rights
neces. sary to exercise the powers and privileges in respect of the first lease and the third
 109

from Maharaj Kumar Raj Kishore Nath Shah Deo of surface rights in respect of Hoyer
village. The period in each of the three leases was thirty years. On March 17, 1932, the
Karanpura Company conveyed the rights and options under the three leases to the appellants.
On September 30, 1934, the appellants acquired the limestone and surface rights in respect of
limestone beds in village Umedanda for 95 years from Maharaja Pratap Narain Uday Nath
Shah Deo and Maharaj Kumar Raj Kishore Nath Shah Deo. On the same date, the appellants
entered into two agreements, one with Maharaja Pratap Narain Uday Nath Shah Deo which is
called the ,bauxite option agreement " thereby acquiring the first option to take a lease or
leases of any area or areas of bauxite deposits in certain villages, and another from the said
Maharaja for the first option to take a lease or leases of limestone beds in the Tori District.
By a fourth agreement also dated September 30,1934, between the Karanpura Company,
Maharaja Pratap NarainUdai Nath Shah Deo acting with the consent of Maharaj Kumars Raj
Kishore Nath Shah Deo and Nand Kishore Nath Shah Deo, the royalties reserved under the
original deeds dated November 29, 1930, were reduced and the periods of the leases were
extended to 99 years from the date of the original leases, By deed dated May 7,1935, the
appellants conveyed to Dewarkhand Cement Company Ltd. (which later came to be known as
Associated Cement Ltd. and will be referred to hereinafter by that name) the benefits of the
four leases and the two agreements for the unexpired periods. By this deed, for a present
consideration of Rs. 25,000 " for trouble and expenses in obtaining the leases and agreements
" and for further payment under several covenants which will be presently set out, the
appellants conveyed the rights vested in them subject to certain reservations. In the year of
account June 1, 1944, to May 31, 1945, the appellants received from the Associated Cement
Ltd. under the first covenant of the deed, Rs. 77,820 being the amount computed at the rate of
0-13 As. per ton of cement manufactured from limestone won from the lands and sold by the
company. The Income-tax Officer, Companies District 1, Calcutta, included this amount in
the total assessable income of the appellants in the assessment year 1946-47. This order was
confirmed in appeal by the Appellate Assistant Commissioner and by the Income-tax
Appellate Tribunal. At the instance of the appellants, the Tribunal referred the following
question with another not material for this appeal to the High Court of Judicature at Calcutta:

" Whether on a proper construction of the Deed of Assignment dated 7th of May, 1935, and
on the facts and in the circumstances of this case, the Tribunal was right in holding that, the
sum of Rs. 77,820 represented a receipt of a revenue nature in the hands of the Applicant and
assessable as such The following facts were held proved by the Tribunal. The principal
objects of incorporation of the appellants were to carry on the business of manufacturing
cement and lime and sale of limestone and the appellants were formed with the object of
acquiring the rights and concessions of the Karanpura Company. By their Memorandum of
Association, the appellants were authorised to sell or dispose of the undertakings or any part
thereof as they thought fit, and to sell, lease, mortgage, dispose of, turn to account or
otherwise deal with all or any part of their property and rights and in pursuance of these
objects the rights and concessions of the Karanpura Company were acquired and extension of
leases and concessions were obtained and were transferred to the Associated Cement Ltd.
The appellants were therefore carrying on in the year of account 1944-45 the business for
which they were incorporated.

After reciting the prefatory clauses, it was stated in the deed:

"WHEREAS it was agreed inter alia that the Purchaser should pay to the Vendor the sum of
Rupees twenty five thousand for trouble and expenses in obtaining the leases and agreements
dated the thirtieth day of September one thousand nine hundred and thirty four hereinbefore
 110

recited and hereinafter expressed to be hereby transferred and Whereas the Purchaser hath
paid to the Vendor the said sum of rupees twenty five thousand as the Vendor doth hereby
acknowledge NOW THIS INDENTURE WITNESSETH that in consideration of the
covenants on the part of the Purchaser hereinafter contained the Vendor hereby grants assigns
and transfers unto the Purchaser and the Karanpura Company at the request and by the
direction of the Vendor hereby grants assigns transfers and confirms unto the Purchaser:".

The deed then proceeds to set out the description of the various leases and concessions and
agreements and the covenants which the Associated Cement Ltd. undertook in favour of the
appellants. These covenants are: (1) That it will pay to the Vendor a sum equal to thirteen
annas in respect of every ton of cement sold by it which shall have been manufactured from
the limestone won by it from the lands hereby transferred and comprised in the hereinbefore
recited leases and agreements. (2) That it will not sell any Fluxstone won by it from the said
lands to the Tata Iron and Steel Company Ltd., at a price less than Rupees one and
annas fourteen per ton F. O. R. the siding nearest to the quarry or place from which it shall be
won without the consent of the Vendor.

(3) That it shall pay to the Vendor one-half the profit( if any) which it shall make by selling
Fluxstone to the Tata Iron & Steel Company Ltd.,or to any other person such profits to be
ascertained after deduction from the price received all costs, charges and expenses including
the royalty payable to the Maharaja in respect thereof but before deucting overhead charges.
Such accounts to be closed and adjusted on the thirtieth day of June and the thirty-first day of
December in each and every year. (4) That it will not grant to the Tata Iron & Steel Company
Ltd., the right to quarry and remove Fluxstone from the lands hereby transferred at a royalty
of less than ten annas per ton, and will pay to the Vendor one-half of any royalty so charged
and received.

(5) That in the event of the payments made under clauses one, three and four above in any
one year not amounting to the minimum hereinafter set out the Purchaser shall pay in lieu and
in full discharge there for the following minimum:

(a) During the first year to be computed from the first day of January one thousand nine
hundred and thirty-five, rupees ten thousand.
(b) During the second year rupees thirty thousand.
(c) During every subsequent year rupees fifty thousand.

Out of the above minimum payment of rupees fifty thousand per year for the purposes of
account, the sum of rupees twenty thousand shall be deemed to have been paid in respect of
payment under clause three above.

(6) That the Purchaser or the persons deriving title under the Purchaser will at all times from
the date hereof duly pay all rents, royalties and payments becoming due under the (four)
hereinbefore recited Indenture of Lease (,subject as regards the Limestone lease to the
modifications effected by the agreement for reduction of royalty dated the thirtieth day of
September one thousand nine hundred and thirty-four hereinabove recited) in respect of the
premises agreements options rights or benefits hereby assigned and transferred and observe
and perform the covenants agreements stipulations and conditions therein contained and
henceforth on the part of the Lessee or grantee to be observed and performed in respect of the
aforesaid premises or under the said Bauxite agreement or under the said Tori Option
 111

agreement or under the said agreement for reduction of royalty And also will at all times from
the date hereof save harmless and keep indemnified the Vendor its successors and assigns
from and against all proceedings costs claims and expenses on account of any omission to
pay the said rent, royalty or payments or any breach of any of the said covenants agreements
stipulations and conditions.

(7) That the Purchaser will not work raise remove or use stone or clay in the properties
comprised in the leases and agreements hereby transferred to it for making lime. (8) That the
Purchaser shall not by any of its actions or omissions cause leases and agreements, mentioned
above and in respect of properties hereby transferred, to be determined, or the rights
thereunder, including the right of renewal, to be prejudiced.

(9) That in areas comprised in the leases and agreements hereinabove expressed to be hereby
assigned and not containing limestone the Vendor's rights under leases and agreements from
the Maharaja of Chotanagpur or Maharaj Kumar Nand Kishore Nath Shah' Deo other than the
leases and agreements above referred to shall not be jeopardised or affected by this Indenture.

(10) That the clay and shales lying within areas, which do not contain Limestone, can be
removed and utilised by the Vendor for all purposes except that of cement manufacture. The
deed then proceeded after setting out certain other covenants:

" AND IT IS HEREBY EXPRESSLY AGREED AND DECLARED that if the Limestone
within the areas comprised in the Leases hereby transferred available for manufacturing
cement is exhausted the Purchaser will be entitled to determine this Indenture on giving to the
Vendor six months' notice in writing in which case the Purchaser, if so required, will
retransfer the leases and agreements aforesaid."

By clauses (1), (3) and (4), the Associated Cement Ltd. undertook to make certain payments
to the appellants. By cl. (1) they agreed to pay 0-13 As. for every ton of cement manufactured
from the limestone won from the lands and sold; by el. (3), the Associated Cement Ltd.
agreed to pay half the profits which they made by selling Fluxstone to the Tata Iron & Steel
Co., or to any other person; and by el. (4), they agreed to pay half the royalty received from
the Tata Iron & Steel Company for the right to quarry and remove fluxstone from the lands.
By clause (5), provision was made for minimum payment in the event of the aggregate under
cis. (1), (3) and (4) not reaching the sums specified therein. Clauses (2), (4), (7), (8) and (9)
were in the nature of restrictive covenants. By cl. (2), the Associated Cement Ltd. were
prohibited from selling any fluxstone won from the lands to the Tata Iron & Steel Company
for less than Re. 1- 14 As. per ton F. O. R. By cl. (4), an obligation not to convey the right to
quarry and remove fluxstone for royalty less than 0-10 As. per ton was imposed. By el. (7)
the Associated Cement Ltd. undertook not to remove or use or allow any one to raise work,
remove or use stone or clay in the lands. By cl. (8), the Associated Cement Ltd. undertook
not to do any acts or omissions causing the leases and agreements to be determined or the
rights thereunder to be prejudiced. By cl. (9), rights of other persons under leases and
agreements in lands not containing limestone were not to be affected. By el. (10), the right of
the appellants to utilise clay and shale lying within the areas not containing limestone except
for the purpose of manufacturing cement was retained, There were certain exceptions to this
and the ninth clause whereby the Associated Cement Ltd. were entitled to excavate, use or
remove all kinds of clays in and from the areas within the boundary lines marked in the plan
and they were also authorised to make permanent structures and use certain strips of lands.
By el. (6) the Associated Cement Ltd. agreed to pay rent stipulated under the original leases
 112

and agreements and also undertook to keep indemnified the appellants from and against all
proceedings, costs, claims and expenses on account of any omission to pay the rent royalty or
payments or any breach of any of the covenants agreements and the leases. There was also
the covenant authorising the Associated Cement Ltd. to terminate the deed in the event of
limestone in the land comprised in the leases being exhausted. The appellants undoubtedly
did not part with all their rights in favour of the Associated Cement Ltd. by this deed dated
May 7, 1935. The consideration under the deed consisted of a fixed component and annual
payments fluctuating with the business activity of the Associated Cement Ltd. A fixed
amount of Rs. 25,000 was paid " for trouble and expenses in obtaining the leases and
agreements " and additional payments were to be made under cls. (1), (3) and (4) subject to
the minimum prescribed by el. (5). It is difficult to categorise a transaction of this character.
It is not a conveyance of all the rights of the appellants nor can it be regarded as a sale even
of the rights which were conveyed. Numerous restrictions were imposed by the deed upon the
rights of the transferee which were inconsistent in their very nature with the character of a
sale, and the covenant authorising termination of the deed in the event of the limestone being
exhausted removes all doubt in that behalf. Nor is it a lease : it is not a transfer of a right to
enjoy property for a certain time in consideration of periodical payments. It also does not
evidence a transaction in the nature of a joint venture between the appellants and the
Associated Cement Ltd. Cement was to be manufactured by the Associated Cement Ltd, out
of limestone to be won from the lands and in consideration of the rights conveyed, payments
at specified rates were agreed to be made out of the price to be obtained by sale of cement,
fluxstone and limestone. The appellants had no control over the production of limestone and
manufacture of cement, or on the sale of fluxstone and limestone. But in assessing the true
character of the receipt for the purpose of the Income-tax Act, inability to ascribe to the
transaction a definite category is of little consequence. It is not the nature of the receipt under
the general law but in commerce that is material. It is often difficult to distinguish whether an
agreement is for payment of a debt by instalments or for making annual payments in the
nature of income. The court has, on an appraisal of all the facts, to assess whether a
transaction is commercial in character yielding income or is one in consideration of parting
with property for repayment of capital in instalments. No single test of universal application
can be discovered for solution of the problem. The name which the parties may give to the
transaction which is the source of the receipt and the characterization of the receipt by them
are of little moment, and the true nature and character of the transaction have to be
ascertained from the covenants of the contract in the light of the surrounding circumstances.
The decision of the question is however not left to the application of any arbitrary standards.
There are certain broad principles which guide the determination of the character of the
receipt. The distinction between a capital receipt and revenue receipt though fine is real. The
dividing line may be thin, and often at first sight imperceptible.

Where capital is repaid in instalments, it is not liable to income-tax; for instance when a
person sells his property and agrees to receive the price stipulated in instalments, by whatever
name such instalments are called, they are not liable to income-tax-see Foley v. Fletcher (1),
Secretary of State in Council of India v. Andrew Scoble (2), Oswald v. Kirkcaldy Magistrates
and Commissioners of Inland Revenue v. Ramsay (4).

(1) (1858) 3 H. & N. 769?

(2) [1903] A.C. 299 (3) [1919] S.C. 147.

(4) (1935) 20 T.C. 79.

 113

But where property is conveyed in consideration of what in truth is annuity payable for a
definite or a definable period, the annuity is not payment on capital account and is taxable-see
State of Bihar v. Sir Kameshwar Singh (1), Captain Maharajkumar Gopal Saran v.
Commissioner of Income- tax, Bihar and Orissa (2), Chadwick v. Pearl Life Assurance Co.
(3).

Again, if property is conveyed in consideration of periodical payments, the payment being a

share of profits of a business or profession-(William John) Jones v. Commissioners of Inland
Revenue(4), or a mineral royalty depending upon the quantity of minerals raised Raja
Bahadur KamakshyaNarain Singh of Ramgarh v. Commissioner of Income- tax, Bihar and
Orissa (5), or computed on sales of manufactured articles-Commissioners of Inland Revenue
v. 36149 Holdings, Ltd. (6), or a percentage of gross profits made in the exploitation of a
secret process-Delage v. Nugget Polish Co., Ltd. (7), is income and taxable. Counsel for the
appellants submitted that the receipt under clause (1) of the terms of the deed dated May 7,
1935, was in the nature of capital payment and relied upon certain decisions in support of that
submission.

In Minister of National Revenue v. Catherine Spooner(8), decided by the Judicial Committee

of the Privy Council in an appeal from the Supreme Court of Canada, the respondent
Catherine Spooner had sold her rights, title and interest in land owned by her in freehold to a
company in consideration of a certain sum in cash, besides shares of the company, and an
agreement to deliver 10% of oil produced from the land on which the company covenanted to
carry out drilling and, if oil was found, pumping operations. These were described as
royalties. Oil was struck in the lands and the respondent was paid 10 of the gross proceeds of
the oil produced in lieu of oil. The (1) [1952] 21 I.T.R. 382. (5) (1943) L.R. 70 I.A. 180. (2)
[1935] 3 I.T.R. 237 (P.C.). (6) (1943) 25 T.C. 173. (3) [1905] 2 K.B. 507. (7) (1906) 2r
Times Law Reports 454. (4) (1919) 7 T.C. 3 10 (8) [1933] A.C. 684.

[1920] 1 H.B. 711, Supreme Court of Canada held that the sum so received was not an annual
profit or gain within the meaning of s. 3 of the Income War Tax Act, but a receipt of a capital
nature and therefore not chargeable to tax. According to the Judicial Committee, there was
between the respondent and the company no relation of lessor or lessee: the transaction was
one of sale and purchase, and the transaction had taken the form which it did because of the
uncertainty whether oil would be found by the purchaser. As the value of the land depended
on this contingency, the price, not unnaturally was made to depend in part on the event of oil
being struck. The judgment lays down no new principle; it proceeded merely upon
interpretation of the document in the light of the circumstances.

In Trustees of Earl Haig v. Commissioners of Inland Revenue (1), the question which fell to
be determined was whether a share of the royalties received in consideration of allowing the
use of the diaries of the late Earl Haig for writing his biography were, in the hands of the
trustees under the will of Earl Haig, capital receipts. That was undoubtedly a case in which
payments received by the trustees were dependent upon the professional activities of the
author and the proceeds derived from the sales of the biography he wrote. By the agreement,
the author was authorised to extract and publish from the diaries what he thought fit. The
diaries were undoubtedly an asset, and after they were used by the author for publication of
the biography, their value as an asset was, if not wholly, largely exhausted and their future
value was negligible. The agreement was therefore regarded as conveying an asset in its
entirety to the author in consideration of a share in the royalties and the receipt of this share
was regarded as receipt of capital. That decision proceeded upon the special character of the
 114

agreement and the nature of the asset transferred and did not seek to lay down any general
principle. In Nethersole v. Withers (2), N who had acquired under an agreement the exclusive
right to dramatise (1) (1939) 22 T.C. 725.

(2) (1948) 28 T.C. 501.

a novel of Rudyard Kipling received under an agreement with the widow of the author, a
third share of a lump sum for which the sound and film rights were granted exclusively to a
film company for a period of ten years. The film right of a comprehensive character having
been granted by the legal representative of the author against payment of the sum stipulated,
the question arose whether the payment received by N was taxable under the Income Tax
Act under Case II of Schedule D or under case VI of Schedule D. It was held that N having
ceased to be the owner of the portion of the copyright she had assigned, the proceeds were
not annual profits or gains within the meaning of Schedule D, Case VI. That was a case in
which N had wholly sold and disposed of a part of the property and the amount received by
her was the price paid in lump and was not in the nature of income. That case also proceeded
upon the special character of the transaction.

The case of The Commissioners of Inland Revenue v. The Marine Steam Turbine Co., Ltd. (1)
on which reliance was sought to be placed by counsel for the appellants needs no detailed
consideration. In that case, a company which was on the facts found not carrying on a trade
or business was held not assessable to Excess Profits Duty, because the condition of liability
was the carrying on of trade or business.

The appellants had however not sold the entirety of the rights acquired by them from the
Karanpura Company. The conveyance was subject to several restrictions and the appellants
retained in part rights in the land conveyed. The transaction was substantially a commercial
transaction for sharing the profits of the commercial activities of the Associated Cement Ltd.
The High Court was therefore right in holding that the transaction dated May 7, 1935, was a
commercial transaction and the payment under cl. (1) thereof at the rate of 0- 13 as. 'per ton
of cement sold was of the nature of income and not capital.

In that view of the case, the appeal fails and is dismissed with costs.

(ii)CIT v Saurashtra Cement Ltd. (2010) 325 ITR 422 (SC) - D.K. Jain, C.K. Prasad

1.This appeal, by special leave, at the instance of the Revenue is directed against the
judgment and order dated 27th June, 2001 delivered by the High Court of Gujarat at
Ahmedabad in Income Tax Reference No.44 of 1986. By the impugned judgment, the High
Court has answered the following questions, referred to it by the Income Tax Appellate
Tribunal, Ahmedabad (for short "the Tribunal") under Section 256(1) of the Income Tax Act,
1961 (for short "the Act"), in the affirmative and in favour of the assessee.

(i) Whether the Tribunal has not erred in law on facts in holding that the amount of
Rs.8,50,000/- received by the assessee was not taxable as revenue receipt in the hands of the
assessee?

(ii) Whether the finding of the Tribunal that the receipt relating to liquidated damages cannot
be treated as a revenue receipt but must be held to be a capital receipt not exigible to tax is
correct in law?
 115

(iii) Whether the assessee is entitled to the addition made to the machinery during the year
thus determining the capital employed for the purpose of claim under Section 80J of the
Income Tax Act, 1961?

The assessee, engaged in the manufacture of cement etc; entered into an agreement with M/s
Walchandnagar Industries Limited, Bombay, (hereinafter referred to as "the supplier") on 1st
September, 1967 for purchase of additional cement plant from them for a total consideration
of Rs.1,70,00,000/-. As per the terms of contract, the amount of consideration was to be paid
by the assessee in four instalments.
The agreement contained a condition with regard to the manner in which the machinery was
to be delivered and the consequences of delay in delivery. Insofar as the present
appeal (1987) 4 SCC 530
 116

is concerned, clause No.6 of the agreement is relevant and it reads as follows:

"6. xxx xxxxxx
Delayed Deliveries:
In the event of delays in deliveries except the reason of Force Majeure at para 5 mentioned
above, the Suppliers shall pay the Purchasers an agreed amount by way of liquidated
damages without proof of damages actually suffered at the rate of 0.5% of the price of the
respective machinery and equipment to which the items were delivered late (sic), for each
month of delay in delivery completion. It is further agreed that the total amount of such
agreed liquidated damages shall not exceed 5% of the total price of the plant and machinery."
As per the said clause in the agreement, in the event of delay caused in delivery of the
machinery, the assessee was to be compensated at the rate of 0.5% of the price of the
respective portion of the machinery for delay of each month by way of liquidated damages by
the supplier, without proof of actual loss. However, the total amount of damages was not to
exceed 5% of the total price of the plant and machinery.
4.The supplier defaulted and failed to supply the plant and machinery on the scheduled time
and, therefore, as per the terms of contract, the assessee received an amount of Rs.8,50,000/-
from the supplier by way of liquidated damages.
5.During the course of assessment proceedings for the relevant assessment Year, a question
arose whether the said amount received by the assessee as damages was a capital or a revenue
receipt. The Assessing Officer negatived the claim of the assessee that the said amount
should be treated as a capital receipt. Accordingly, he included the said amount in the total
income of the assessee. Aggrieved, the assessee filed an appeal before the Commissioner of
Income Tax (Appeals), but without any success. The assessee carried the matter further in
appeal to the Tribunal. Relying on the ratio of the decisions of this Court in Commissioner of
Income Tax, Nagpur Vs. Rai Bahadur Jairam Valji and Others2 and Kettlewell Bullen and
Co. Ltd. Vs. Commissioner of Income-Tax, Calcutta3, the Tribunal came to the conclusion
that the said amount could not be treated as a revenue receipt. According to the Tribunal, the
payment of liquidated damages to the assessee by the supplier was intimately linked with the
supply of machinery i.e. a fixed asset on capital account, which could be said to be connected
with the source of income or profit making apparatus rather than a receipt in course of profit
earning process and, therefore, (1959) 35 ITR 148 (SC) AIR 1965 SC 65it could not be
treated as part of receipt relating to a normal business activity of the assessee. The Tribunal
also observed that the said receipt had no connection with loss or profit because the very
source of income viz., the machinery was yet to be installed. Accordingly, the Tribunal
allowed the appeal and deleted the addition made on this account.
6.Being dissatisfied with the decision of the Tribunal, as stated above, at the instance of the
Revenue, the Tribunal referred the afore-noted questions of law for the opinion of the High
Court. The reference having been answered against the Revenue and in favour of the
assessee, the Revenue is before us in this appeal.
7.We have heard Mr. R.P. Bhatt, learned Senior Counsel appearing for the Revenue and Mr.
Bhargava V. Desai on behalf of the assessee.
8.Mr. Bhatt submitted that although the said amount of damages had been received by the
assessee under clause 6 of the agreement for breach of contract, yet the said amount had been
received as compensation for the loss of profit, and therefore, it is in the nature of a revenue
 117

receipt. According to the learned counsel, it was on account of late commissioning of the
plant that the assessee could not commence production as per its schedule and thereby
suffered loss in its profits, which was compensated by the supplier and, therefore, the said
amount should have been considered as revenue receipt.
9.Per contra, Mr. Desai, learned counsel appearing for the assessee, while supporting the
decision of the High Court submitted that the amount received by the assessee was by way of
compensation for delay in the delivery and installation of the plant and had a direct nexus
with the capital asset and therefore, it was in the nature of a capital receipt. Learned counsel
also argued that answer to the questions stands concluded in favour of the assessee by the
decision of the High court of Madras in E.I.D. Parry Ltd. Vs. Commissioner of Income Tax4,
which has attained finality on account of dismissal of the Civil Appeal preferred by the
Revenue against the said judgment.
10.Thus, the short question for determination is whether the liquidated damages received by
the assessee from the supplier [1998] 233 ITR 335 (Mad) of the plant and machinery on
account of delay in the supply of plant is a capital or a revenue receipt?
11.The question whether a particular receipt is capital or revenue has frequently engaged the
attention of the Courts but it has not been possible to lay down any single criterion as
decisive in the determination of the question. Time and again, it has been reiterated that
answer to the question must ultimately depend on the facts of a particular case, and the
authorities bearing on the question are valuable only as indicating the matters that have to be
taken into account in reaching a conclusion. In Rai Bahadur Jairam Valji (supra), it was
observed thus:
"The question whether a receipt is capital or income has frequently come up for
determination before the courts. Various rules have been enunciated as furnishing a key to the
solution of the question, but as often observed by the highest authorities, it is not possible to
lay down any single test as infallible or any single criterion as decisive in the determination
of the question, which must ultimately depend on the facts of the particular case, and the
authorities bearing on the question are valuable only as indicating the matters that have to be
taken into account in reaching a decision. Vide Van Den Berghs Ltd. v. Clark5. That,
however, is not to say that the question is one of fact, for, as observed in Davies (1935) 3
I.T.R. (Eng. Cas.) 17 (H.M. Inspector of Taxes) v. Shell Company of China Ltd.6, "these
questions between capital and income, trading profit or no trading profit, are questions which,
though they may depend no doubt to a very great extent on the particular facts of each case,
do involve a conclusion of law to be drawn from those facts."
12.In Kettlewell Bullen and Co. Ltd. (supra), dealing with the question whether compensation
received by an agent for premature determination of the contract of agency is a capital or a
revenue receipt, echoing the views expressed in Rai Bahadur Jairam Valji (supra) and
analysing numerous judgments on the point, this Court laid down the following broad
principle, which may be taken into account in reaching a decision on the issue:
"Where on a consideration of the circumstances, payment is made to compensate a person for
cancellation of a contract which does not affect the trading structure of his business, nor
deprive him of what in substance is his source of income, termination of the contract being a
normal incident of the business, and such cancellation leaves him free to carry on his trade
(freed from the contract terminated) the receipt is revenue : Where by the cancellation of an
agency the trading structure of the assessee is impaired, or such cancellation results in loss of
 118

what may be regarded as the source of the assessee's income, the payment made to
compensate for cancellation of the agency agreement is normally a capital receipt."
13.We have considered the matter in the light of the afore- noted broad principle. It is clear
from clause No.6 of the agreement dated 1st September 1967, extracted above, that the
liquidated damages were to be calculated at 0.5% of the price of the respective machinery and
equipment to which the items were delivered late, for each month of delay in delivery
completion, without proof of the actual damages the assessee would have suffered on account
of the delay. The delay in supply could be of the whole plant or a part thereof but the
determination of damages was not based upon the calculation made in respect of loss of profit
on account of supply of a particular part of the plant. It is evident that the damages to the
assessee was directly and intimately linked with the procurement of a capital asset i.e. the
cement plant, which would obviously lead to delay in coming into existence of the profit
making apparatus, rather than a receipt in the course of profit earning process. Compensation
paid for the delay in procurement of capital asset amounted to sterilization of the capital asset
of the assessee as supplier had failed to supply the plant within time as stipulated in the
agreement and clause No.6 thereof came into play. The afore-stated amount received by the
assessee towards compensation for sterilization of the profit earning source, not in the
ordinary course of their business, in our opinion, was a capital receipt in the hands of the
assessee. We are, therefore, in agreement with the opinion recorded by the High Court on
question Nos. (i) and (ii) extracted in Para 1 (supra) and hold that the amount of Rs.8,50,000/-
received by the assessee from the suppliers of the plant was in the nature of a capital receipt.
14.We, therefore, dismiss the appeal with no order as to costs.
(iii)ACIT vs Meenakshi Khanna (2013- TIOL880ITATDEL

This is an appeal filed by the Revenue against the order of the Commissioner of Income Tax
(Appeals)-XXV, New Delhi dated 17.11.2011 for the assessment year 2008-09. The grounds
of appeal taken by Revenue are as under:"A. Whether Ld. CIT (A) was justified in deleting
addition of Rs.39,98,408/- made by the Assessing Officer u/s 56(2) (vi) when the amount
received by the assessee was without consideration.

B. Whether Ld. CIT (A) was justified in deleting addition of Rs.39,98,408/- when provisions
of section 56 (2) (vi) were clearly applicable in the case of the assessee.

C. Whether Ld. CIT (A) was justified in the deleting addition of Rs.39,98,408/- when the
amount received was not from the relative (ex-spouse) of the assessee and hence falls in
exceptions to charging of tax."

2. The brief facts of the case are that the return of income was filed on 23.07.2008 disclosing
a total income of Rs.8,15,050/-. The case of the assessee was selected for scrutiny.

3. During the assessment proceedings, the Assessing Officer observed from the bank
statement of assessee that there was a credit of Rs.39,98,408.60 equal into Rs.99,093.15US$.
The assessee was asked to submit explanation in respect of aforesaid credit entry to which the
assessee replied that the amount was received as alimony due from her husband over a period
of time and in support the assessee filed confirmation from Dr. Paul Dax, a national of
Germany and ex-husband who has stated as under:
 119

" MS. Meenakshi Khanna is my ex-wife and that I have sent her US $ 99,093 during the
month of August, 2007."

4. The Assessing Officer show caused the assessee as to why not the amount received be
added to the income of assessee as per provisions of section 56(2) (vi) of the Act. In
response, assessee submitted her reply by letter dated 18.10.2010 stating as under:

"This is regarding the amount of 99,093 US $ received in our saving a/c from US. It is stated
that the above said amount received from her ex-husband Dr. Paul Dax for
which confirmation has been given earlier. This amount has been received as alimony from
ex-husband as per divorce agreement in August 1990. It is also stated that assessee has never
received any amount from her ex-husband earlier."

5. The Assessing Officer relying upon the provisions of section 56(2)

(vi) held that the assessee was not covered under the definition of relative as provided in
exceptions to section 56(2) (vi) and, therefore, held the amount received as income taxable
under the provisions of section 56(2) (vi).

6. Dissatisfied with the order, the assessee filed appeal before the CIT (A) and submitted
various submissions. The CIT (A) after going through the submissions of assessee deleted the
addition by holding as under:

"The word consideration has not been defined under the Income Tax Act therefore we need to
verify its meaning from the law which govern principles of contract. Consideration has been
defined u/s 2(d) of Indian Contract Act which inter-alia reads:-
"That at the desire of the promisor, the promise or any other person has done or abstained
from doing, or does or abstains from doing, or promises to do or to abstain from doing,
something, such act or abstinence or promise is called a consideration for the promise."
In Currie vs. Misa (1875) LR 10 EX-153 the consideration was defined as "A valuable
consideration, in the sense of the law, may consist either in some right, interest, profit, or
benefit accruing to the one party, or some forbearance, detriment, loss, or responsibility,
given, suffered, or undertaken by the other."
This definition has been considered by Hon'ble Supreme Court and compared with the
definition given in section 2(d) of Contract Act and approved as being practically the same in
ChidambaraIyer V. RengaIyer (1966) 1 SCR 168.
Going by these definitions it cannot be said that the appellant received the money without
consideration which is a prerequisite condition for invoking clause (vi) of sub-section (2)
of section 56 of the Act because appellant in the facts received the amount against
consideration of relinquishing her personal right of claiming monthly maintenance as
provided under law. In view of the above of the fact that amount was received against
consideration the addition made by Ld. Assessing Officer of the alimony received is deleted.
Proceeding further with the second question "who is spouse" of the individual? The word
'spouse' has not been defined under the Income Tax Act. The word 'spouse' as defined under
law lexicon second edition (2001) means a wife or a husband or bride as the case may be.
Since the amount was received by the appellant from the husband as condition of separation
 120

and the amount was paid by way of alimony only because they were husband and wife and
the appellant was spouse person who has paid the amount therefore the payment received
amounts to have been received from the spouse of the individual and hence falls within the
exception clause of relative. Therefore also clause (vi) of sub-section (2) section 56 is not
applicable and amount received will not amount to income u/s 2(24) of Act."

7. Aggrieved, the Revenue is in appeal before us. At the outset, the Ld. Departmental
Representative submitted that payments in lieu of divorce were to be made in installments
and there was no mention of lump- sum payment in the divorce agreement. He further argued
that the divorce was executed in 1990 and the amount was received in the Financial Year
2007- 08 in which year the assessee was not a wife of husband as the divorce had already
taken place and, therefore, the amount received by her from him did not fit into the definition
of relative as provided in explanation to section 56(2) (vi). Reliance in this respect was placed
on the case law of Princes Maheshwari Devi vs. CIT reported in 147 ITR 258 wherein it was
held that monthly receipts of alimony were income taxable under the Act.

8. The Ld. AR on the other hand, argued that there was an agreement for custody, separation
and divorce on 01.12.1989 and divorce finally took place on 20.04.1990 and till the date of
divorce they were husband and wife and money was received pursuant to this agreement and
the husband of assessee had agreed to pay this money in installments over a period of time
which he did not honour and, therefore, the wife threatened for execution of divorce
agreement and her husband, therefore, parted with the amount as full and final settlement in
lieu of past monthly non payments and in lieu of future payments. It was further argued that
the amount received was not without consideration and rather it contained consideration for
extinguishing her right of living with her husband. It was further argued that the amount was
a capital receipt and in this respect, the case law of Princes Maheshwari Devi of Pratapgarh
vs. CIT (1984) 147 ITR 258 was relied upon.

9. We have heard the rival parties and have gone through the material placed on record. We
find that the divorce agreement was though entered in 1989-90 and monthly payments were
promised to be paid to the assessee by husband, who did not pay the same and, therefore, the
assessee threatened to take legal action against husband who therefore, paid a lump-sum
amount for settlement of all her claims against the husband.

10. The Ld. CIT (A) has held that amount was paid by way of alimony only because they
were husband and wife and appellant was spouse of the person who has paid the amount and,
therefore, payment received from spouse did fall within the definition of relative. The Ld.
CIT (A) has also held that the amount was received against consideration of relinquishing her
personal right of claiming monthly payments as provided under the divorce agreement. In the
case law of Princes Maheshwari Devi relied by both Ld. Departmental Representative and
Ld. AR, the Bombay High Court had held monthly payments of alimony as taxable and
lump-sum amount of alimony as tax free being capital receipt.

11. In the present case, though the assessee was to receive monthly alimony which was to be
taxable in the each year from conclusion of divorce agreement but in this case monthly
payments were not received and, therefore, were not offered tax. The receipt by the
assesseerepresents accumulated monthly installments of alimony which has been received by
the assessee as a consideration for relinquishing all her past and future claims. Therefore, we
held that there was sufficient consideration in getting this amount and, therefore, section
56(2) (vi) is not applicable. Moreover, if the Revenue's arguments are to be accepted of it
 121

being monthly payments liable for tax as per Bombay High Court order, then also the
amounts represented by past monthly payments can not be taxed in this year. Therefore, we
held that amount was a capital receipt not liable to tax.

In view of the above facts and circumstances, we do not find any infirmity in the orders of
CIT (A). Hence, the appeal filed by the Revenue is dismissed.

(iv)CIT v Rani Shankar Mishra (2010) 320 ITR 542 (Del) - ON'BLE MR JUSTICE
BADAR DURREZ AHMED, HON'BLE MR JUSTICE RAJIV SHAKDHER

In January, 1982, the assessee had applied for a job in the Voice of America which was a
state owned broadcasting agency. In 1984, the assessee was informed that she had cleared the
competitive test. But, she was never offered the job. It is relevant to note that in 1977, a class
action suit had been filed before the United States District Court for the District of Columbia,
United States entitled Carolee Brady Heartman, et al. v. Madeleine K. Albright, Secretary of
State and Marc B. Nathanson, Chairman, Broadcasting Board of Governors: Civil Action
No.77-2019 JR. The said class action had been brought on behalf of the women who had
been denied employment in certain professions and technical positions in the former United
States Information Agency (USIA). The allegation was that the women had been denied entry
into certain positions because of their sex, in violation of Title VII of the Civil Rights Act of
1964 of USA.

3. The matter had travelled right upto the United States Supreme Court and, thereafter, the
claim forms filed by over 1100 women were being analysed. One claim form was also
submitted by the assessee in 1989. In the course of hearing of individual claims, hearing in
respect of 48 such class members had been concluded and 46 out of them had won in whole
or in part. Based on this information and the knowledge acquired during the hearings, a
proposal was made by the Government of United States to settle the entire class action for
US$ 508 million. The said settlement offer was accepted and a consent decree, which was
approved by the United States District Court for the District of Columbia on 22.03.2000, was
drawn up. As per the consent decree, each of the members of the class other than those whose
cases had been individually settled by then, were entitled to the said sum of US$ 508 million
in full and final settlement of all claims for the relief, including without limitation, all claims
for back pay, instatement, front pay, retirement and other employee benefits and pre-
judgment interest. Post-judgment interest was also decreed from the date on which the
consent decree was approved by the court upto the date of payment. Consequently, the
assessee received her share out of US$ 508 million which was given to the entire class of
1100 claimants (except those claimants whose cases had been individually decided by then).

4. The question that has arisen in the present case is whether the said amount received by the
assessee in the two assessment years in question would be covered within the expression
"profits in lieu of salary" as appearing in Section 17(3)(iii) of the Income-tax Act, 1961. The
Commissioner of Income-tax had categorically found as a fact that there was no employer-
employee relationship between the assessee and the Voice of America or the United States
Government. Consequently, the Commissioner of Income-tax (Appeals) concluded that the
said amount received by the assessee cannot fall within the concept of "salary". The tribunal
also noted the factual position that the assessee was, in fact, never offered the job.
Consequently, the only conclusion that could be arrived at with regard to the nature of the
amount received by the assessee was that it was not offered as a part of or arising out of the
employment of the assessee. The amount was received by the assessee by way of
 122

compensation for not having been offered the job with the Voice of America. The allegation
was, as noted above, that she alongwith about 1100 other women had been discriminated
against on the ground of sex and had not been offered jobs by the Government agency.

5. Section 17(3)(iii) reads as under:-

"17. "Salary", "perquisite" and "profits in lieu of salary" defined. -

(3) "Profits in lieu of salary" includes -

(i) xxxxxxxxxxxxxxxx xxxx;

(ii) xxxxxxxxxxxxxxxxxxxx;
(iii) any amount due to or received, whether in lump sum or otherwise, by any assessee from
any person -
(A) Before his joining any employment with that person; or (B) After cessation of his
employment with that person."

The expression "profits in lieu of salary" bears reference to the provisions of Section 17 (1)
which defines salary for the purposes of Sections 15, 16 and 17. Salary, inter alia, includes
profits in lieu of salary as per Section 17(1)(iv) of the said Act. It is in this context that the
expression "profits in lieu of salary" has been defined in Section 17(3) of the said Act. The
case of the revenue is that the amounts received by the assessee fall under Section 17 (3)(iii)
of the said Act. We have already extracted the relevant portion of Section 17(3)(iii) above. A
plain reading thereof would indicate that the amount due or received whether in lump sum or
otherwise by an assessee from any person must be in connection with the employment with
that person. Sub-clause (A) refers to the period prior to an assessee joining such employment
and sub-clause (B) refers to the period after cessation of an assessee‟s employment with
another person. We have already noted above that the Commissioner of Income-tax
(Appeals) clearly found as a fact that there was no employer-employee relationship. The
Income- tax Appellate Tribunal has also observed that the assessee was never offered any
job. We have also examined the consent decree and the background to the settlement which
was offered to all the members of the class action. It is clear that the class action itself was
based on the ground that the members of the class had been denied entry into certain
positions because of their gender. The very basis of the class action is that they had not been
given the job for which they had applied on the ground of discrimination based on their sex.
This clearly implies that none of the class members, including the assessee, had ever been
offered a job by the Voice of America or by any other governmental agency of the USA. In
fact, the very concept of a salary is that it is regarded as a reward or recompense for the
services performed. The assessee never performed any service as she was never given the job.
Thus, the revenue‟s contention that the said amounts received by the assessee were in the
nature of „profits in lieu of salary‟, cannot be accepted.

6. Both the Commissioner of Income-tax (Appeals) as well as the Income-tax Appellate

Tribunal have also concluded that the said amounts received by the assessee were in the
nature of capital receipts. We agree with that conclusion because the amount was received by
way of compensation for not being offered the job on the basis of gender discrimination. The
decision of the tribunal, therefore, does not call for any interference.

7. No substantial question of law arises for our consideration.

 123

The appeals are dismissed.

(v)T.Kannan, Madurai vs Department Of Income Tax on 3 March, 2009 - . Facts leading to

this appeal are that for Assessment Year 2007-08, assessee filed return of income [ROI] on
27.10.2007 using e-filing mode admitting an income of Rs. 3,13,65,020/-. During the year
ended March 2004, the assessee had purchased land measuring 2 acres 51 cents situated at
Survey No. 143/1A of Pattanturu Agrahara Village, Krishnarajapuram, Hubli Bangalore East
Taluk from one Mr. P.C.D Nambiar, Chennai at a cost of Rs. 2,24,54,580/-. It was noticed
that on the eastern side of the property, one M/s Paranjape Scheme Constructions Ltd, a
public company of developers had trespassed assessee's property by using a private road to
reach their land located behind assessee's property. To get the encroached portion retrieved,
the assessee filed civil suit which was numbered OS No. 1340/2005 for restraining that
company's entry on assessee's land. After two years of pursuing of this civil suit, the
defendants M/s Paranjape Scheme Constructions Ltd., came for a out-of-court settlement
pleading for giving 'right of easement' to reach their property. As per this agreement, the
assessee permitted the use of the private road enabling them to reach their property and in
turn, the said party paid a sum of Rs. 25 I.T.A. No. 1496/Mds/2010 lakhs to the assessee.
After deducting expenses, the net amount of Rs. 24,82,500/- was credited to the land account.
The assessee treated the said sum as capital receipt and mentioned this fact in the return as
under:

"Note No. 5 : During the year, the assessee received a sum of Rs. 24,82,500/- [net of
expenses] from M/s Paranjape Scheme Constructions Ltd., for providing easement right in
private road situated on the eastern side of the land at S. No. 143/1A of Pattanduru Agrahara
Village , Krishnarajapuram Hubli, Bangalore East Taluk, Bangalore Distrit and the same is
credited to the land account as the receipt is in the nature of capital receipt."

3. The Assessing Officer issued notice to the assessee u/s 143(2) of the Income-tax Act, 1961
[in short, the Act] proposing to treat the impugned receipt of Rs. 25 lakhs as capital gains and
invited objections of the assessee, if any. The assessee filed his reply stating that there was no
transfer of property, and even for the sake of argument, if it was treated as transfer in view of
the decision of the Hon'ble Jurisdictional High Court in the case of CIT Vs. V.B. Srinivasa
Shetty 128 ITR 294, the computation provisions as I.T.A. No. 1496/Mds/2010 prescribed u/s
48 could not be applied since there was no cost of acquisition in respect of the transfer of the
rights, if any. So, according to the assessee, amount received was only capital receipt and
could not be treated a capital gain or any other income for that matter. Sensing that he could
not tax this receipt under the head 'capital gains', Assessing Officer tried to tax this receipt as
rent for the use of private road and accordingly, he treated the net amount of Rs. 24,82,500/-
as rent received for using land under the head 'income from other sources'. Being aggrieved,
the assessee filed first appeal and the Commissioner of Income-tax [Appeals] has finally
epilogued that this receipt cannot be taxed under the head 'income from other sources' and
that this receipt is only capital receipt and under the provisions of the Act, the same cannot be
taxed.

4. We have heard the rival submissions and have carefully considered the entire material on
record. It was argued by the ld. D.R. that this is a compensation amount received from the
company towards using assessee's portion of land and ought to have been confirmed by the
Commissioner of Income-tax [Appeals] as income I.T.A. No. 1496/Mds/2010 under the head
'income from other sources' being rent received from this land. In fact, a piquant situation has
arisen in this case. M/s Paranjape Scheme Constructions Ltd. did not have egress or ingress to
 124

its property and that is why it encroached upon the property of the assessee. For that matter,
the assessee was compelled to file civil suit to stop this company from trespassing upon his
land. As per the court decree, resulted into by way of compromise between the parties, 'a
right to easement' was granted to the company for which the assessee received Rs. 25 lakhs.
As per this agreement, which we have gone through, the ownership of that property would
always remain with the assessee. In any case, if the assessee ever sells this property to any
third party, the right of easement will still continue with the company and he will have to sell
the same alongwith that encumbrance resulting as per the court decree, meaning thereby,
assessee has not sold any part of his property, yet he is precluded to unilaterally deal with the
same in any manner he liked to. Legally, he continues to be its owner but practically he
cannot stop use of this portion of the land by the company. It is a fact that he has received Rs.
25 lakhs and has also shown this amount in the 'note' appended to his return of income, as
capital receipt in the 'land account'. Initially, the Assessing Officer proposed to tax this
receipt under the head 'capital gains', but when the assessee explained that although this is
capital receipt, but this cannot be taxed under any provision of law because the 'right of
easement' being an 'intangible asset' having no cost thereof cannot be taxed, as such in view
of the decision of the Hon'ble Jurisdictional High Court rendered in the case of V.B.
Srinivasa Shetty [supra]. Being convinced about sensing this legal position, the Assessing
Officer has taxed this receipt under the head 'income from other sources'. In the opinion of
the Assessing Officer, this is a 'rent receipt' given by the company for the use of assessee's
land for reaching to land locked property. The Commissioner of Income-tax has repelled this
reason of the Assessing Officer and after discussing all aspects, he has finally gone with the
claim of the assessee. We are also of the same view. This receipt cannot be treated as rent by
any stretch of imagination, because for receiving a rent, there has to be a relationship of
'landlord' and 'tenant', between the parties. In this case, nobody is land lord and tenant.
Assessee is not a landlord, rather, he is the owner of the property. Company is not tenant but
is granted only a easement right and can use this piece of land for good without hindrance
from assessee's side. There is no transfer of property, neither the company is a tenant, receipt
has been gained by assessee by virtue of use of this property as per court decree by way of
easement right. This receipt being capital receipt in relation to capital asset can only be taxed
under the head 'capital gain', if it all it can be taxed. Since, in this case, it being intangible
asset having no cost, cannot be taxed in view of the dictum of the Hon'ble Jurisdictional High
Court in the case of V.B. Srinivasa Shetty [supra]. Now the question arises as to whether any
income can go untaxed when there is a residue clause provided in section 56(1) of the Act.
We are afraid that this is a case where this income cannot be taxed and if it cannot be taxed
under the Act, no tax can be levied under one pretext or the other. Our above view is
supported by the decision of the Hon'ble Supreme Court taken in the case of Sandhu Brothers
reported in 273 ITR 1 wherein it has been held that 'it would be illogical and against logic
of section 56 of the Act to hold that that which is not chargeable to capital gain could be
taxed as income u/s 56 of the Act'. Decision of the Hon'ble Allahabad High Court relied on
by the ld. D.R. in 123 ITR 24 in the I.T.A. No. 1496/Mds/2010 case of Raja Bulund Sugar
Company Ltd. Vs. CIT is entirely on different issue and different facts, and is, therefore, not
at all applicable even remotely to the facts of this case. The ratio of the decision of the
Hon'ble Supreme Court in the case of State of Punjab Vs. British India Corporation [1964] 2
SCR 114:AIR 1963 SC 1459 also supports, to some extent, the case of the assessee.
Consequently we do not find any infirmity in the appellate order and decline to interfere with
the same.

5. In the result, the appeal filed by the department stands dismissed.

 125

Section -9 of Income Tax Act:

Sanofi Pasteur Holdings SA vs. Dept. of Revenue – [TS-57-HC-2013 (AP)] -
JUSTICE GODA RAGHURAM, JUSTICE M.S. RAMACHANDRA RAO
In a path-breaking judgement, the Andhra Pradesh High Court has overruled the earlier order
passed by the Authority for Advance Rulings (AAR) in November, 2011 and held that capital
gains arising out of transfer of French company’s shares by French corporate shareholders to
the assessee, will not be taxable in India, under the beneficial provisions of the Double
Taxation Avoidance Agreement (tax treaty) between India and France. Further, it was held
that the retrospective amendments to provisions of the Income-tax Act, 1961 (the Act) do not
have any impact on the interpretation of the tax treaty provisions; consequentially, the
Revenue’s order under section 201 holding Sanofi as ‘an assessee-in-default’, is not
sustainable.
Facts of the case
Shanta Biotechnics Ltd, (SBL), an Indian company engaged in the business of research and
development of technologies for pharmaceutical products, is a subsidiary of ShanH SAS,
France (ShanH). ShanH is a joint venture of Merieux Alliance (MA) and Groupe Industriel
Marcel Dassault (GIMD). Both MA and GIMD were French entities engaged in different
lines of businesses. A share purchase agreement (SPA) was entered into between MA/GIMD
(the sellers) and Sanofi (the buyer) of ShanH shares on 10 July, 2009. Pursuant to the SPA,
Sanofi had purchased 80.37% shares of ShanH from MA and balance 19.63% of ShanH
shares from ShanH. MA and GIMD sought advance ruling on the taxability of sale of shares
of ShanH to Sanofi in India. The AAR [Groupe Industrial Marcel Dassault, In re [2011] 16
taxmann.com 21 (AAR) and Merieux Alliance, In re [2011] 340 ITR 353 (AAR)] ruled that
the transactions are part of a scheme for avoidance of tax and is accordingly taxable in India
as per the Act and also in terms of Article 14(5) of the tax treaty. Aggrieved by the ruling of
the AAR, the buyer as well as sellers filed a writ petition before the Andhra Pradesh High
Court.
Issues before the High Court
The following key issues were inter alia raised before the High Court:

1) Is ShanH not an entity with commercial substance; is a sham or illusory contrivance, a

mere nominee of MA and/or MA/GIMD being the real, legal and beneficial owner(s) of SBL
shares; and a device incorporated and pursued only for the purpose of avoiding capital gains
liability under the Act ?

2) Was the investment, initially by MA and thereafter by MA and GIMD through ShanH in
SBL, a colourable device designed for tax avoidance? If so, whether the corporate veil of
ShanH must be lifted and the transaction (of the sale of the entirety of ShanH shares by
MA/GIMD to Sanofi) treated as a sale of SBL shares?

3) Is the transaction (on a holistic and proper interpretation of relevant provisions of the Act
and the DTAA), liable to tax in India?

4) Whether retrospective amendments to provisions of the Act (by the Finance Act, 2012)
alter the trajectory or impact provisions of the DTAA and/or otherwise render the transaction
liable to tax under the provisions of the Act?
 126

5) Whether the AAR ruling dated 28-11-2011 is sustainable? If not, what is the appropriate
relief that could be granted to the petitioners (in W.P. Nos. 3339 and 3358 of 2012); and
whether the orders by the Revenue dated 25-05-2010 and 15-11- 2011 are valid and
sustainable? and 6) Whether the order dated 25-05-2010 (challenged in W.P. No. 14212 of
2010) determining the petitioner- Sanofi to be an 'assessee in default' in respect of payments
made by it to MA and GIMD for acquisition of ShanH shares, u/S. 201(1) of the Act; the
consequent notice of demand dated 25-05-2010; and a rectification order dated 15-11-2011
(u/S. 154 of the Act) re-computing the long-term capital gain, the tax thereon and the
consequent interest, are valid ?

Relevant principles of statutory interpretation:

We notice and have endeavored to conform to principles of statutory construction, relevant to

the lis before us. We are conscious that the democratic integrity of law, depends entirely upon
the degree to which its processes are legitimate and as Judge Robert H. Bork cautioned, a
judge who announces a decision must be able to demonstrate that he began from recognized
legal principles and reasoned in an intellectually coherent and politically neutral way to his
result; and that the desire to do justice, whose nature seems to him obvious, is compelling
while the concept of the legal process is abstract, the signals occasionally ambivalent and the
abstinence it counsels (from encroaching into the realm of other organs of Government)
unsatisfying. We are also conscious of Cardozo's stately admonition, more appropriate to
pursuing the interpretive role in adjudication; and that choice of appropriate interpretive
principles is a hermeneutic choice not a political or a policy choice. The relevant principles:

(i) The task of interpretation is to arrive at the legal meaning of an enactment. This is not
necessarily the same as its grammatical meaning. Salmond observed: the object of
interpreting a statute is to ascertain the intention of the legislature enacting it;

(ii) The grammatical meaning of an enactment is its linguistic meaning taken in isolation
from legal considerations, i.e., the meaning it bears when, as a piece of English prose, it is
construed according to the rules and usages of grammar, syntax and punctuation (the verbal
formulae) and the accepted linguistic canons of construction. An enactment is grammatically
ambiguous where grammatically capable of more than one meaning. A modern statement of
the nuanced principle on this aspect is clear from the following passage in the speech of Lord
Simon of Glaisdale: Suthendran v. Immigration AppealTribunal:

Parliament is prima facie to be credited with meaning what is said in an Act of Parliament.
The drafting of statues, so important to a people who hope to live under the rule of law, will
never be satisfactory unless courts seek whenever possible to apply 'the golden rule' of
construction, that is to read the statutory language, grammatically and terminologically, in the
ordinary and primary sense which it bears in its context, without omission or addition. Of
course, Parliament is to be credited with good sense; so that when such an approach produces
injustice, absurdity, contradiction or stultification of statutory objective the language may be
modified sufficiently to avoid such disadvantage, though no further, a passage quoted with
approval in Harbhajan Singh v. Press Council of India;

(iii) Identifying the legal meaning of an enactment from its grammatical meaning requires an
informed interpretation, which according to the rule propounded by Oliver, LJ, in relation to
taxing statutes in - Wicks v. Firth (Inspector of Taxes)99, is however of general application.
The formulation reads: accepting once more that the subject is not to be taxed except by clear
 127

words, the words must, nevertheless, be construed in the context of the provisions in which
they appear and of the intention patently discernible on the face of those provisions from the
words used;

(iv) Where, in relation to the facts of a given case, the enactment is grammatically
ambiguous, the legal meaning is the one to which on balance of factors arising from the
relevant interpretative criteria accord the greater weight;

(v) Ambiguity could be semantic, syntactical or contextual. The latter is where there is a
conflict between the enactment and its internal or external context. Thus, where there are two
possible grammatical meanings of the enactment in relation to its internal or external context,
it is ambiguous;

(vi) Grammatical ambiguity in the above sense could be general or relative, the latter when it
is ambiguous only in relation to certain facts;

(vii) In a case of relative ambiguity the facts must be brought into the equation;

(viii) The unit of interpretation is not merely the subset of the relevant provision falling to be
construed, the provision itself or the generic enactment in which it occurs but the whole
universe of applicable and relevant legal rules of which the enactment is a part;

In the case on hand therefore, the meaning and the trajectory of the retrospective amendments
to the Act (by the Finance Act, 2012), must be identified by ascertaining the legal meaning of
the amendments, considered in the light of provisions of the Act; the mischief, the
amendments are intended to address; and other applicable legal norms; which in the context
include provisions of the DTAA, an instrument effectuated under constitutional text and
authority and duly notified under provisions of the Act; and the amendment ought be
confined to its legitimate locus and orbit.

As earlier observed, provisions of the Act and of the DTAA are overlapping and competing
legal magisteria and the proper interpretive role requires, on a harmonious construction and in
accordance with the relative weight and priority, giving effect to both competing provisions,
as per the inter se weightage mandated by the overarching legal norms, set out in Section
90(2) of the Act. Revenue interpretation of DTAA, to justify application of provisions of the
Act : Analysis :

Petitioners and Revenue are agreed that provisions of paragraphs (1) to (4) of Article 14 of
the DTAA have no bearing or application to chargeability to tax or the Contracting State to
which tax on the capital gain involved, is allocated, in respect of the transaction in issue.
Though Article 14(4) is not relevant and admittedly so, reference to this provision would
assist elucidation of the true meaning, purpose and trajectory of the provisions of Article
14(5). Petitioners and Revenue agree that Article 14(5) is the relevant and applicable
provision; though while petitioners contend that the tax on the capital gain is allocated to
France, Revenue claims that it stands allocated to India. Petitioners additionally contend that
if Revenue's "underlying assets" theory is pursued to its logical conclusion, the tax on the
capital gain is allocated to France, under Article 14(6).

Article 14(4), [as admitted by Revenue - vide written submissions - paragraph 6 (sub-paras 6
and 16)], has no application as this provision pertains to gains from alienation of shares of the
 128

capital stock of a company, the property of which consists directly or indirectly principally of
immovable property situated in a Contracting State. Clearly, the explicit intent and reach of
this provision is to tax capital gain derived from alienation of shares of real estate companies,
whose assets are comprised principally of immovable property, subject however to exclusion
of immovable property pertaining to the industrial or commercial operations of such company
from computation of the taxable capital gain.

Provisions of Article 14(4) have been set out. On a true, fair and grammatical construction of
the provision, it is clear that the expression "directly or indirectly" is incorporated, to
accommodate a "see through". Thus, while considering whether the gain from alienation of
shares of the capital stock of a company is chargeable to tax, assessment of the transaction
must necessarily involve the enquiry whether the property of the company principally
(whether directly or indirectly), consists of immovable property. The expression "directly or
indirectly" is intended to clarify the treaty intent that gain from alienation of shares of a
company, whose property consists principally of immovable property, whether directly or
indirectly, is chargeable to tax and the right to tax is allocated to the Contracting State
whereat the immovable property of the company so liable, is situate.

The requisites for application of Article 14(4) are, in our considered view, the following :

(i) The transaction must involve alienation of shares of the capital stock of a company [as
defined in Article 3(1)(e)]; and

(ii) The property of such company must principally comprise (directly or indirectly),
immovable property;

On fulfillment of the two criteria above, the contracting State allocated the right to tax such
gain is the one where immovable property of such company, is situate.

Article 14(5) deals with alienation of shares (excluding those comprehended within
paragraph 4) representing a participation of at least 10% in a company which is a resident of
a Contracting State and the right to tax is allocated to that contracting State in which the
company is a resident. On an interactive analyses of paragraphs (4) and (5), in our considered
view, the scope and reach of Article 14(5) is :

(a) the transaction must involve gains from alienation of shares [not being shares of the
capital stock of a company, the property of which principally comprises, directly or indirectly
of immovable property - Art.14(4)], representing participation of at least 10% in the
company; and

(b) on indicators in (a) being satisfied, the gains derived from alienation of shares of such
company may be taxed in the contracting State whereat the company is resident.

On no rational interpretive principle is it legitimate to consider provisions of Article 14(5) as

permitting a "see through". The provision, on a true, fair and non-manipulative interpretation,
does not accommodate reckoning of the inherence of control by an
intermediary/interpositioned joint venture company (ShanH), of the affairs, management and
assets of its subsidiary (SBL), as alienation of shares by or of the control over the affairs,
management and assets of the subsidiary (SBL), by one or all of the distinct participants of
 129

the interpositioned JV i.e., by MA/GIMD, who are distinct and French resident corporate
entities themselves.

It therefore cannot be, that the transaction in issue is permitted (under the DTAA regime) to
be taxed in India on the basis that there is a deemed alienation of SBL shares; and in France
on the basis that there actual alienation, of ShanH shares. Neither the text nor the context
of Art.14(5) legitimize such interpretation. Strained construction which subverts the policy
underlying India entering into a double taxation avoidance treaty with another State, by
enabling dual taxation through artificial interpretation of treaty provisions, is in our view, an
impermissible exercise of judicial discretion (of choosing among alternative interpretations).

Petitioners have contended (a contention that commends our acceptance) that the UN Model
Convention provides that countries negotiating a treaty have an option in Article 14(5) to
permit the clause to operate only in instances where a substantial portion of the company's
assets are situate in that contracting State, mere residence of a company would not suffice and
its underlying assets should also be situate in that State. The relevant commentary on the UN
Model Convention, at paragraph-11, mentions that such a clause must be incorporated as part
of a treaty. The relevant part of the commentary reads : Some countries might consider that
the Contracting State in which a company is resident should be allowed to tax the alienation
of its shares, only if a substantial portion of the company's assets are situated in that State,
and in bilateral negotiations might urge such a limitation. Other countries might prefer that
paragraph to be omitted completely.

The DTAA does not incorporate such a clause and accommodating a "see through" in Article
14(5) would transgress the negotiated terms of the DTAA since the capital gains tax arising
from the transaction, which stands allocated to France in terms of the DTAA would be
susceptible to double-taxation, both in India and France, by an artificial and strained
construction of the provisions of Article 14(5).

Para 91. ... ... This invitation by Revenue, in our considered view, transcends the interpretive
role and intrudes into the proper domain of the federal Executive/legislative power, viz.,
treaty making. We politely, but firmly, decline this invitation by the Revenue, to
jurisdictional aggression/overreach.

1) The Court observed that ShanH has a commercial existence, which is distinct from that of
MA and GMID. Main object of incorporation of ShanH was to serve as a an investment
vehicle in other words for pumping foreign direct investment in India and this was done by
way of participation in SBL. Also, the receipt of dividends by ShanH as a shareholder in SBL
is indicative of the fact that ShanH is a distinct entity as the dividends distributed by SBL are
chargeable tax under the Indian law.

2. On going through all the transactional documents, it was observed that ShanH was not
established for the purpose of avoiding capital gains liability under the Indian Income tax Act
of 1961. ShanH was incorporated in conformity with MA'"s established business practices
and organizational structure.

Avoidance of capital gains tax liability in India

The transaction under consideration is one of transfer of control, management and business
interests in SBL by MA and GIMD. In SPA, MA is defined to include its successors and
 130

permitted assignees, whereas there is no assignment by MA in favour of ShanH. In the

amended Articles of Association of SBL, MA is defined to mean itself and does not include
its successor and assignee. MA and GIMD are legal and beneficial owners of SBL shares.
MA and GIMD participated in capital, control and management of SBL. As such, ShanH had
neither control over management nor enjoyed any shareholder’s rights over SBL. ShanH has
no commercial substance. This is supported by the fact that ShanH does not operate any
business, has no fixed assets (except investment in SBL) or employees. Also, due diligence
with respect to SBL was carried out on the mandate of MA. ShanH did not make payments
for acquisition of SBL shares. The subsequent accounting by ShanH of the purchase
consideration paid directly by MA to SBL, as a loan from MA, will not change reality. As
such, lifting of corporate veil of ShanH is justified. This is supported by various judicial
precedents. [McDowell and Company Ltd. v. CTO [1985] 154 ITR 148 (SC), National
Cement Mines Industries Ltd. v. CIT [1961] 42 ITR 69 (SC), JuggilalKamalapat v. CIT
[1969] 73 ITR 702 (SC) and Aditya Birla Nuvo Ltd. v. DDIT [2011] 342 ITR 308 (Bom)]

The fact that ShanH was not incorporated for the purpose of avoidance of tax was reaffirmed
by the fact that a higher rate of capital gain tax is payable and has been remitted to revenue in
France. Tax Department failed to establish that ShanH was interposed only as a tax avoidant
device and hence no case of piercing or lifting of corporate veil of ShanH was made out. The
court observed that is in existence as a rtegistered French resident corporate entity and as the
legal and beneficial owner of shares of SBL and hence the principlae of piercing of corporate
veil of ShanH could be made out.

On lifting the corporate veil, it is evident that MA and GIMD realised the gain on alienation
of shares representing participation of more than 10% in the capital, control and management
of SBL. Thus, the gains are chargeable to tax in India, in view of Article 14(5) of tax treaty.
The long-term capital gains arising on transfer of controlling rights and underlying assets of
SBL, is capable of computation. The gains will be computed by reducing the cost of
acquisition of SBL shares by ShanH from the value of sales of ShanH shares by MA/GIMD
to Sanofi. Once the right to tax the gains stand allocated to the source country, domestic law
provisions of the source country will have to be read into the tax treaty in terms of Article
3(2) of the tax treaty, where any expression has not been defined in a tax treaty. Since
‘alienation’ is not defined in the tax treaty, its meaning has to be imported from the domestic
law (refer section 2(47) of the Act which includes disposal of an asset whether directly or
indirectly). This exercise amounts to giving effect to Article 3(2) of the tax treaty and does
not amount to overriding the tax treaty.

3. According Article 14(5) of the India- France Double Taxation Avoidance of 'Gains from
the alienation of shares representing a participation of at least 10 per cent in a company
which is a resident of a Contracting State may be taxed in that Contracting State.'

Therefore the present case falls within the taxation territory of Spain and not India.
Controlling stake of ShanH over the assets and management of SBL cannot be distinguished
from its shareholding and hence cannot be treated as a separate asset Therefore the given
transaction cannot be taxed in India keeping in view thw provisions of the DTAA between
India and France.

4. The amendment of provisions of the Indian Income Tax Act, 1961are intended to curb
certain mischief targeted to prevent tax avoidance and nowhere are in conflict or alter the
provisions of India Spain DTAA and therefore are not applicable to present case.
 131

The retrospective amendments should not be understood by resorting to the speech of the
Finance Minister while introducing the Finance Bill. Assessee’s contentions Issue 1-
Avoidance of capital gains tax liability in India GIMD, a major business conglomerate
would not have committed to invest 20% in ShanH, if MA and not ShanH was the legal and
beneficial owner of SBL shares. Further, the Revenue cannot ignore that the FIPB before the
transaction recognised it as a valid transaction. There is no necessity of any deed of
assignment since ShanH owns the shares since inception. The copy of general ledger of
ShanH substantiates remittances from ShanH to SBL towards acquisition of shares. ShanH is
an investment company with a commercial substance of investment in an Indian company,
SBL. Setting up of a subsidiary company for making fresh acquisitions was a legal,
permissible and known method of doing business. ShanH is a joint venture (JV) and
genuineness of JV’s had never been disputed in any jurisdiction, either in India or France.
Article 14(5) of the tax treaty does not provide for ‘see through’ and accordingly lifting of
corporate veil is impermissible. The right to tax capital gain arising on the share transfer
transaction was allocated to France as per the tax treaty. Further, the capital gains tax payable
in France was more than the tax payable in India. Thus, ShanH was not conceived, pursued
and persisted to serve as an Indian tax-avoidant scheme. Alternatively, it is not possible to
determine the consideration and the cost of acquisition apportionable to the controlling rights
and underlying assets. Where the computation provisions are linked with the charging
provisions, failure of one component will also make the other inapplicable. Hence based on
the provisions of the Act and tax treaty the sale of shares of ShanH was not liable to tax in
India.
ShanH was incorporated as an investment vehicle, to facilitate foreign direct investment and
to cushion potential investment risks of MA/GIMD directly investing into SBL. ShanH
purchased and owned SBL shares since inception and is the legal and beneficial owner of
SBL shares, being the registered shareholder. ShanH continues to receive dividends on its
SBL shareholding which are assessable to tax under provisions of the Act. ShanH as a
French resident corporate entity is a distinct entity from MA and has commercial substance,
otherwise GIMD would not have committed to invest 20% of stake in ShanH. Subsequently,
ShanH became a JV company in which MA and GIMD were the joint venture partners.
ShanH exists as a corporate entity and continues to hold shares of SBL after the share transfer
between MA/GIMD and Sanofi. In the absence of any evidence to prove that ShanH was set
up only as tax avoidant device, piercing or lifting the corporate veil of ShanH is not
permitted. Further, this is supported by the fact that higher rate of capital gains tax has been
paid in France. As such, as observed in Vodafone International Holdings BV [[2012] 341
ITR 1 (SC)], further enquiry as to de facto control versus legal control and legal right versus
practical rights by ShanH over SBL was unwarranted. Even on piercing the corporate veil of
ShanH, the transaction was that of transfer by MA/GIMD of their ShanH shareholding as
opposed to transfer of SBL shares in favour of Sanofi. The transaction under consideration
was for alienation of 100% shares of ShanH in favour of Sanofi and did not constitute
transfer or deemed transfer of shares, control, management, or underlying assets of SBL. The
right to tax capital gain arising to MA/GIMD has been allocated to France under the
provisions of Article 14(5) of tax treaty. The value of controlling interest or rights of ShanH
over the affairs, assets and management of SBL cannot be computed separately as these
rights are incidental to its shareholding and are not separate assets.
 132

5. The finding of AAR that capital gains arising out of the present transaction were taxable in
India was unsustainable as the transaction did not involve any tax avoidance. There was no
liability on part of Sanofi to deduct tax at source while making payments to MA nad GMID
for acquisition of shares of ShamH as the same is contingent upon capital gains arising and
being chargeable under the Income Tax Act, 1961 and since it is not approved that the
present transaction is chargeable to tax, therefore no liability on Sanofi to deduct is
established.

Summary of conclusions :

a) ShanH is an independent corporate entity, registered and resident in France. It has a

commercial substance and a purpose (FDI in SBL); and is neither a mere nominee of MA
and/or MA/GIMD, nor is a contrivance/device for tax avoidance;

b) since inception (in 2006) till date, ShanH (not MA or MA/GIMD) had acquired and
continues to hold the SBL shares;

c) there is no warrant for lifting the corporate veil of ShanH; and even on looking through the
ShanH corporate persona there is no material to conclude that there is a design or stratagem
to avoid tax;

d) the capital gain arising as a consequence of the transaction in issue is chargeable to tax;
and the resultant tax is allocated to France (not to India) under the DTAA;

e) the retrospective amendments to the Income Tax Act, 1961 (vide the Finance Act, 2012)
have no impact on interpretation of the DTAA; the transaction in issue falls within Article
14(5) of the DTAA; and the tax resulting there from is allocated exclusively to France;

f) the ruling dated 28-11-2011 of the Authority for Advance Rulings is unsustainable; and

g) the order of assessment dated 25-05-2010 (determining Sanofi to be an assessee in default,

u/Sec. 201 of the Act) is unsustainable. The consequent demand notice dated 25-05-2010 and
the Rectification order dated 15-11-2011, being orders/proceedings consequent to the order
dated 25-05-2010, are unsustainable.

This is a landmark ruling from the High Court which would be welcoming news from the
perspective of foreign strategic investors who have made investments in India through a
layered structure. Further, the High Court has commented that in cases involving tax treaty
implication on domestic laws, Azadi BachaoAndolan - [2003] 263 ITR 706 (SC) and
Vodafone International Holdings BV (above) could be relevant cases that may be referred for
guidance. Besides, the High Court has laid down an important principle that retrospective
amendments in the Finance Act, 2012 does not have impact on the protection and taxing
rights under the tax treaty.
CIT Vs. Samsung Electronics Co. Ltd. & Others (245 CTR (Kar) 481)
Facts
The various transactions involved by the taxpayers with non-residents were:
 133

The taxpayer imported computer software as a ‘shrink wrapped’ product (ready to

use/ off the shelf) which was not customized as per the requirements of the tax payer.
The taxpayer secured the software from non-resident and used it for testing the
software developed by the taxpayer to ensure that the software developed conformed
to the requirements of its parent company.
The taxpayer entered into a software license agreement with a non-resident company
whereby it acquired the right to prepare a copy of the software for effective
redistribution, and to make one back-up copy on its own computers. Initially, the
Assessing Officer (‘AO’) passed an order holding that the payments in all the above
transactions amounted to ‘royalty’ under Explanation 2 to section 9(1)(vi) of the Act
and therefore, tax had to be ‘withheld at source’ by the taxpayers. On applying
provisions of the respective DTAAs, the rate of WHT was reduced to 10%.
Additionally, penalty was also imposed on the taxpayer. Aggrieved by the said order,
the taxpayers herein approached the Commissioner of Income Tax (Appeals)
[‘CIT(A)’] who confirmed the order passed by the AO. Against which, an appeal was
preferred before the Income Tax Appellate Tribunal (‘ITAT’) which was decided in
favor of the taxpayer that such payments do not amount to royalty. On department’s
appeal before the Bangalore High Court, the matter was ruled against the taxpayer.
However, on appeal to the Supreme Court, the Supreme Court set aside the order of
the High Court by analyzing section 195 of the Act and remanded the matter to the
High Court for fresh consideration based on certain Supreme Court’s observations in
GE Technology.
ARGUMENTS AND RULING
Arguments of the taxpayers The taxpayer contended before the High Court that the said
payment would not amount to ‘royalty’ within the meaning of Section 9(1)(vi) as the
transaction was in the nature of a sale and not a license. No copyright or part of any copyright
has been licensed to the taxpayer and the sale was simply off the shelf. The proprietary rights
in the software continued to subsist with the non-resident owner and the use of the software
by the taxpayer was limited to making backup copy and redistribution. Further, since the
transaction was in the nature of ‘sale’ and not ‘license’, and given that there was no
permanent establishment (‘PE’) of the non-resident owner in India, such income would not be
taxable in India as business income also. The taxpayer relied on TCS v. State of Andhra
Pradesh1 (‘TCS’) where the Supreme Court held that in a transfer of incorporeal right in a
software wherein copyright remains with the originator, what is actually sold is the copy of
the copyrighted software and not the copyright itself. Furthermore, the taxpayer relied on
OECD commentary and other Supreme Court judgments to establish that only copies of the
software were procured and not the copyright itself. Even though the agreement with the non-
resident company uses the word ‘license’, there is no license or assignment involved in the
transaction as per the Copyright Act. It was argued in one of the appeals that the taxpayer was
involved only in handing over the articles to the ultimate customers and at times the article
was directly sent to them and as such the tax payer did not use the software involved.
Arguments of the revenue
The revenue argued that even if it was a sale, it would still be taxable in India as business
income even without a PE and for this he relied on certain judgments. 2 On the other hand, the
revenue argued that the transaction was in fact a license agreement since the rights granted to
1
2004 ITR (Vol. 271) 401
2
Gracemac Corpn v. ADIT ITA 1331/ Del/ 2008
 134

the taxpayer would not have been available had it not been for the said agreement, therefore,
the payments would amount to royalty and not sale. The revenue distinguished the case of
TCS that the issue was in relation to sales tax and not royalty. The revenue further argued that
even if the payment was made for use of copyrighted article, then in view of the explanation
in section 9(1)(vi) of the Act, ‘royalty’ means consideration including lump sum payment for
transfer of all or any rights for imparting any information concerning the use of copyright
work in which copyright vests with
the non-resident company.
Ruling of the Court
The High Court had to decide the matter in the light of the Supreme Court’s observation that
section 195 uses the word chargeable and therefore, only those payments which are
chargeable to tax in India would be subject to WHT. The Supreme Court referred to certain
cases 3that unless the income is chargeable to tax in India, there is no need for withholding
any tax in India. The High Court held that ‘royalty’ has been explained in section 9(1)(vi) as
being a consideration for the transfer of all or any of the rights in respect of a copyright.
Further, the court read the definition of royalty under the governing DTAA in line with the
Supreme Court decision in Azadi BachaoAndolan4 that provisions of the DTAA were to be
construed narrowly such that they acted to the benefit of the taxpayer. Accordingly, an
examination of Article 12 of the DTAA between India and the USA defined ‘royalty’ as a
payment of any kind received as consideration for the use of or the right to use any copyright.
The High Court then proceeded to examine whether the resident company, by way of such an
agreement, acquired the ‘right to use’ a copyright of the non-resident company under the
DTAA. The court then opined that copyright is an umbrella of rights, and therefore, when a
product is sold which has copyright imbibed in it, then there is transfer of part of the
copyright and transfer of right to use the copyright for internal business. Further, the court did
not heed the ratio laid down in TCS and distinguished it by stating that it was in the context
of sale of goods and not on royalty. The court explained that if the owner of the copyright
continued to exclusively possess proprietary rights over the software, and by way of an
agreement, transferred a right of use of such copyright, such a right could be termed ‘license’
and a payment in lieu thereof could be deemed to be ‘royalty’. The court proceeded to
explain, referring to the Copyright Act, that when the copyright holder (non-resident) could
sue the taxpayer (Samsung Electronics) in the event if any reproduction was made de hors the
agreement, then, what was granted by way of the agreement was a license, and therefore, any
fee in return thereof would be
‘royalty’. Finally, the court distinguished the example of purchasing a book vis-à-vis the
purchase of computer software in a CD. It held that since a license has to be separately
granted for use of software in a CD, there is no similarity with that of purchasing a book
which is supported by the fact that section 14 of the Copyright Act deals separately with
literary works of computer software and that of books, etc.
The Supreme Court’s ruling in TCS was that sale of computer software off the shelf does not
part away with it the incorporeal rights attached to the copyright and is merely a sale of a
copyrighted article. However, the High Court did not appreciate this argument on the point
that TCS did not deal with royalty and was only in the context of sale of goods. The bone of
contention is, what really is the difference between ‘sale of a software’ and ‘licensing of a

3
Cooper Engineering, Czech Ocean Shipping International, Transmission Corporation and Eli Lilly
4
263 ITR 706
 135

software’ when the copyright continues to subsist with the owner. From the point of view of
income tax, this distinction is vital because in case of sale there is no royalty involved as the
same could only be taxed as business income and further, sale is excluded from the definition
of royalty under section 9(1)(vi). However, if the same is treated as licensing and if there is
‘use’ or ‘right to use’ of the copyright, there is royalty involved in it. The ‘use’ of copyright
involves the exercise of exclusive rights of the real owner of the copyright such as sale,
reproduction, to perform in the public, translation, etc. If such rights are transferred, then the
bright line between sale and license diminishes and would be liable to tax under the Act and
the relevant DTAA as royalty. However, one has to wait to see how the Supreme Court
would decide on this issue (if the taxpayer prefers an appeal) especially in the light that it had
provided certain guidelines while remanding this case to the High Court.
Asia Satellite Telecommunications Co. Vs. DIT (332 ITR 340)
The appellant/assessee, viz., Asia Satellite Telecommunications Co. Ltd., is a company
incorporated in Hong Kong and carries on business of private satellite communications and
broadcasting facilities. This company was formed in 1988 and it claims that it had no office
in India. Appeal pertains to the assessment year 1997-98 and it is also claimed that during the
relevant previous assessment year, i.e., 1996-97, the assessee had no customers, who are
residents of India. During the previous year, relevant to the assessment year under appeal, the
appellant was the lessee of a satellite called AsiaSat 1 which was launched in April 1990 and
was the owner of a satellite called AsiaSat 2 which was launched in November 1995. These
satellites were launched by the appellant and were placed in a geostationary orbit in orbital
slots, which initially were allotted by the International Telecommunication Union to UK, and
subsequently handed over the China. These satellites neither use Indian orbital slots nor are
they positioned over Indian airspace. The footprints of AsiaSat 1 and AsiaSat 2 extend over
four continents, viz., Asia, Australia, Eastern Europe and Northern Africa. The footprint is
that area of the earth's surface over which a signal relayed from the appellant's satellite can be
received. AsiaSat 1 comprises of a South Beam and a North Beam and AsiaSat 2 comprises
of the C Band and the Ku Band. The territory of India falls within the footprint of the South
Beam of AsiaSat 1 and the C Band of AsiaSat 2.

It enters into an agreement with TV channels, communication companies or other companies

who desire to utilize the transponder capacity available on the appellant's satellite to relay
their signals. The customers have their own relaying facilities, which are not situated in India.
From these facilities, the signals are beamed in space where they are received by a
transponder located in the appellant's satellite. The transponder receives the signals and on
account of the distance the signals have travelled, they are required to be amplified. The
amplification is a simple electrical operation. Thereafter, the frequency on which the signals
are to be downlinked is changed only in order to facilitate the transmission of signals so that
there is no distortion between the signals that are being received and the signals that are being
relayed from the transponder. The transponder operations are commonly known, which are
carried out not only in satellite transmission but also in the case of terrestrial transmission.
There is no change in the content of the signals whatsoever that is carried out by the appellant
in the transponder. Thereafter, the signals leave the transponder and are relayed over the
entire footprint area where they can be received by the facilities of the appellant's customers
or their customers.

It is the case of the assessee that it has no role whatsoever to play either in the uplinking
activity or in the receiving activity. Its role is confined in space where the transponder which
it makes available to its customers performs a function which it is designed to perform. The
 136

only activity that is performed by the appellant on earth is the telemetry, tracking and control
of the satellite. This is carried out from a control centre at Hong Kong.

For this reason, it is claimed by the appellant that no part of the income generated by it from
the customers to whom the aforesaid services are provided was chargeable to tax in India and
for this reason no return income was filed in India. However, Deputy Commissioner of
Income Tax (Non-resident Circle), New Delhi as Assessing Officer issued a letter notice
dated20.10.1999 under Section 142(1) stating that the assessee had entered into agreements
with various companies for lease of transponders for downlinking programmes to various
countries including India and therefore, income of the assessee was chargeable in India. The
appellant was accordingly called upon to file its return. The assessee responded by
questioning the authority of the AO and explaining as to why its income was not chargeable
to tax in India. It also sought some time to file its return of income. Ultimately, the return was
filed on 30.12.1999, reiterating that no income earned by the appellant was chargeable to tax
in India.

Following substantial questions of law:

(i) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in
holding that the amounts received by the Appellant (a non-resident) from its non-resident
customers for availing transponder capacity was chargeable to tax in India where the satellite
was not stationed over Indian airspace and in directing how much income is to be
determined?
(ii) Whether on the facts and in the circumstances of the case Tribunal was right in holding
that the Appellant had a business connection in India through or from which it earned
income?
(iii) Whether on the facts and in the circumstances of the case the Tribunal was justified in
holding that the amount paid to the Appellant by its customers represented income by way of
royalty as the said expression is defined in Explanation 2 to Section 9(1)
(vi) of the Income Tax Act?
(iv) Whether on the facts and in the circumstances of the case the Tribunal was justified in
holding that the customers of the Appellant were either carrying on business in India or had a
source of income in India and, hence, the amount received by the Appellant from its
customers were chargeable to tax in India?
(v) Whether on the facts and in the circumstances of the case the Tribunal was justified in
admitting the additional ground raised by the revenue seeking to assess the amounts received
by the Appellant as fees for technical services in terms of Section 9(1)(vii)?
(vi) Whether on the facts and in the circumstances of the case the Tribunal was justified in
directing the Assessing Officer to allow the expenditure relatable to India only whilst
computing the income chargeable to tax in India?
(vii) Whether on the facts and in the circumstances of the case the Tribunal erred in holding
that depreciation was admissible to the appellant only on a proportionate basis?‖

2. Likewise, in ITA 134 of 2003, the following substantial questions of law were framed for
determination:
 137

(i) Whether the ITAT is right in law in holding that the interest under Section 234B of the
Income Tax Act, 1961 should be calculated by giving benefit to the assessee of tax deductible
under Section 195 by the payer though no such deduction in fact was made?
(ii) Whether Ld. ITAT is right in law in holding that sec.9(1)(i) of the Income Tax Act, 1961
is not applicable in the case of the assessee?
(iii) Whether the Ld. ITAT has erred in not deciding the issue whether income of the assessee
is taxable u/s 9(1)(vii) of the Income Tax Act, 1961?
(iv) Whether ITAT is right in holding that transponders cannot be regarded as equipment
under Explanation 2 clause (iva) to section 9(1)(vi) of the Income Tax Act, 1961?

Relevant Statutory Provisions:

24. Chapter II of the Income Tax Act under the caption ―Basis of Charge‖ enumerates
various provisions on the basis on which income of a person is exigible to tax in
India. Section 4 is the charging Section. Section 5 delineates the ‘scope of total income'. Sub-
section (1) thereof deals with total income earned by a residnt with which we are not
concerned in the instant case, as the appellant is admittedly a non-resident. It is the sub-
section (2), which is relevant for a non-resident, which reads as under:

"Section 5(2) (2) Subject to the provisions of this Act, the total income of any previous year
of a person who is a non-resident includes all income from whatever source derived which -
(a) Is received or is deemed to be received in India in such year by or on behalf of such
person; or
(b) Accrues or arises or is deemed to accrue or arise to him in India during such year.
Explanation 1 : Income accruing or arising outside India shall not be deemed to be received
in India within the meaning of this section by reason only of the fact that it is taken into
account in a balance sheet prepared in India.
Explanation 2 : For the removal of doubts, it is hereby declared that income which has been
included in the total income of a person on the basis that it has accrued or arisen or is deemed
to have accrued or arisen to him shall not again be so included on the basis that it is received
or deemed to be received by him in India.

25. It is clear from the reading of the aforesaid provision that a non-

resident is liable to pay tax on the income derived by him, which is received or deemed to be
received in India or which accrues or arises or is deemed to accrue or arise in India during the
relevant year. Thus, a non-resident is under an obligation to pay tax in respect of income
generated/earned by him in India. Section 9 of the Act lays down the various circumstances
under which income would be deemed to accrue or arise in India. We are concerned herewith
Clause (i), (vi) and (vii) therefore, we are extracting below only those portions of this
provision and omitting other portions of this lengthy Section:
"Section 9 (1) The following incomes shall be deemed to accrue or arise in India :- (i) All
income accruing or arising, whether directly or indirectly, through or from any business
 138

connection in India, or through or from any property in India, or through or from any asset or
source of income in India, or through the transfer of a capital asset situate in India;
Explanation [1] : For the purposes of this clause - (a) In the case of a business of which all the
operations are not carried out in India, the income of the business deemed under this clause to
accrue or arise in India shall be only such part of the income as is reasonably attributable to
the operations carried out in India;

The learned Senior counsel referred to and gave his own analysis to the Standard Agreement
entered into by AsiaSat with its customers, which is summarized below:

Definition of ‘AsiaSat 1' as per which, the appellant is the operator of the satellites. Clause
3.2(ii) and (iii), Clause 3.4 as per which, submitted the learned Senior counsel, not only the
appellant is the operator of the satellite and to obtain the requisite licenses to operate the
satellite and maintain the same, the appellant remains in the control of this satellite and is in
fact prohibited from giving control of operation of satellite or any part thereof to its
customers.

39. He also referred to the ruling of the Authority for Advance Rulings (AAR) in the case of
ISRO Satellite Centre [ISACT] Vs. Commissioner concerned DIT (Intl. Taxation) [307 ITR
59] pointing out that the process of operation of a satellite and the role played by the
transponder therein and the control and operation of the transponder have been discussed in
detail in the Ruling in the said judgment. It was argued that this judgment gives the definition
and explains the working of the transponder. Every transponder receives a signal at a
particular frequency and retransmits it at a different frequency over the footprint area of the
satellite. This is the process employed in the transponder. Further, the transponder may also
amplify the signal before retransmitting it. In the ISRO (supra) case, there was no
amplification of the signal, but the ruling of the AAR is not based or founded on this fact as
such. The learned counsel emphasized that ratio of the aforesaid Ruling was that where
transponder and the process therein are actually utilized by the satellite operator for rendering
a service to the customer, it cannot be said that the transponder or process employed therein
are used by the customer. On this premise, it was argued that the question of receiving any
royalty for ‗use' of the transponder does not arise, as there was no such user.

40. Reliance was also placed on the judgment of the Supreme Court in the case of Bharat
Sanchar Nigam Ltd. and Anr. Vs. Union of India (UOI) and Ors. [282 ITR 273] wherein the
Apex Court laid down the crucial significance of holding the license required to operate the
equipment in question. It is only the person who holds the requisite license as required by the
statute, who can be said to operate, use and control the equipment in question,. In the present
case, the license required by the statute for operating the satellite and all its parts, components
and systems is held only by AsiaSat and not by its customers. Further, AsiaSat is prohibited
from parting with control of any part of the operations of the satellite to its customers.

41. It was also argued that the essence of the agreement was required to be seen and
nomenclature as held by the Supreme Court in the case of Puran Singh Sahini Vs.
SundariBhagwandasKripalani&Ors. [(1991) 2 SCC 180]. On the reading of the agreement
with the customers, argued the learned Senior counsel, it was clear that the appellant had not
leased out the equipments to the customers. On the contrary, the equipment was used by the
appellant as its owner only to provide and render services to its customers, which was a vital
distinction brought out clearly by the Karnataka High Court in the case of Lakshmi Audio
 139

Visual Inc. Vs. Assistant Commissioner of Commercial Taxes (Kar.) [124 STC 426], which
reads as under:

9. Thus if the transaction is one of leasing/hiring/letting simpliciter under which the

possession of the goods, i.e., effective and general control of the goods is to be given to the
customer and the customer has the freedom and choice of selecting the manner, time and
nature of use and enjoyment, though within the frame work of the agreement, then it would
be a transfer of the right to use the goods and fall under the extended definition of "sale". On
the other hand, if the customer entrusts to the assessee the work of achieving a certain desired
result and that involves the use of goods belonging to the assessee and rendering of several
other services and the goods used by the assessee to achieve the desired result continue to be
in the effective and general control of the assessee, then, the transaction will not be a transfer
of the right to use goods falling within the extended definition of "sale". Let me now clarify
the position further, with an illustration which is a variation of the illustration used by the
Andhra Pradesh High Court in the case of RashtriyaIspat Nigam Ltd. v. Commercial Tax
Officer.
Illustration:
(i) A customer engages a carrier (transport operator) to transport one consignment (a full
lorry load) from place A to B, for an agreed consideration which is called freight charges or
lorry hire. The carrier sends its lorry to the customer's depot, picks up the consignment and
proceeds to the destination for delivery of the consignment. The lorry is used exclusively for
the customer's consignment from the time of loading, to the time of unloading at destination.
Can it be said that right to use of the lorry has been transferred by the carrier to the customer?
The answer is obviously in the negative, as there is no transfer of the "use of the lorry" for the
following reasons: (i) The lorry is never in the control, let alone effective control of the
customer;
(ii) the carrier decides how, when and where the lorry moves to the destination, and continues
to be in effective control of the lorry; (hi) the carrier can at any point (of time or place)
transfer the consignment in the lorry to another lorry; or the carrier may unload the
consignment en-route in any of his godowns, to be picked up later by some other lorry
assigned by the carrier for further transportation and delivery at destination.
(ii) On the other hand, let us consider the case of a customer (say a factory) entering into a
contract with the transport operator, under which the transport operator has to provide a lorry
to the customer, between the hours 8.00 a.m. to 8.00 p.m. at the customer's factory for its use,
at a fixed hire per day or hire per km subject to an assured minimum, for a period of one
month or one week or even one day ; and under the contract, the transport operator is
responsible for making repairs apart from providing a driver to drive the lorry and filling the
vehicle with diesel for running the lorry. The transaction involves an identified vehicle
belonging to the transport operator being delivered to the customer and the customer is given
the exclusive and effective control of the vehicle to be used in any manner as it deems fit; and
during the period when the lorry is with the customer, the transport operator has no control
over it. The transport operator renders no other service to the customer. Therefore, the
transaction involves transfer of right to use the lorry and thus be a deemed sale.

42. Mr. Ganesh also submitted that the language of Section 9 1(vi) was almost verbatim and
identical to the language which also had earlier been used in international tax treaties. In that
 140

international tax treaties, the term ‘royalty' came up for discussion before the Courts in the
following cases:

a) Commissioner of Income Tax Vs. Ahmedabad Manufacturing and Calico Printing Co.
[139 ITR 806 (Guj)].
b) Commissioner of Income Tax Vs. Vishakhapatnam Port Trust [(1983) 144 ITR 146 (AP).
c) N.V. Philips Vs. Commissioner of Income Tax [172 ITR 521].
d) Commissioner of Income Tax Vs. Neyvali Lignite Corporation Ltd. [243 ITR 459 (Mad.)].

45. Mr. Sanjeev Sabharwal, learned counsel for the Revenue, staunchly refuted the aforesaid
contentions. His first submission was that whether the appellant had control over the satellite
or not makes no difference having regard to the language of the provision. He drew our
attention to sub-section (3) of Explanation 2 which according to him, merely states ‗use of
standard facility'. His submission was that:

a) ‘Use' in context means only ‘usage simpliciter' and nothing more;

b) Legislature has intentionally' used the expression ‘use' because in other sub clause of
Explanation 2 to Section 9(1)(vi) wherever required expression used is use or right to use';
c) In view of the aforesaid distinction maintained deliberately by the legislature, hence it is
not the case ofcaususomissus;
d) Thus, according to the respondent it makes no difference in what capacity the appellant
allows someone to use the process.
n nutshell, he submitted that the territorial nexus is not relevant in taxing the satellite
services'/'utilization of segmented transponder capacity' and is to fall in the tax jurisdiction of
the source country, i.e., where services are utilized in regard to use of process embedded in
the active transponder, [control whereof is with the broadcaster] and in view of use of word
process, which does not have to be ‘secret' but having restrictive access to be commercially
exploitable.
The entire controversy revolves round the interpretation which is to be given to sub-clause
(vi) of Section 9(1) of the Act. This sub- clause makes income by way of royalty payable by
certain persons as chargeable to tax. These persons pay the ‘royalty' made either by the
Government or a resident or a non-resident. We have to keep in mind that Section 9 of the
Act is a deeming provision and if the situation specified therein exists, it is to be deemed that
income has accrued or arisen in India.
(4) As per Section 9(1)(vi) of the Act, the income by way of royalty payable by the
Government or a resident; or a non-resident shall be deemed to accrue or arise in India. The
term royalty has been defined in Explanation 2 to Section 9(1) (vi) of the Act. In the case of
KeshavjiRavji& Co. Vs. CIT [(1990) 183 ITR 1 (SC), the Supreme Court said that an
Explanation generally speaking, is intended to explain the meaning of certain phrases and
expressions contained in the statutory provisions. There is no general theory as to the effect
and intendment of an Explanation except that the purpose and intendment are determined by
its own words. An Explanation depending upon its own language might supply or take away
something from the contents of a provision. It is also true that an Explanation may be
introduced by way of abundant caution in order to clear any mental cobwebs surrounding the
 141

meaning of the statutory provision spun by interpretative errors and to place what Legislature
considers to be true meaning beyond any controversy or doubt. In view of decision of the
Supreme Court in KeshavjiRavji& Co. (supra), Explanation 2 has to be read as part and
parcel of Section 9 (1)(vi) of the Act.

56. As noticed above, the Tribunal has held that the appellant is deriving income from lease
of transponder capacity of its satellites. The appellant is deriving income from lease of
transponder capacity of its satellites. The appellant is amplifying and relaying the signals in
the footprint area after having been linked up by the TV channels. The essence of the
agreement of the TV channels with the appellant is to relay their programmes in India. The
responsibility of the appellant is to make available programmes of the TV channels in India
through transponders on its satellite. The function of the satellite in the transmission chain is
to receive the modulator carrier that earth stations emitted as uplinking, amplifying them and
retransmitting them and downlink for reception at the destination earth stations. The meaning
of the word ―process being a series of action or steps taken in order to achieve a particular
end, considering the role of the appellant in the light of meaning of the term ‘process', it is
evident that the particular end, viz., viewership by the public at large was achieved only
through the series of steps taken by receiving the uplinked signals, amplifying them and
relaying them after changing the frequency in the footprint area including India. This is held
that the TV channels in entire cycle of relaying the programmes in India were using the
process provided by the assessee and, therefore, it is liable to be taxed as royalty income.

57. We have to test the rationality of the aforesaid reasoning and consider the attack
thereupon by the appellants in their arguments recorded above. Before that, we may take note
of few judgments relevant to the context. In the case of Commissioner of Income Tax Vs.
Datacons P. Ltd. [155 ITR 66 (Kar.)], the company was engaged in processing the data
supplied by its customers by using IBM unit record machine computer. The assessee received
vouchers and statements of accounts from its customers and converted them into balance
sheets, stock accounts, sales analyses etc. They were printed as per the requirement of the
customers. The Karnataka High Court held that in all these activities, the assessee had to play
an active role by coordinating the activities and collecting the information. Such activities
amounted to processing of goods. In the case of NV Philips Vs. Commissioner of Income
Tax [172 ITR 521], the assessee received the amount for providing specialized knowledge of
manufacturing particular commodity which included working methods, manufacturing
process including indications, instructions, specifications, standards and formulae, method of
analysis and quality control. It was held that the payment for the user of such specialized
knowledge, though not protected by a patent, was assessable as royalty. In the case of DCM
Ltd. Vs. Income Tax Officer, the issue related to transfer of comprehensive technical
information know-how and supply of equipment. It was held that the collaboration agreement
dealing with the dispatch of one or more of its engineers, technologists to visit the factory site
of the assessee, train the factory personnel and to commission the specified processes, would
not create a permanent establishment. Therefore, it was held that the payments were not in
the nature of ‗royalty'. In Modern Threads (I) Ltd. Vs. DCIT, it was held that the payments
were made in installments to Italian company for supply of technical know-how and also for
supply of basic process engineering documentation for designing, construction and operation
of plant subject to their liability on account of rectifying form, it was held that the amount
paid for supply of technical know-how and basic engineering documentation for setting of the
plant in India for manufacturing of PTA was the business profit in the hands of Italian
company in the absence of permanent establishment in India.
 142

58. In the light of our discussion explaining Explanation 2 to Section 9(1) of the Act, let us
proceed to apply these principles on the facts of the case. The starting point has to be the
nature of services provided by the appellant to its customers as per the agreement arrived at
between them. Keeping in view the aforesaid operation of the satellites, we revert back to
the agreement entered into between the appellant and its customers. It is clear from various
clauses of the agreement (and noticed above), the appellant is the operator of the satellites. It
also remains in the control of the satellite. It had not leased out the equipments to the
customers. On this basis, it is argued by the appellant that the equipment is used by the
appellant and it is only providing and rendering services to its customers and not allowing the
customers to use the process. In the case of ISRO (Supra), AAR has narrated in detail the
process of the operation of a satellite and the role played by the transponder therein.

65. It needs to be emphasized that a satellite is not a mere carrier, nor is the transponder
something which is distinct and separable from the satellite as such. It was explained that the
transponder is in fact an inseverable part of the satellite and cannot function without the
continuous support of various systems and components of the satellite, including in
particular:
(a) Electrical Power Generation by solar arrays and Storage Battery of the satellite, which is
common to and supports multiple transponders on board the satellite.
(b) Common input antenna for receiving signals from the customers' ground stations, which
are shared by multiple transponders.
(c) Common output antenna for retransmitting signals back to the footprint area on earth,
which are shared by multiple transponders.
(d) Satellite positioning system, including position adjusting thrusters and the fuel storage
and supply system therefor in the satellite. It is this positioning system which ensures that the
location and the angle of the satellite is such that it receives input signals properly and
retransmits the same to the exact desired footprint area.
(e) Temperature control system in the satellite, i.e., heaters to ensure that the electronic
components do not cease to operate in conditions of extreme cold, when the satellite is in the
―shadow.
(f) Telemetry, tracking and control system for the purpose of ensuring that all the above
mentioned systems are monitored and their operations duly controlled and appropriate
adjustments made, as and when required.
66. It was also not disputed that each transponder requires continuous and sustained support
of each of the above-mentioned systems of the satellite without which it simply cannot
function. Consequently, it is entirely wrong to assume that a transponder is a self-contained
operating unit, the control and constructive possession of which is or can be handed over by
the satellite operator to its customers. On the contrary, the transponder is incapable of
functioning on its own. In fact, the Tribunal has itself demonstrated so in the order as is clear
from the following:
―A bare perusal of this meaning reveals that equipment is an instrument or tool which is
capable of doing some job independently or with the help of other tools. A part of a
equipment incapable of performing any activity in itself cannot be termed as an equipment.
We take an example of scissors which has two blades. This scissor is n equipment but when
 143

one blade is separated from the other blade, it ceases to be an equipment. In other words, the
blade in isolation cannot be termed as an equipment. Reverting to the facts of the present
case, we find that the transponder is not an equipment in itself On other words, it is not
capable of performing any activity when divorced from the satellite. It was fairly conceded
by the Ld. AR that the transponder in itself without other parts of satellite is not capable of
performing any function. Rightly so because satellite is not plotted at a fixed place. It rotates
in the same direction and speed as the earth. If it had been fixed at a particular place or the
speed or direction had been different from that of earth, it could not have produced the
desired results. Transponder is part of satellite, which is fixed in the satellite and is neither
moving in itself nor assisting the satellite to and the transponder, namely, a part of it, playing
howsoever important role, cannot be termed as equipment.
76. Klaus Vogel has also made a distinction between ―letting an asset and ―use of the asset
by the owner for providing services‖ as below:
―On the other hand, another distinction to be made is letting the proprietary right,
experience, etc., on the one hand and use of it by the licensor himself, e.g., within the
framework of an advisory activity. Within the range from ‘services', viz. outright transfer of
the asset involved (right, etc.) to the payer of the royalty. The other, just as clear-cut extreme
is the exercise by the payee of activities in the service of the payer, activities for which the
payee uses his own proprietary rights, know-how, etc., while not letting or transferring them
to the payer.
8. There are judgments of other High Courts also to the same effect.

These are as under:

(a) Commissioner of Income Tax Vs. Ahmedabad Manufacturing and Calico Printing Co.,
[139 ITR 806 (Guj.)] at Pages 820-822.
(b) Commissioner of Income Tax Vs. Vishakhapatnam Port Trust [(1983) 144 ITR 146 (AP)]
at pages 156-157.
(c) N.V. Philips Vs. Commissioner of Income Tax [172 ITR 521] at pages 527 & 538-539.

79. For the aforesaid reasons, we are unable to subscribe to the view taken by the Tribunal in
the impugned judgment on the interpretation of Section 9(1) (vi) of the Act. We, thus,
answer Question No. (3) in favour of the assessee and against the Revenue and set aside the
order of the Tribunal on this aspect. Re: Applicability of Section 9(1)(vii):

80. It was for the first time that the Revenue argued before the Tribunal that income of the
appellant was taxable under Section 9(1)(vii) of the Act as well. The appellant had objected
to the admission of this ground. The Tribunal brushed aside this objection and admitted the
ground. At the same time, the Tribunal did not decide the issue as the income of the assessee
is held taxable under Section 9(1)(vi) of the Act. It is for this reason both the assessee and the
Revenue have challenged the order of the Tribunal whereas the appellant states that the
Tribunal erred in admitting this ground, the Revenue pleads that the Tribunal erred in not
deciding the issue even after admission. Insofar as the objection of the appellant is concerned,
we are of the opinion that it has no merit. The Tribunal rightly held that the issue raised was
purely legal, which did not require consideration of any fresh facts, as all necessary facts
were adjudication of the issue as to whether the amount received was chargeable to tax
 144

under Section 9(1)(vii) were available on record. Insofar as the issue on merit is concerned,
interestingly no arguments were advanced by the learned counsel for the Revenue. The
ground was admitted at the instance of the Revenue. Further specifically, question of law was
raised and appeal admitted on that ground as to whether the Tribunal erred in law in not
deciding the issue. In spite thereof, during arguments, this aspect on merits was not touched,
therefore, we cannot accept the submission of the Revenue for covering the case
under Section 9(1)(vii) of the Act. Presuming, form the aforesaid conduct, the case is not
sought to be covered under this Section.

81. As a result, the appeal preferred by the assessee is allowed and the judgment of the
Tribunal is set aside and the appeal of the Revenue is dismissed.

CIT Vs. Neyveli Lignite Corporation Ltd. (243 ITR 459 Mad HC) - R J Babu, A
Subbulakshmi

1. The assessee is engaged in the mining of lignite. For more efficient conduct of its business,
it acquired steam generating plants with auxiliaries for the purchase of which equipment, it
entered into an agreement on May 1, 1981, with a Hungarian company, Transelectro. The
agreement was entered into after the assessee had invited tenders for the supply of the
equipment and the assessee had found the tenders submitted by Transelectro to be the most
satisfactory.

2. The contract with Transelectro described the supplier as the principal supplier/contractor. It
contemplated the performance of part of the services required to be performed under the
contract by two other companies. Nevertheless, the responsibility for the work done by them
was also to be taken by the principal contractor.

3. The scope of the work, as set out in the contract reads as under: "1.0 Scope of work:

1.1 In connection with the manufacture, supply, erection, and commissioning of three (3)
steam generating units and auxiliaries for the proposed 3 x 210 MV installation at Neyveli,
Tamil Nadu, India, Neyveli Lignite Corporation Limited, Neyveli (hereinafter referred to
"NLC"), have agreed at the instance of the bidder, viz., Transelectro to enter into two
contracts as described hereinunder, one with Transelectro, Budapest, Hungary (hereinafter
referred to as Transelectro), and the other with Vinay Engineering, New Delhi (hereinafter
referred to as "Vinay").

1.2 Contract--I which Transelectro (who shall be named the principal contractor) covers
broadly the design, manufacture and supply of all imported equipment and components as
well as supervision of erection, testing and commissioning utilising his own personnel and
providing a special engineer for the guarantee period. The design and engineering of Indian
suppliers including inspection during their manufacture are also covered.

1.3 Contract--II with Vinay covers broadly the manufacture and supply of equipment and
components of Indian origin, erection, testing and commissioning of the complete equipment
under direction, control and supervision of Transelectro in addition to certain services
indicated here-under."
 145

4. The work to be done by Transelectro was to cover the design, manufacture and supply of
all imported equipment and components as also the supervision of erection, testing and
commissioning.

5. The total responsibility for the contract as provided in Clause 1.6 of the agreement was to
be with Transelectro from start to completion.

6. The contract price for the work to be done by Transelectro was set out in Clause 5. The
break-up amounts given there specified the amounts payable for design, engineering abroad,
for supply of equipment manufactured abroad, for setting up and essential spares and for
special maintenance bills. Clause 7.8 sets out the term of payment for design and engineering.
The dates by which the drawing for different components were to be supplied were also set
out in the annexure to the contract. Clause 30.1 provided that the contract price was deemed
to include royalties, fees and patent, covering materials, articles, apparatus, devices,
equipment or processes used in the work. It also provided that the purchaser was to be kept
indemnified by the contractor against all claims, suits, damages, losses, actions, costs,
charges, etc., or for infringement of copyright or other right if any, in relation to the design,
plans, machines, diagram, drawings or in respect of the materials supplied by the contractor.

7. The Income-tax Officer, when approached by the assessee under Section 195 of the Act,
took the view that the amounts payable under the contracts for design and engineering was
the income which had accrued to the foreign contractors, in India in the assessment year
1981-82, and was, therefore, an amount in respect of which the assessee was required to
deduct the income-tax before crediting the amount to the account of the foreign supplier, or
paying the same.

8. The assessee having appealed against that order to the Commissioner, the Commissioner
allowed the appeal. The Tribunal to whom the matter was taken in further appeal, confirmed
the view of the Commissioner and held that the amount paid by the assessee for design and
engineering was not an amount which could be regarded as royalty and was not an amount
which could be regarded as income accruing to the foreign supplier in India.

9. Section 9 of the Act deals with income deemed to accrue or arise in India. Section 9(1)(vi)
deals with income by way of royalty. It, inter alia, provides that the income by way of royalty
payable by a person who is a resident, excepting the payments referred to in Section
9(1)(vi)(b) shall be deemed to arise or accrue in India. For the purpose of Section 9(1)(vi) the
term "royalty" has been defined in Explanation 2 which reads as under:

"Explanation 2. --For the purposes of this clause, 'royalty' means consideration (including any
lump sum consideration but excluding any consideration which would be the income of the
recipient chargeable under the head 'Capital gains'), for-

(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent,
invention, model, design, secret formula or process or trade mark or similar property;

(ii) the imparting of any information concerning the working of, or the use of, a patent,
invention, model, design, secret formula or process or trade mark or similar property;

(iii) the use of any patent, invention, model, design, secret formula or process or trade mark
or similar property;
 146

(iv) the imparting of any information concerning technical, industrial commercial or scientific
knowledge, experience or skill;

(v) the transfer of all or any rights (including the granting of a licence) in respect of any
copyright, literary, artistic or screntific work including films or video tapes for use in
connection with television or tapes for use in connection with radio broadcasting) but not
including consideration for the sale, distribution or exhibition of cinematographic films; or

(vi) the rendering of any services in connection with the activities referred to in Sub-clauses
(i) to (v);

(vii) income by way of fees for technical services payable by-

(a) the Government; or

(b) a person who is a resident except where the fees are payable in respect of services utilised
in a business or profession carried on by such person outside India or for the purposes of
making or earning any income from any source outside India; or

(c) a person who is a non-resident, where the fees are payable in respect of services utilised in
a business or profession carried On by such person in India or for the purposes of making or
earning any income from any source in India."

10. The term "royalty" normally connotes the payment made by a person who has exclusive
right over a thing for allowing another to make use of that thing which may be either physical
or intellectual property or thing.

The exclusivity of the right in relation to the thing for which royalty is paid should be with
the grantor of that right. Mere passing of information concerning the design of a machine
which is tailor-made to meet the requirement of a buyer does not by itself amount to transfer
of any right of exclusive user, so as to render the payment made therefor being regarded as
"royalty".

11. In a contract for the design, manufacture, supply, erection and commissioning of
machinery which does not involve licence of the patent concerning the machinery, or
copyright, of its design, mere supply of drawings before the manufacture is commenced to
ensure that the buyer's requirements are fully taken care of and the supply of diagram and
other details to enable the buyer to operate the machines, and also to assure the buyer, that the
machines will perform to the specification required by the buyer, such supply is only
incidental to the performances of the total contract which includes design, manufacture and
supply of the machinery.

12. The price paid by the assessee to the supplier is a total contract price which covers all the
stages involved in the supply of machinery from the stage of design to the stage of
commissioning. The design supplied is not to enable the assessee to commence the
manufacture of the machinery itself with the aid of such design. The limited purpose of the
design and drawings is only to secure the consent of the assessee for the manner in which the
machine is to be designed and manufactured, as it was meant to meet the special design
requirements of the buyer.
 147

13. The contract between the assessee and the manufacturer does not anywhere refer to any
specific patent owned by the supplier which the buyer is permitted to exploit. All that the
contract provides is an indemnity to the buyer, to protect the buyer against any action by a
third party claiming patent, trade mark or other rights in the equipment supplied.

14. None of the sub-clauses in and Explanation 2 under Section 9(1)(vi) would, in the
circumstances of this case, be capable of being" regarded as covering the design and
engineering carried out by the supplier of the machinery abroad. There is no transfer or
licence of any patent, invention, model or design. The design referred to in the contract is
only the design of the equipment required to be manufactured by the supplier abroad and
supplied to the purchaser. The information concerning the working of the machine is only
incidental to the supply as the machinery was tailor-made for the buyers. Unless the buyer
knows the way in which the machinery has been put together, the machinery cannot be
maintained in the best possible way and repaired when occasion arises. No licence of any
patent is involved. Sub-clause (vi) and also (vii) of Section 9(1) would have no application as
the design was only preliminary to the manufacture and integrally connected therewith. The
other three sub clauses also in the circumstances of the case are not attracted.

15. The Tribunal was therefore right in holding that the amount paid as part of the total
contract price towards design and engineering of the steam generators supplied by the
Hungarian company to the assessee-mining company, was not royalty for the purpose of
Section 9(1)(vi) or 9(1)(vii) of the Act, and the amount paid did not result in the accrual of
the income to the foreign supplier in India.

16. We, therefore, answer the questions referred to us, namely:

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in
holding that the payments made to the Hungarian concern Transelectro is not liable to
deduction of tax at source?

(2) Whether the Tribunal is justified in law and had valid materials to hold that the payments
made by the assessee by way of design and drawings to the Transelectro cannot come within
the meaning of the expression 'royalty' occurring in Section 9(1)(vi) or 9(1)(vii) of the Act ?
and (3) Whether having regard to Article 30 of the agreement specifically providing that
royalty and fees for patent shall be deemed to have been included in the contract price, the
Tribunal is justified in law and had valid materials to hold that the amount paid to design and
engineering is only a component of the total payment agreed to be paid by the assessee for
the purpose of three steam generators and is not in the nature of royalty ?"

In favour of the assessee and against the Revenue. The assessee shall be entitled to costs in
the sum of Rs. 2,000 (rupees two thousand only).

Ishikawajima-Harima Heavy Industries Ltd. Vs DIT [(2007) 288 ITR 408 (SC)] -
S.B. Sinha, Dalveer Bhandari
Facts

Appellant herein is a company incorporated in Japan. It is a resident of the said country. It

pays its taxes in Japan. It is engaged, inter alia, in the business of construction of storage
 148

tanks as also engineering etc. It formed a consortium along with Ballast Nedam International
BV, Itochu Corporation, Mitsui & Co. Ltd., Toyo Engineering Corporation and Toyo
Engineering (India) Ltd. With the said consortium members, it entered into an agreement
with Petronet LNG Limited (hereinafter referred to as "the Petronet") on 19.01.2001 for
setting up a Liquefied Natural Gas (LNG) receiving storage and degasification facility at
Dahej in the State of Gujarat. A supplementary agreement was entered into by the parties on
19.03.2001. The contract envisaged a turnkey project. Role and responsibility of each
member of the consortium was specified separately. Each of the member of the consortium
was also to receive separate payments. Appellant was to develop, design, engineer and
procure equipment, materials and supplies, to erect and construct storage tanks of 5 MMTPA
capacity, with potential expansion to 10 MMTPA capacity at the specified temperatures i.e. -
200 degree Celsius. The arrangement also was to include marine facilities (jetty and island
break water) for transmission and supply of the LNG to purchasers; to test and commission
the facilities relating to receipt and unloading, storage and re-gasification of LNG and to send
out of re-gasified LNG by means of a turnkey fixed lump-sum price time certain engineering
procurement, construction and commission contract. The project was to be completed in 41
months. The contract indisputably involved : (i) offshore supply, (ii) offshore services, (iii)
onshore supply, (iv) onshore services and

(v) construction and erection. The price was payable for offshore supply and offshore
services in US dollars, whereas that of onshore supply as also onshore services and
construction and erection partly in US dollars and partly in Indian rupees.

The following questions were proposed by the appellant for determination:

"1. On the facts and circumstances of the case, whether the amounts, received/receivable by
the applicant from Petronet LNG for offshore supply of equipments, materials, etc. are liable
to tax in India under the provisions of the Act and India- Japan tax treaty?

2. If the answer to (1) is in the affirmative in view of Explanation (a) to section (1)(i) of the
Act and/or Article (1) read together with the protocol of the India-Japan tax treaty, to what
extent are the amounts reasonably attributable to the operations carried out in India and
accordingly taxable in India?

3. On the facts and circumstances of the case, whether the amounts received/receivable by the
applicant from Petronet LNG for offshore services are chargeable to tax in India under the
Act and/or the India-Japan tax treaty?

4. If the answer to (3) above is in the affirmative, to what extent would be amounts
received/receivable for such services be chargeable to tax in India under the Act and/or the
India-Japan tax treaty?

5. If the answer to (3) above in the affirmative, would be applicant be entitled to claim
deduction for expenses incurred in computing the income from offshore services under the
Act and/or the India- Japan treaty?

Mr. Harish N. Salve, the learned Senior Counsel appearing on behalf of Appellant, urged :

(i) The Authority misconstrued and misinterpreted the contract in arriving at its
aforementioned findings, as from a bare perusal thereof, it would appear that the payments
 149

were made in US dollars in respect of 'offshore supply' and 'offshore services' and
furthermore title to the goods passed on to Petronate outside the territories of India and
services had also been rendered outside India;

(ii) The fact that the contract signed in India was of consequences as converse could not have
made the appellant not liable to pay the tax;

(iii) The Authority committed a manifest error in arriving at its findings insofar as it failed to
properly construe Explanation-2 appended to Section 9(1)(vii) of the Act as it was nobody's
case that the consideration related to a construction, assembly, mining or like project so as to
fall outside the scope thereof;

(iv) Although fee received by Appellant is effectively connected to the contract but it is not
attributable to the permanent establishment and, therefore, Article 12(5) of the Double
Taxation Avoidance Agreement (DTAA) is not attracted;

(v) Appellant being a non-resident in terms of Section 5(2) of the Act, it would be chargeable
to tax in India only in the event income accrues or arises in India or is deemed to accrue or
arise in India or income is received or is deemed to be received in India and not otherwise;

(vi) As no part of the income for the 'offshore supply' or 'offshore services' is received in
India, the Authority misdirected itself in passing the impugned judgment;

(vii) A legal fiction raised under the Act cannot be pushed too far. Also, as all operations in
connection with the offshore supply are carried out outside India, the question of any portion
of the consideration to be regarded as deemed to accrue or arise in India would not arise;

(viii) The requirement of the appellant to perform certain services in India, such as unloading,
port clearance, transportation of the equipments supplied would not render the appellant
eligible to tax as the consideration thereof is embedded in the consideration for the offshore
supply;

(ix) Although the appellant was required to carry out certain activities in India, the
consideration for offshore services had separately been provided for.

(x) Assuming that the income from the offshore supply is chargeable to tax in India on the
premise that Section 9(1)(i) applies, it was required to be examined by the Authority as to
whether it would also be chargeable in accordance with the provisions of the Double
Taxation Avoidance Agreement (DTAA) in terms whereof no charge to tax in India was
leviable in respect of the consideration for offshore supply. Mr. Mohan Parasaran, the learned
Additional Solicitor General appearing on behalf of the respondent, on the other hand,
submitted :

(i) The question as to whether terms of the contract constitute a composite contract or not is
essentially a question of fact and the findings of the Authority being final, therefore, should
not ordinarily be interfered with;

(ii) The Authority having found in favour of the Revenue two primary tests to determine as to
whether the contract in question was a composite one for execution of a turnkey project viz :
 150

(a) whether the 'offshore' and 'onshore' elements of the contract are so inextricably linked that
the breach of the 'offshore' element would result in the breach of the whole contract;

(b) whether the dominant object of the contract is the execution of a turnkey project and the
question whether the title to the goods supplied passes offshore or within India is secondary
to the execution of the contract, the impugned judgment should not be interfered with;

(iii) Each component of the contract was directly relatable to the performance of the
integrated contract as violation and/or breach on the part of the parties thereto would affect
the entire contract;

(iv) The contract itself providing for milestone dates, the breach of any of the terms thereof
would result in the breach of the entire contract and not just the particular obligation;

(v) The turnkey project contemplated a permanent establishment and in that view of the
matter Explanation appended to Section 9(1)(i) of the Act is directly applicable.

(vi) The appellant has business connection in India and in that view of the matter the causal
connection between the offshore supply and offshore services being interlinked with the
entire project, the opinion of the Authority cannot be faulted;

(vii) By reason of DTAA, the parties thereto can always allocate the jurisdiction to tax the
entire income attributable to such permanent establishment to the country in which it is
established;

(viii) Supply of goods whether offshore or onshore as well as rendition of service whether
offshore or onshore are attributable to the turnkey project and, thus, it would be wrong to
contend that in terms of Article 7 of DTAA, no tax could be levied upon the appellant.

While the first question was answered in negative, question no.2 was answered in the
following terms :

"Question 2The income received in British India cannot be said to wholly arise in India
within the meaning of Section 4-A(c)(b) of the Act and that there should be allocation of the
income between the various business operations of the assessee company demarcating the
income arising in the taxable territories in the particular year from the income arising without
the taxable territories in that year for the purposes of Section 4-A(c)(b) of the Act."

In Carborandum Co. v. Commissioner of Income-Tax, Madras [(1977) 108 ITR 335 : (1977)
2 SCC 862], this Court referring to its earlier decision in Commissioner of Income Tax,
Punjab v. R..D. Aggarwal and Co.& Another [(1965) 56 ITR 20], opined :

"15. On a plain reading of sub-sections (1) and (3) of Section 42 it would appear that income
accruing or arising from any business connection in the taxable territories even though the
income may accrue or arise outside the taxable territories will be deemed to be income
accruing or arising in such territory provided operations in connection with such business,
either all or a part, are carried out in the taxable territories. If all such operations are carried
out in the taxable territories, sub- section (1) would apply and the entire income accruing or
arising outside the taxable territories but as a result of the operations in connection with the
business giving rise to the income would be deemed to accrue or arise in the taxable
 151

territories. If, however, all the operations are not carried out in the taxable territories the
profits and gains of the business deemed to accrue or arise in the taxable territories shall be
only such profits and gains as are reasonably attributable to that part of the operations carried
out in the taxable territories. Thus comes in the question of apportionment under sub-section
(3) of Section 42."

In CIT v. Mitsui Engineering and Ship Building Co. Ltd. [259 ITR 248], on which reliance
was placed; the contention was that the finding that the contract for designing, engineering,
manufacturing, shop testing and packing up to f.o.b port of embarkation could not be split up
since the entire contract was to be read together and was for one complete transaction. It was
in the said fact situation held that it was not possible to apportion the consideration for design
on one part and the other activities on the other part. The price paid to the assessee was the
total contract price which covered all the stages involved in the supply of machinery.

The term 'permanent establishment' has not been defined in the Income Tax Act.

Since the appellant carries on business in India through a Permanent Establishment, they
clearly fall out of the applicability of Article 12(5) of the DTAA and into the ambit of Article
7. The Protocol to the DTAA, in paragraph 6, discusses the involvement of the permanent
establishment in transactions, in order to determine the extent of income that can be taxed. It
is stated that the term 'directly or indirectly attributable' indicates the income that shall be
regarded on the basis of the extent appropriate to the part played by the permanent
establishment in those transactions. The permanent establishment here has had no role to play
in the transaction that is sought to be taxed, since the transaction took place abroad.

Clause 1 of Article 7, thus, provides that if an income arises in Japan (Contracting State), it
shall be taxable in that country unless the enterprise carries on business in the other
Contracting State (India) through a permanent establishment situated therein. What is to be
taxed is profit of the enterprise in India, but only so much of them as is directly or indirectly
attributable to that permanent establishment. All income arising out of the turnkey project
would not, therefore, be assessable in India, only because the assessee has a permanent
establishment.

(1) Sufficient territorial nexus between the rendition of services and territorial limits of India
is necessary to make the income taxable. (2) The entire contract would not be attributable to
the operations in India viz. the place of execution of the contract, assuming the offshore
elements form an integral part of the contract. (3) Section.9(1)(vii) of the Act read with
Memo cannot be given a wide meaning so as to hold that the amendment was only to include
the income of non-resident taxpayers received by them outside India from Indian concerns
for services rendered outside India. (4) The test of residence, as applied in international law
also, is that of the taxpayer and not that of the recipient of such services. (5) For Section
9(1)(vii) to be applicable, it is necessary that the services not only be utilized within India,
but also be rendered in India or have such a "live link" with India that the entire income from
fees as envisaged in Article 12 of DTAA becomes taxable in India. (6) The terms 'effectively
connected' and 'attributable to' are to be construed differently even if the offshore services
and the permanent establishment were connected.

(7) Section 9(1)(vii)(c) of the Act in this case would have no application as there is nothing to
show that the income derived by a non-resident company irrespective of where rendered, was
utilized in India. (8) Article 7 of the DTAA is applicable in this case, and it limits the tax on
 152

business profits to that arising from the operations of the permanent establishment. In this
case, the entire services have been rendered outside India, and have nothing to do with the
permanent establishment, and can thus not be attributable to the permanent establishment and
therefore not taxable in India. (9) Applying the principle of apportionment to composite
transactions which have some operations in one territory and some in others, is essential to
determine the taxability of various operations. (10) The location of the source of income
within India would not render sufficient nexus to tax the income from that source. (11) If the
test applied by the Authority for Advanced Rulings is to be adopted here too, then it would
eliminate the difference between the connection between Indian and foreign operations, and
the apportionment of income accordingly.

(12) The services are inextricably linked to the supply of goods, and it must be considered in
the same manner.

For the reasons aforementioned, the appeal is allowed in part and to the extent mentioned
hereinbefore. No costs.

V. Income under the Head Salaries

(Section 15 – 17)

The Commissioner Of Income Tax ... vs C J International Hotels Ltd. on 11 May,

2011 - M.L. MEHTA, J.A.K.Sikri

2. The assessees are engaged in the business of owning, operating and managing hotels.
Surveys were conducted under Section 133A of the Income Tax Act, 1961 (hereinafter
referred to as "the Act") at the business premises of the assessees during which it was found
that the assessees had been paying tips to its employees but not deducting taxes thereon. The
Assessing Officers treated the amounts of tips under the head "Salary" in the hands of
respective staff and held that the assessees were liable to deduct taxes at source from such
payments under Section 192 of the Act. The assessees were treated by the Assessing Officers
as "assessees-in-default" under Section 201(1) of the Act. The Assessing Officers worked out
different amount of taxes to be paid by these assessees under Section 201(1) and also interest
under Section 201(1A) of the Act for the aforementioned assessments years.

3. Aggrieved from the orders of the Assessing Officers, the assessees filed appeals before
Commissioner of Income Tax (Appellate) [hereinafter referred to as "CIT(A)"]. The appeals
in all the four cases were allowed by the CIT(A) by separate orders. The CIT(A) relied upon
the decisions of the Tribunal in the case Nehru Place Hotels v. ITO, 173 Taxman 88, ITA
No.4055- 4060/DL/2005 and held that the assessees could not be treated assessees-in-default
under Section 201(1) of the Act for non deduction of tax on tips collected by it and
distributed among their employees. Consequently, the CIT(A) in all the four appeals held that
no interest was to be charged under Section 201(1A) of the Act.

4. Aggrieved from the orders of the CIT(A), the Revenue filed appeals before the Income Tax
Appellate Tribunal (hereinafter referred to as "the Tribunal"). All the appeals came to be
dismissed by the Tribunal relying upon its own order for the assessment year 1986-87 (in the
case of assessee/ITC) and also on the case of Nehru Place Hotels Limited. V. ITO (supra)]. A
 153

common order was passed by the Tribunal in the cases relating to ITAs No.475/2010 and
476/2010 of the assessee/ITC. The case relating to the assessee/ITC (ITA No.860/2010) for
the assessment year 2003-2004 came to be disposed by the Tribunal vide separate order dated
30th October, 2009. The case relating to the assessee/CJ for the assessment year 2005-2006
came to be disposed by the Tribunal vide its order dated 17th December, 2009. In all the
cases, the Tribunal held that the payments of tips paid by the assessees to its employees are
not liable for TDS under Section 192 of the Act and thus, the assessees could not be treated
assessees-in-default under Section 201 and consequently not liable for any interest
under Section 201(1A) of the Act. It is against these orders of the Tribunal that the present
appeals have been preferred by the Revenue.

5. The appeals have been admitted on the common questions of law as under:-

"(a) Whether on the facts and in the circumstances of the case, the Ld. ITAT erred in law and
on merits holding that the assessee was not an „assessee in default‟ for short/non deduction
of tax at source on account of banquet and restaurant tips collected and paid by it to its
employees?
(b) Whether on the facts and in the circumstances of the case, the Ld. ITAT erred in law and
on merits in holding that the payment of banquet and restaurant tips to the employees of the
assessee in its capacity as employer were not profits in lieu of salary within the meaning
of Section 17 (3) (ii) of the Income Tax Act, 1961?"

6. We have heard the learned counsel for the parties and perused the record. The common
question that arises for consideration is, as to whether tips paid by the customers for availing
services in the restaurants of the assessees constitute salary within the meaning of Section
15 and Section 17 of the Act and whether the assessees are liable to deduct taxes at source on
these payments under Section 192 of the Act.

7. There is no dispute with regard to the proposition that the obligation to deduct taxes at
source under Section 192 of the Act in respect of a payment arises when an employee is
responsible to make a payment, which is chargeable to tax under the head "Salary" in the
hands of the recipient. It is for the purpose of deduction of tax at source from salary
that Section 192 of the Act defines „salary‟ as under :-

(1) "any person responsible for paying any income chargeable under the head "salaries" shall,
at the time of payment, deduct income-tax on the amount payable at the average rate of
income-tax on the amount payable at the average rate of income tax computed on the basis of
the rates in force for the financial year in which the payment is made, on the estimated
income of the assessee under this head for that financial year."

8. A plain reading of this Section would explain that the employer is required to deduct tax at
source out of the income of the employees chargeable under the head „salary‟ at the time of
payment on the basis of estimated income of the recipient.

9. Learned counsel for the Revenue submits that the assessees are in default on account of
their failure to deduct tax at source under Section 192 of the Act on the tips which constitute
income of the employees chargeable under the head „salary‟ under Sections 15 and 17 of the
Act. On the other hand, learned senior counsel, Mr.Syali, and Mr.Vohra, for the assessees,
contend otherwise. They submit that since the tips are not „salaries‟ or „in lieu thereof‟ paid
 154

by the assesses to the employees, the same were not income and thus not taxable under the
head „salary‟ under Section 15 and consequently, no tax was required to be deducted
under Section 192 of the Act.

10. The counsel for the Revenue as well as assessees on their part explain the mechanism and
nature of payment of tips by the customers and their payment/distribution by the assessees.
Learned counsels for the assessees submit that the tips are paid by the customers out of their
own volition and discretion. They are in the nature of gratuitous payment made by the
customers directly to the waiters/staff, as reward in appreciation of services rendered to them.
Neither the payment of the tips by the customers nor the quantum of tips is mandatory. The
tips are received by the employees from the customers. The assessees act as mere
trustees/custodian in collecting the tips charged to the customers credit cards and then pass
over the same to the employees/waiters for whom these are meant. Merely because the
assessees in the aforesaid circumstances, collect the amount of tips, in the first instance, and
pass on to the employees, it cannot be construed as the amount of tips flowing under the
contract of employment and becoming part of the salary paid by the assessees to the
employees. The assessees only act as a conduit for passing the tips onto the employees. No
part of tips is retained by the assessees. Learned counsels for the assessees submit that the
assessees act in fiduciary capacity in the matter of collection and distribution of the tips. They
are neither contractually nor compulsorily bound to pay any tips to the staff. The tips amount
collected from the customers and distributed among the staff cannot, by any stretch of
imagination, be said to be salary due/payable or paid by the assessees. They submit that the
tips received by the employees are not remuneration or reward/return for services rendered by
the employees to the assessees (employer). But, the same represent reward given by the
customers at their discretion pleased with the services rendered. The earning of the tips was
entirely at the pleasure of the customers. They further submit that the tips vary from customer
to customer and from bill to bill. Further, the employees cannot claim any vested right
thereto, since the employer neither pays nor is bound to pay any amount to the employees as
tips. The tips are not any dues from the employers payable to the employees nor are they
allowed to be paid to them by the employer. The mere fact that an employee would not have
earned the tips if he had not been deputed at the outlet, cannot lead to the inference that the
payment of tips was flowing from the contract of employment. The fact that the employment
was the cause without which the earnings of the tips would not have happened (causa sine
qua non) does not ipso facto lead to inference that the same was in the nature of salary, since
the contract of employment was not the immediate causa causana of such earnings. Learned
counsels submit that the essential pre-condition of Section 15 are not met, since the amount
of tips is neither due from any employer nor it would constitute as a salary paid or allowed to
be paid by or on behalf of the employer. Learned counsel refers to the case of Emil Webber :
200 ITR 483 @ 487 (SC). Learned senior counsel, Mr.Syali, also submits that the payments
should flow from the employer to the employee or else it is income from other source and not
as part of salary. To bolster the above submissions, learned counsels of the assessees,
Mr.Vohra and Mr.Sayali, rely upon the cases of The Ram Bagh Palace Hotel, Jaipur v. The
Rajathan Hotel Workers' Union, Jaipur, AIR 1976 SC 2303; Quality Inn Southern Star v. The
Regional Director, Employees' State Insurance Corporation, Civil Appeal No.1250/2001
decided by the Supreme Court on 3rd December, 2007 and Nehru Place Hotels v. ITO, 173
Taxman 88.

11. Learned counsel for the Revenue, Ms.Rashmi Chopra, on the other hand submits that the
outlet/restaurant, tips are routed through the bills as service charges and being a part of bills
are mandatorily to be paid on clearance of the bill. Amounts of service charges added to the
 155

bill vary as per policy of the employer as to the amount of benefit to be given to its
employees. Addition of service charges in the bills cannot be termed as gratuitous or even
voluntary and discretionary, but are compulsory. She submits that the assessees have been
persistently following a well-laid procedure to charge a fix amount of say, 10% or so as
service charges from its customers at the time service is rendered by the staff at the banquets
and they are further regularly collecting the other outlet tips. About 50% of the amounts so
earned from banquets towards the service charges are retained by the assessees before
distribution of the balance to the staff. The tips collected from the other outlets are also being
disbursed to the employees on monthly or fortnightly basis. She submits that it is immaterial
how the same is collected and how the amount is paid to it employees. But as and when it is
disbursed by the assessees, the employees earned the same only on account of rendering
services to the employer. Thus, there was an employer and employee relationship that existed
at all times. The business activities of the assessees are pursued from its employees, whose
duties are to serve their customers or the tips are being paid to the employees in lieu of
rendering prompt services for their employers. Learned counsel, Ms.Rashmi Chopra, further
submits that the assessees are now deducting TDS from the tips/service charges from the bills
of banquets, but are not doing so in respect of tips collected from other outlets. She submits
that the assessees cannot adopt double tax policies in distribution of tip amounts. The tip
amounts may be charged in any shape or by any name, may be called as "service charges" or
"tips", the meaning and purpose remains the same. The day the total bill towards food and
beverages along with tip is paid by the customer to the assessee, the right to claim the tips in
addition to salary accrues to the employee from the employer assessee. Similar to the salary,
the tip receipts of the hotel employees are also sourced from the hotel bills paid by the
customers. Therefore, as regard the source of tips and monthly salary of hotel employees,
there is no fundamental difference. The proceeds collected from its customers come under the
books of accounts of the assessees.

12. In support of her submissions, learned counsel, Mr.Chopra, relies upon the case
of Karamchari Union v. Union of India and others, 243 ITRS 143.

13. In view of the above submissions of learned counsel for the parties, we need to see as to
whether the tips paid to the employees by the assessees would constitute salary within
the meaning of Sections 15 and 17 of the Act, as alleged by the Revenue or it would not be so
as submitted by the assessees. As per the Webster Comprehensive Dictionary, „tip‟ means
small gift of money for service given, to a servant, waiter, porter or alike. There is no dispute
that it is not a payment made by the employer as a reward or remuneration for services
rendered by the employee. As per the Oxford English Dictionary, „tip‟ means a small present
of money given especially for a service rendered or accepted. Under Section 2(24) „income‟
has been defined to include several items which have been enumerated thereunder and we are
concerned here with item No.1 which is profits and gains. In the words of Halsbury, the word
„profit‟ has to be understood in its natural and proper sense, i.e., in a sense in which no
commercial man would misunderstand. (see Gresham Life Assurance Society v. Styles
(1892) 3 TC 185. The concept of „salary‟ goes back to the days of Roman Empire. The
soldiers were given „Sal (Salt)‟ as a regard for their services. With the passage of time, the
mode has changed from salt to money. However, „salary‟, in its conceptual and legal sense,
remains a reward for the services rendered. The word „salary‟ is derived from the word
„salarium‟. In a nutshell, it means compensation for „rendition of some sort of service‟. The
salary is paid usually as a reward for the performance of one‟s duties. It is paid at the stated
intervals.
 156

14. To make the assessees responsible to deduct tax at source, it would be essential to see, as
to whether tips form part of the salary within the meanings scribed to it under the Act. For the
purpose of income to be chargeable under the head „salary‟, Section 15 defines salary as
under:

"15. Salaries. - The following income shall be chargeable to income-tax under the head
"Salaries" -
(a) any salary due from an employer or a former employer to an assessee in the previous year,
whether paid or not;
(b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a
former employer though not due or before it became due to him;
(c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an
employer on a former employer, if not charged to income-tax for any earlier previous year."

15. Section 17 extends the scope of meaning of Section 15, which reads as under:

"17. "Salary", "Perquisite" and "profits in lieu of salary" defined - For the purposes
of sections 15 and 16 and of this section, -
(1) "salary" includes -

(i) Wages,

(ii) Any annuity or pension;

(iii) Any gratuity;

(iv) Any fees, commissions, perquisites or profits

in lieu of or in addition to any salary or
wages;

(v) Any advance of salary;

(2) ................

(3) "profits in lieu of salary" includes -

(i) The amount of any compensation due to or

received by an assessee from his employer
or former employer at or in connection with
the termination of his employment or the
modification of the terms and conditions
relating thereto;

(ii) Any payment [other than any payment

referred to in clause (10) [, clause (10A)] [, clause(10B)], clause (11), [clause (12) [, clause
13] or clause (13A)] of section 10), due to or received by an assessee from an employer or a
former employer or from a provident or other fund, [***] to the extent to which it does not
 157

consist of contributions by the assessee or [interest on such contributions or any sum received
under a Keyman insurance policy including the sum allocated by way of bonus on such
policy:"

16. Under the provisions of Sections 15 and 17 as reproduced above, we may see that the
salary is not merely defined to mean the compensation of services rendered, but, by providing
an inclusive definition under Section 17, the scope of provision of Section 15 gets widened.
Though we are not concerned, we note that even the pension and gratuity, which ordinarily
do not come within the definition of "salary", are included within the term „salary‟ by virtue
of Section 17(1). Thus, the legislation under Section 15 does not confine salary within the
narrow limit of compensation for services rendered during the subsistence of a relationship of
employer and employee but even includes the benefits which may become available at the
end of that relationship. The word „includes‟ is generally used as word of extension, but the
meaning of a word or phrase is extended when it is said to include things that would not
properly fall within its ordinary connotation. Thus, where „includes‟ has an extending force,
it adds towards the phrase a meaning which does not naturally belong to it. Scope of inclusive
definition cannot be restricted to those words only which occur in such definition, but
inclusive definition will extend to so many other things, which are not talked of in the section
- {All India Defence accounts Association v. Union of India, [1989] 175 ITR 494
(Allahabad)}. In sub-clause (iv) of Section 17(1), it has been provided that even fees,
commissions, perquisites or profits which are paid to a person „in lieu of or in addition to any
salary or wages‟ shall be included in income, taxable under Section 15 of the Act. As per CIT
v. Gopal Krishna Suri, [2000] 113 Taxman 707 (Bombay), the word „salary‟ under Section
17(1) is very wide and an inclusive definition. Further as per CIT v. Ram Rattan Lal Verma,
[2005] 145 Taxman 256 (Allahabad), the expression „salary‟ for the purpose of computing
income for charging purpose will mean only as defined under Section 17.

17. In fact, Section 17 defines "salary", "perquisites" and "profits in lieu of salary" only for
the purposes of Section 15 and Section 16. Under sub-Section (1), "Salary" includes not only
wages, pension, gratuity, etc., but under the sub-clause (iv), it includes any fees,
commissions, perquisites, or profits „in lieu of‟ or „in addition to salary or wages‟. The
income of tips in all cases may not strictly fall within the "profits in lieu of salary", but in any
case, it would be „profit in addition to salary or wages‟ at the hands of the recipients. It is in
this way that the meaning of "salary" under Section 15 as also under Section 16 is expanded
by the inclusion of anything which is received by an employee in addition to salary or wages.
The word "profits" here is used only to convey any "advantage" or "gain" by receipt of any
payment by the employee. Applying this general meaning of the word "profits" and
considering meaning given to it under Section 17(1)(iv) and Section 17(3)(ii) it can be said
that "advantage" in terms of payment received by the employee from the employer in relation
to or in addition to salary or wages would be covered by the inclusive definition of the word
"salary". Because of the inclusive meaning given to this, phrase "profits in lieu of salary"
would include any payment due to or received by an employee from an employer, even
though it has no connection with the profits of the employer. Likewise, the inclusive meaning
given to the phrase "profits in addition to salary or wages" would include any payment due to
or received by an employee from an employer even though it has no connection with the
profits of the employer. Under Section 15 clause (b), any salary paid or allowed to an
employee by or on behalf of his employer was to constitute income chargeable to tax under
the head "salary". In the expanded definition of "salary", as noted above, by virtue of Section
17, any amount paid by an employer to his employee by virtue of his employment or
"allowed to him" by or on behalf of the employer would constitute income under Section
 158

15 of the Act. That being the plain interpretation of Section 15 and Section 17, the receipt of
tips by an employee from his employer would fall within clause (b) of Section 15.

18. The submissions that since the tips were received by the employee from the customers
and not the employer, such receipts would not constitute income under clause (b), would be
in fact not the correct interpretation of clause (b) of Section 15. If it was so intended by the
Legislature that the tips so received by an employee were not to constitute income
under Section 15, there was no need of Section 17 in the Act. Section 17 prescribes various
kinds of gains received in addition to salary as being income for the purposes of Section 15.
The employer, by virtue of employment, allows the employee to receive tips from the
customers and in case the employer himself collects, that is also disbursed by the employer to
the employees. As per CIT v. L.W. Russel, 53 ITR 91, in order that any payment can be
construed as a nature of "salary", the same must have reference to the employment, where
under the employee acquires vested right, enforceable in law to receive the amount. In this
case, it was also held that the expression "paid" includes every receipt by the employee from
the employer whether it was due to him or not and the expression "allowed" is of wider
connotation and any credit made in the employee‟s account is covered thereby and it should
imply that the right is conferred on the employee in respect of the same. Once the tips are
paid by the customers either in cash directly to the employees or by way of charge to the
credit cards in the bills, the employees can be said to have gained additional income. When
the tips are received by the employees directly in cash, the employer hardly has any role and
it may not be even knowing the amounts of tips collected by the employees. That would
outrightly be out of the purview of responsibility of the employer under Section 192 of the
Act. But, however, when the tips are charged to the bill either by way of fixed percentage of
amount, say 10% or so on the total bill, or where no percentage was specified and amount is
indicated by the customer on the bill as a tip, the same goes into the receipt of the employer
and is subsequently disbursed to the employees depending upon the nature of understanding
and agreement between the employers and the employees. Different settings have different
operating mechanisms with regard to collection and disbursement of the tips. Some of the
outlets have in-built system of charging some percentage in the bills itself that may be either
in the shape of "service charges" or "tips" or may be by any other name. Others leave it to the
customers to indicate some amount either on percentage basis or in lumpsum as tips. In either
case, these payments go to the receipts of the employer and are distributed either on weekly,
quarterly or monthly basis. Such receipts at the hands of employees are nothing but their
income for the purpose of Section 15. The system has been continuing and a large amount of
income at the hands of the recipients generated through this channel of tips is escaping
assessment. What is worse is that it is happening with the full knowledge of the employers,
who are admittedly collecting and distributing this part of the income to the employees
without evening knowing as to whether the same was being accounted for by them for the
purposes of taxation or not. As soon as such amounts are received by the employer, an
obligation arises on him to disburse the same to the rightful persons, namely, the employees.
Simultaneously, a right accrues to the employees to claim the same from the employer. By
virtue of his relationship of an employer and employee, a vested right accrues to the
employee to claim the same.

19. From the above interpretation of the provisions of Section 2(24), Section 15 and Section
17, we may see that the tips would constitute income within the meaning of Section 2(24) and
thus taxable under Section 15.
 159

20. In case of Karamchari Union v. Union of India and others, 243 ITRS 143, the Supreme
Court has held as under:

"Applying the aforesaid general meaning of the word „Profits‟ and considering the dictionary
meaning given to under Section 17(1)(iv) and (3)(ii), it can be said that „advantage‟ in terms
of payment of money received by the employee from the employer in relation to or in
addition to any salary or wages would be covered by the inclusive definition of the word
„salary‟. Because of the inclusive meaning given to the phrase "profits in lieu of salary"
would include „any payment‟ due to or received by an assessee from an employer, even
though it has no connection with the profit of the employer."

21. Applying the above ratio of the Apex Court, the advantage to the hotel employees in the
form of monies received as banquet tips or other outlet tips would be covered by the inclusive
definition of „salary‟ and there cannot be two opinions in view of the said judgment of the
Supreme Court.

22. In the case of Ram Bagh Palace Hotel, Jaipur (supra), which was relied upon by the
learned counsels for assessees, in support of their submission that the amounts of tips do not
constitute salary of the employees paid by the employer under the contract of the
employment, the context was entirely different. The Hon‟ble Supreme Court described the
nature of tips at the hands of the employees as payments not paid by the management out of
its pocket but a transfer of what was collected from the customers in the following manner:

"2. We regret to be unable to agree with the counsel on this point. It is well-known that in
important hotels in the country, the appellant is now a five star hotel-the customers are of the
affluent variety and pay tips either to the waiters directly or in the shape of service charges or
otherwise to the management along with the bill for the items consumed. In short, the true
character of tips cannot be treated as any payment made by the management out of its pocket
but a transfer of what is collected to the staff as it is intended by the payer to be so
distributed. It may also happen that more money comes in by the way of tips into the pockets
of the management than distributed by it. We cannot therefore consider the receipt of tips by
the staff as anything like a payment made by the management to its employees warranting
consideration by the tribunal to depress the award of dearness allowance."

23. The case of Quality Inn Southern Star (supra) relied upon by the learned counsels for
assesses is also distinguishable. It was in the context of wages under Section 2(22) of the
Employees‟ State Insurance Act, 1948 that it was held by the Apex court that amount of
service charges collected from the customers and disbursed among the employees does not
amount to wages under Section 2(22) of this Act. It was held that "the amount received by the
employees were not in the nature of "wages" as they were not given to the employees under
the terms of contract of employment, either express or implied. The appointment letters
expressly state that employees are not entitled to any other remuneration. Thus, the
distribution of service charges is expressly excluded from the wages."

24. From the above discussion, we may conclude that the receipt of the tips constitute income
at the hands of the recipients and is chargeable to the income tax under the head "salary"
under Section 15 of the Act. That being so, it was obligatory upon the assessees to deduct
taxes at source from such payments under Section 192 of the Act.
 160

25. Mr.Syali, learned senior counsel for the assessee/CJ, and also Mr.Vohra, the learned
counsel for the assessee/ITC, submit that the obligation cast on the assessees under Section
192 is to make an honest and bonafide estimate of income of the employees chargeable to the
tax under the head "salaries", but this obligation does not extend beyond to precisely compute
such income at the hands of the employees. They submit that if in assessment of the
employee it was found that there was a short deduction of tax by the employer out of the
income of the employee chargeable under the head "salary" on account of bonafide difference
of opinion, regarding inter alia treatment of any amount/receipt, then the employer/assessee
cannot be held liable as „assessee-in-default‟ under Section 201 of the Act and subjected to
the penal consequences of the alleged failure. They submit that the assessees‟bonafide
believed that the tips are paid by the customers and that though the employee is liable to pay
tax in respect of the tips, the employer is not liable to include the same in the estimated salary
for the purpose of bonafide deductions of tax at source under Section 192 of the Act. They
submit that this practice was adopted since the commencement of the hotel business and the
same was accepted by the Revenue by accepting the assessments in the form of annual
returns in the past. They place reliance on the cases of Gwalior Rayon Silk Co. Limited v.
CIT, 140 ITR 832 (Madhya Pradesh) and CIT v. Nestle India Limited, 243 ITR 435 (Delhi).

26. In the case of Gwalior Rayon Silk Co. Limited (supra), the Madhya Pradesh High Court
observed as under:-

"The provisions of s. 201 of the Act are attracted in the case of an employer only when that
employer does not deduct or, after deducting, fails to pay the tax as required by the Act. We
have already seen that the Act requires an employer to deduct and pay tax on the estimated
income of his employee. A duty is cast on an employer to form an opinion about the tax
liability of his employee in respect of the salary income. While forming this opinion, the
employer is undoubtedly expected to act honestly and fairly. But if it is found that the
estimate made by the employer is incorrect, this fact alone, without anything more, would not
inevitably lead to the inference that the employer has not acted honestly and fairly. Unless
that inference can be reasonably raised against an employer, no fault can be found with him.
It cannot be held that he has not deducted tax on the estimated income of the employee."

27. In the case of CIT v. Nestle India Limited (supra), the High Court of Delhi while
upholding the order of the Tribunal quashing the order under Section 201 of the Act observed
as follows:-

"The conclusion arrived at by the Tribunal is a pure finding of fact, which does not give rise
to any question of law. The Tribunal has not examined, and rightly so, the question as to
whether the said allowance would be exempt under Section 10(14) of the Act or not because
that question has to be adjusted at the time of assessment of the employee receiving the said
allowance and he cannot be bound by the stand of his employer about the taxability or
otherwise of a particular allowance. Deduction of income-tax is subject to regular assessment
in the hands of the payee/recipient. "

28. Reliance is also placed on the order of the Tribunal in the case of Nehru Place Hotels
Limited (supra) wherein the Tribunal held the assessees to be not in default on the ground of
bonafide belief that no taxes were deductable at source along with the fact that the assessee
(Nehru Place Hotel) had started deducting the TDS and depositing tax on this particular
payments for the financial year 2004-2005. Reliance is also placed on the decision of this
 161

Court in ITAs No.778/2008 etc. dated 21.07.2008. In the order dated 21.07.2008 rendered in
ITA No.778/2008 and others, the Division Bench of this Court observed as under:

"ITA Nos. 778/2008, 779/2008, 780/2008, 814/2008 and 816/2008 These appeals pertaining
to assessment years 1999-2000 to 2004-05 have been preferred by the revenue against the
common order of the Income Tax Appellate Tribunal dated 27.7.2007.
The issue before the Tribunal was whether the assessee could be termed as an assessee in
default within the parameters of Section 201(1)/201(IA) of the Income Tax Act, 1961. The
Tribunal has inter alia come to the conclusion that in any event it was quite reasonable for the
assessee to form a bonafide belief that the tips which were collected by it on behalf of the
employees and subsequently distributed to its employees did not form part of the salary paid
by them and, therefore, no deduction on account of tax at source was required to be made by
the assessee. The Tribunal came to the conclusive finding that the assessee had such a
bonafide belief and it is on account of this that the tax was not deducted at source.
Consequently, we find that no substantial question of law arises for our consideration. The
appeals are dismissed."

29. We have given our thoughtful consideration to the submissions of the learned counsels
for the assessees based on bonafide belief and non deducting tax at source from the payments
made to the employees on account of tips. Learned counsel appearing for the Revenue did not
controvert that this practice has been accepted by the Revenue by accepting the assessments
in the form of annual returns of the assessees in the past. Since the taxes were to be deducted
from the amounts, which were the dues of the employees, no dishonest intentions could be
attributed to the assessees. In this regard, we find no reasons to disagree with the reasoning of
Madhya Pradesh High Court and Delhi High Court in the cases of Gwalior Rayon Silk Co.
Limited (supra) and CIT v. Nestle India Limited (supra) respectively.

30. Thus, while reiterating our conclusion that the receipts of the tips constitute „income‟ of
the recipients and is chargeable under the head „salary‟ under Section 15 of the Act and that
it was obligatory upon the assessees to deduct taxes at source from such payments
under Section 192 of the Act, we, in the given circumstances, are inclined to give the benefit
of bonafide belief to the assessees for the periods upto the assessment years. In the given
circumstances, we are of the view that the cause of non-deduction of taxes as submitted
appears to be sufficient being adequate, reliable and sound. Based on this reasoning, we
cannot make them liable for levy of penalty as envisaged under Section 201 of the Act. {See
CIT v. Majestic Hotel Ltd. [2006] 155 Taxman 447 (Delhi). However, levy of interest
under Section 201(1A) is neither treated as penalty nor has the said provision been included
in Section 273B to make „reasonableness of the cause‟ for the failure to deduct, a relevant
consideration. Section 201(1A) makes the payment of simple interest mandatory. The
payment of interest under that provision is not penal. There is, therefore, no question of
waiver of such interest on the basis that the default was not intentional or on any other basis.
(See Bennet Coleman & Co. Ltd. v. V.P. Damle, Third ITO, [1986] 157 ITR 812 (Bom.)
and CIT v. Prem Nath Motors (P.) Ltd., [2002] 120 Taxman 584 (Delhi).

31. In view of our discussions, we thus answer the questions accordingly as indicated above.
The appeals are allowed without any order as to costs.
 162

Income from Household property (Section 22)

CIT vs. Poddar Cement Pvt Ltd. - 226 ITR 625 (SC)] - K.S. PARIPOORNAN & K.
VENKATASWAMI & B.N. KIRPAL

Brief facts are necessary to appreciate the question that arises for our consideration.

The respondent in Tax Reference Case Nos. 9-10/86 is a company and an assessee under the
Act (hereinafter called the 'assessee'). It owns four flats bearing Nos. 231, 232, 241 and 242
in a building call as "Silver Arch" on Nepeansea Road, Bombay. The builders of the said
building are M/s Malabar Industries Pvt. Ltd. Out of the four aforesaid flats, two were
directly purchased by the respondent-company from the builders and the other two were
purchased by its sister concern and subsequently by the assessee. The possession of the flats
was taken after payment of consideration in full some time in August, 1973. It is common
ground that all these flats have been let out to various persons. The rental income from these
flats was included in the Return for the assessment years in question, namely, 1975-76 and
1976-77. It was the case of the assessee that the rental income from the flats was assessable
as 'income from other sources' under Section 56 of the Act inasmuch as the assessee-
company was not the 'legal owner' of the property in the flats. Such a claim was put forward
before the Assessing Officer mainly on the ground that the title to the property (four flats)
had not been conveyed to the Co-operative society which was formed by the purchasers of
the flats and that so long as the ownership was not transferred in the name of the assessee the
rental income from the flats could not be assessed as 'income from house property'
(under Section 22 of the Act).

One other subsidiary question was also raised by the assessee that the rental income should
be calculated on the bonafide annual value and not the actual rent received. As a matter of
fact, the assessee has shown Rs. 49,800 as chargeable rent. The Income Tax Officer,
however, has taken the annual letting value of those flats at Rs. 1,31,268 on the basis of rent
receivable in respect of flats from an adjoining building. The Income Tax Officer also
rejected the claim of the assessee that the income from the flats should be assessed
under Section 56 of the Act.

Aggrieved by the orders of the Income Tax Officer, the assessee preferred appeals to the
Commissioner of Income Tax (Appeals), who by an order dated 9.4.81 upheld in toto the
views as stated above by the Income Tax Officer. After receiving the orders from the
appellate authority, the assessee filed Miscellaneous Applications dated 14.9.81 before the
appellate authority purporting to be under Section 154 of the Act. It was contended before the
appellate authority that in view of the decision of this Court in Diwan Daulat Rai Kapur v.
New Delhi Municipal Committee, 122 I.T.R. 700, the authorities were bound to take the
annual letting value of those flats on the basis of standard rent chargeable and in any case not
on the basis of the actual rent receivable with regard to some other flats. The appellate
authority accepted the asscssee's Miscellaneous Applications by Order dated 17.3.82 and
rectified its earlier order dated 9.4.81. Still not satisfied with the appellate order, the assessee
preferred two appeals against the order of the appellate authority contending that the income
from the four flats should have been assessed under Section 56 of the Act and not
under Section 22. The Revenue preferred two appeals against the rectification order dated
17.3.82.
 163

Those four appeals were considered by the Income Tax Appellate Tribunal, (Bombay Bench
"A"), Bombay, and the Tribunal by a common order dated 8.5.86 purporting to follow several
decisions of the Bombay High Court accepted the case of the assessee and held that the
income from the flats could not be taxed as 'income from house property' under Section 22,
but should be taxed as 'income from other sources' under Section 56 of the Act. The Tribunal,
however, did not decide the other question, namely, whether the actual rental income should
be taken into account for the computation or the chargeable rental value. We are not
concerned with the latter question here.

The Tribunal when moved by the Revenue under Section 256(1) of the Act referred the case
straight away to this Court under Section 257 of the Act in view of conflicting decisions
between the High Courts.

The question referred to reads as follows :-

"Whether on the facts and in the circumstances of the case, the Tribunal was justified in law
in holding that the income derived by the assessee- company from flats from the building
known as "Silver Arch" of Bombay is taxable under the head 'income from other sources'
under Section 56 of the Income Tax Act and not income from "house property" under Section
22 of the Income Tax Act, 1961?"

Mr. K.N. Shukla, the learned senior counsel appearing for the Revenue, has advanced the
arguments in general, in view of the fact that the Revenue had not taken an uniform stand in
assessing the owners of flats as seen from the facts given above. He submitted that the
owners of flats as well as promoters are liable to be taxed under Sections
56 and 22 respectively of the Income Tax Act. In other words, the promoters are the legal
owners and income from house property will have to be taxed at the hands of the promoters
under Section 22 of the Act and the owners of the flats being in beneficial enjoyment of the
respective properties will have to pay tax under Section 56 as 'income from other sources'. He
invited our attention to a decision of this Court in R.B. Jodha Mal Kuthiala v. Com-missioner
of Income Tax, Punjab, J & K and Himachal Pradesh, 82 ITR 570 rendered under the Income
Tax Act and also a recent judgment reported in Mohd. Noor &Ors., Etc. v. Mohd. Ibrahim
&Ors., Etc., [1994] 5 SCC 562, rendered under the Rajasthan Tenancy Act, 1955. He also
invited our attention to a judgment of the Bombay High Court in C.I.T. Bombay City-III v.
Zorostrian Building Society Ltd., 102 ITR 499. In general, he left to the ultimate decision of
the Court on the issue in question without finally expressing his point of view in view of the
conflicting stand taken by the Revenue while making the assessments under challenge.

Mr. Sharma, the learned senior counsel, advanced the leading arguments and according to
him, Section 22 of the Act charges the income arising from the house property and not the
ownership of the house property. Such income from the house property can be real or
notional. He also argued that income under the head 'house property' real or notional cannot
escape taxation whoever may be regarded as the owner but certainly it cannot have two
owners at the same time. According to the learned counsel, the owner is the person who in his
own right can use the house property or derive income from it. Only such owner has to be
taxed under the head 'income from house property'. He alone has to be taxed under this head.
If he cannot be taxed under this head, he cannot be taxed at all. In other words, he cannot be
taxed under the head 'income from other sources' under Section 56 of the Act. He also
contended that income from house property cannot be taxed doubly once in the hands of the
legal owner under Section 22 and again in the hands of actual user and recipient of income
 164

under Section 56 of the Act. Permitting such assessment would be opposed to equity and
justice which is not normally allowed by the Courts. As a corollary from the last contention
he submitted that it is well settled that the interpretation, which would avoid hardship and
double taxation, should be preferred rather to the interpretation which would result in
hardship and double taxation. Lastly, it was contended by Mr. Sharma that the Parliament
wherever found necessary had provided for avoidance of double taxation expressly
like Sections 64(2), 69D, 93(2) and 94(4) but no such express provision was considered
necessary as regards Sections 22 to 27 as they thought in their wisdom that no authority of
Income Tax would assess the same income twice, once in the hands of the legal owner on
notional basis and again in the hands of buyer on actual receipt of rent.

Mr. Sharma, learned senior counsel, in support of these arguments while placing heavy
reliance on the judgment of this Court in JodhaMal's case (supra) also cited numerous
judgments of the High Court which have applied the principles enunciated in the judgment of
this Court in JodhaMal's case. The judgments on which reliance was placed are the following

1. Addl C.I.T. v. U.P. State AgroIndl. Corporation, 127 ITR 97, (Allahabad).

2. Smt. Kala Rani v. C.I.T. Patiala-I, 130 ITR 321 (Punjab & Haryana).

3. Addl. C.I.T., Bihar v. Sahay Properties & Investment Co. (P) Ltd., 144 ITR 357 (Patna).

4. Saiffuddin v. C.I.T., 156 ITR 127 (Rajasthan).

5. Madgul Udyog v. C.I.T., 184 ITR 484 (Cal.).

6. Maharani Yogeshwari Kumari v. C.I.T., 213 ITR 541 (Rajas-than).

7. C.I.T. v. General Mktg. & Mfg. Co. Ltd., 222 ITR 574 (Cal-cutta).

8. C.I. T. v. Krishna Lal Ajmani, 222 ITR 653 (Patna).

Mr. H.N. Salve, learned senior counsel appearing for the respondent- assessee in Tax
Reference Case Nos. 9-10/86, took a different stand from that of Mr. Sharma and contended
that the word 'owner' in Section 22 of the Income Tax Act should be understood in its general
sense and not in the sense in which it was understood by this Court in JodhaMal's case
(supra). According to learned counsel, the word 'owner' can only refer to the legal owner and
none else, as concept of dual ownership is unknown in Indian Jurisprudence. He invited our
attention to the language of Section 9(1) of the Old Income Tax Act which corresponds
to Section 22 of the present Act and contended that the assessment does not depend on actual
receipt of income from house property. He also submitted that the view taken by some of the
High Courts that the owners of the flats even in the absence of any registered document of
sale in their favour can be treated as owners in view of Section 53A of the Transfer of
Property Act is wholly wrong and unsustainable. That view, according to him, is contrary to
the well settled position in law as laid down in several judgments of this Court. The learned
senior counsel submitted that the ownership is paramount title and it cannot be otherwise
interpreted. Mr. Salve sub-mitted that even if the interpretation suggested by him to Section
22 results in double taxation even then that has to be accepted as that being the correct
position in law. There is no equity in Taxation law. In support of his arguments he placed
reliance on the following judgments of this Court :
 165

1. Balkrishna Gupta &Ors. v. Swadeshi Polytex Ltd. &Anr., [1985] 2 SCC 167.

2. NarandasKarsondas v. S.A. Kamtam&Anr., [1977] 2 SCR 341.

3. Bai Dosabai v. MathurdasGavinddas&Ors., [1980] 3 SCR 762.

4. Rani Chhatra Kumari v. Mohan Bikram, (1931) 58 I.A. 279. We are given to understand
that an identical issue is pending before a Full Bench of the Delhi High Court and Mr. Syali,
learned counsel appearing in that case sought our permission to place his arguments. The
question being of some importance, we permitted him to submit his argu-ments.

Mr. Syali, learned counsel, submitted that the Income Tax Act is a self- contained code,
exhaustive of all matters dealt with therein and its provisions show an intention to depart
from the common rule. In support of that, he placed reliance on a judgment of this Court
in R.B.R. Subba Rao &Ors. v. CIT, 30 ITR 163. According to the learned counsel, the
meaning of the word 'owner' occurring in Section 22 has to be understood contextually,
purposivcly and only within the four corners of the Income Tax Act. Adopting a wider
meaning, according to him, will not and cannot lead to rewriting the Civil Law. In a way, he
supported the stand taken by Mr. Sharma, learned senior counsel, and he also placed heavy
reliance on the judgment of JodhaMal's case. In addition to the cases cited by Mr. Sharma,
learned counsel Mr. Syali invited our attention to a case reported in (Late) Nawab Sir Mir
Osman Ali Khan v. Commissioner of Wealth Tax, Hyderabad, 162 ITR 888. He also invited
our attention to a recent judgment of this Court reported in State v. S.J. Chaudhary, [1996] 2
SCC 428, to support his contention the words occurring in a statute should be so construed as
to continuously update the wordings in accordance with the changes in social conditions.

To appreciate the submissions made at the bar, it is necessary to set out the relevant sections
from the Act. We set out hereunder Section 9(i) of the old Act, Sections 22, 27 and 56 of new
Act.

"9(1) The tax shall be payable by an assessee under the head 'Income from property' in
respect of the bona fide annual value of property consisting of any building 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."

"22. Income from house property.- The annual value of property consisting of any building or
lands appurtenant thereto of which the assessee is the owner, other than such portions of such
property as he may occupy for the purposes of any business or profession carried on by him
the profits of which are chargeable to income-tax, shall be chargeable to income-tax under
the head "Income from house property."

27. "Owner of house property", "annual charge", etc., defined - For the purposes of sections
22 to 26 -

(i) xxx xxxxxxxxx

(ii) xxx xxxxxxxxx

 166

(iii) a member of a cooperative society to whom a building or part thereof is allotted or leased
under a house building scheme of the society shall be deemed to be the owner of that building
or part thereof.

[before amendment]

(iii) a member of a co-operative society, company or other associa-tion of persons to whom a

building or part thereof is allotted or leased under a house building scheme of the society,
company or association, as the case may be, shall be deemed to be the owner of that building
or part thereof;

(iiia) a person who is allowed to take or retain possession of any building or part thereof in
part performance of a contract of the nature referred to in section 53A of the Transfer of
Property Act, 1882 (4 of 1882), shall be deemed to be the owner of that building or part
thereof;

(iiib) a person who acquires any rights (excluding any rights by way of a lease from month to
month or for a period not exceeding one year) in or with respect to any building or part
thereof, by virtue of any such transaction as is referred to in clause (f) of section 269UA,
shall be deemed to be the owner of that building or part thereof;

(iv) xxx xxxxxxxxx

(v) xxx xxxxxxxxx

(vi) xxx xxxxxxxxx

56. Income from other sources - (1) Income of every kind which is not to be excluded from
the total income under this Act shall be chargeable to income-tax under the head "Income
from other sources", if it is not chargeable to income-tax under any of the heads specified
in section 14, items A to E.

(2) In particular, and without prejudice to the generality of the provisions of sub-section (1),
the following income shall be char-geable to income-tax under the head "Income from other
sources", namely -

(i) xxx xxxxxxxxx

(ia) xxx xxxxxxxxx

(ib) xxx xxxxxxxxx

(ic) xxx xxxxxxxxx

(id) xxx xxxxxxxxx

(ii) xxx xxxxxxxxx

 167

(iii) where an assessee lets on hire machinery, plant or furniture belonging to him and also
buildings, and the letting of the buildings is inseparable from the letting of the said
machinery, plant or furniture, the income from such letting, if it is not chargeable to income-
tax under the head "Profits and gains of business or profession".

From the narration of the facts and the rival submissions it will be seen that the controversy
revolves around the meaning to be given to the word 'of which the assessee is the owner'
occurring in Section 22 of the Act. We may point out that Section 9(i) of the old Act was
substantially the same as Section 22 of the new Act. We may also state that the whole
of Section 9 of the old Act has been split up and redrafted into several separate Sections,
namely, Sections 22 to 27 under the new Act.

We have noticed the reliance placed by the bar on the decision of this Court in JodhaMal's
case which was concerned with the old Section 9(i) of the Act. In that case, this Court had
occasioned to consider the meaning to be given to the words 'of which he is the owner'. Of
course, on facts the Court was called upon to decide whether the erstwhile admitted owner of
the property is liable to pay income-tax on the house property under Section 9 even after the
said property has been vested in the Custodian of Evacuee Property by virtue of Section 6(1)
of the Pakistan (Administration of Evacuee Property) Ordinance, 1949. The contention of the
Revenue in that was that notwithstanding the vesting of the house property in the Custodian
the legal ownership remained with the assessee therein and, therefore, Section 9(1) of the old
Act was attracted. This contention was repelled by this Court. Hegde, J. speaking for the
Bench observed at page 575 :

"The question is who is the "owner" referred to in this Section? Is it the person in whom the
property vests or is it he who is entitled to some beneficial interest in the property? It must be
remembered that Section 9 brings to tax the income from property and not the interest of a
person in the property. A property cannot be owned by two persons, each one having
independent and exclusive right over it. Hence, for the purpose of Section 9, the owner must
be that person who can exercise the rights of the owner, not on behalf of the owner but in his
own right."

The learned Judge observed that "it is true that equitable considerations are irrelevant in
interpreting tax laws. But, those laws, like all other laws, have to be interpreted reasonably
and in consonance with justice". Again at page 577, it was held that "for determining the
person liable to pay tax, the test laid down by the Court was to find out the person entitled to
that income". Again at page 578 it was observed : "No one denies that an evacuee from
Pakistan has a residual right in the property that he left in Pakistan. But the real question is,
can that right be considered as ownership within the meaning of Section 9 of the Act. As
mentioned earlier that Section seeks to bring to tax income of the property in the hands of the
owner. Hence, the focus of that Section is on the receipt of the income. The meaning that we
give to the word "owner" in Section 9 must not be such as to make that provision capable of
being made an instrument of oppression. It must be in consonance with the principles
underlying the Act."

In our opinion, the above observations of this Court clearly fixes the liability on a person who
receives - or is entitled to receive the income from the property in his own right. In spite of
this, the assessing officers of various circles instead of uniformally following the ratio laid
down in this case have taken different diametically opposite views depending upon the
pronouncements of the concerned High Courts in the circles on the scope of Section 22 of the
 168

Act. The High Courts of Allahabad. Punjab and Haryana, Rajasthan, Calcutta and Patna have
taken the view by correctly understanding the ratio laid down in JodhaMal's case and the
High Courts of Bombay, Delhi and Andhra Pradesh have taken a different view wrongly
distinguishing on facts in JodhaMal's case.

In the Kala Rani's case (supra), the Punjab and Haryana High Court after referring to the
judgment of this Court in JodhaMal's case observed as follows:

"Thus, it cannot be accepted that before a person can be assessed under Section 22 of the Act,
he must be the owner by virtue of a sale deed in his favour. As a matter of fact, what is being
taxed under Section 22 of the Act is the income from house property or the annual value of
the property of which the assessee is the owner."

The High Court rejected the contention that the mere possession of the property in pursuance
of an agreement to sell was not sufficient to burden the assessee with tax on any income
under Section 22 of the Act.

The High Court of Patna in Sahay Properties' case (supra) has elaborately dealt with this case.
As a matter of fact, civil appeals were preferred by Special Leave against the judgment of the
Patna High Court in Civil Appeal Nos. 5874-76 of 1983. However, those appeals were dis-
missed as withdrawn on 20.3.1996 without deciding the issue.

Brief facts in that case were, the assessee company acquired certain immovable property in
February 1962. The assessee paid the entire consideration and was in actual physical
possession of the entire properties contracted to be sold. The assessee was empowered by the
vendor to use the properties in whatsoever manner the assessee liked and to receive and enjoy
the entire usufructs thereof, with the only reservation that a formal deed of conveyance with
registration in conformity with the Indian Registration Act would follow at the request of the
assessee and once that request was made, it was incumbent upon the transferor to execute
such a deed of conveyance and to get it registered. The assessee was assessed under Section
22 in respect of the income from the property but the Tribunal held that the assessee was not
the owner of the property and was not liable to be assessed as such.

The Patna High Court has cited this Court's judgment in JodhaMal's case and also number of
other judgments of the different High Courts. The High Court had also gone into the concept
of "ownership" and referred to passages from G.W. Paton on Jurisprudence, Dias on
Jurisprudence, Stroud's Judicial Dictionary and Pollock on Jurisprudence. We may usefully
extract certain passages from the judgment of the Patna High Court.

The learned Judges observed at page 361 :

"The emphasis, therefore, in this statutory provision is that the tax under the Section is in
respect of ownership. But this matter is not as simple as it looks. This leaves us to a more
vexed question as to what is ownership. Should the assessment be made at the hands of the
person who has the bare husk of the legal title or at the hands of the person who has the rights
of an owner of a property in a practical sense? Enjoyment as an owner only in a practical
sense can be attributed to the term "owner" in the context of this Section - a person who can
exercise the rights of the owner and is entitled to the income from the property for his own
benefit. It is well- settled, and learned counsel for either side were not at loggerheads, that the
 169

section cannot be so construed as to make it an instrument of oppression, to use the language

of Hegde, J., in the case of Jodha Mal, (1971) 82 ITR 570 (SC).

We are very much alive to the legal position that it is true that there is no equity about a tax.
There is no presumption as to a tax. Nothing is to be read innothing is to be implied. We can
look only fairly at the language used. Nonetheless, the tax laws have to be interpreted
reasonably and in consonance with justice. This is well-settled by numerous decisions of the
Supreme Court itself.

We have, therefore, to judge and interpret the language of Section 22 of the Act in the context
of that particular Section, and that context we shall come back to hereinafter at a more
appropriate place.

In the meantime, it would not be irrelevant to go into the concept of "ownership". What is
ownership after all? Read from the Roman Law upto the English Law at the present stage,
medieval stage having been interspersed with different formulae, the position that now
juristically emerges is this. The full rights of an owner as now recognised are :

"(a) The power of enjoyment (e.g., the determination of the use to which the res is to be put,
the power to deal with produce as he pleases, the power to destroy);

(b) Possession which includes the right to exclude others;

(c) Power to alienate inter vivos, or to charge as security;

(d) Power to leave the res by will.

One of the most important of these powers is the right to exclude others. The property right is
essentially a guarantee of the exclusion of other persons from the use of handling of the
thing.......But every owner does not possess all the rights set out above? - a particular owner's
powers may be restricted by law or by an agreement he has made with another." (refer to
G.W. Paton on Jurisprudence, 4th Edn., pp.517-18).

While dealing with the concept of possession and enumerating the illustrative cases and rules
in this respect, Paton says at p.577 in cl.(x):

"To acquire possession of a thing it is necessary to exercise such physical control over the
thing as the thing is capable of, and to evince an intention to exclude others:......"

Reference in this connection has been made to the case of Tubantia: Young v. Hichens and of
Pierson v. Post, [1805] 3 Caines 175 (Supreme Court of New York)......

It would thus be seen that where the possession of a property is acquired, with a right to
exercise such necessary control over the property acquired which it is capable of, it is the
intention to exclude others which evinces an element of ownership.

To the same effect and with a more vigorous impact is the subject dealt with by Dias on
Jurisprudence, (4th Edn., at p.400):
 170

"The position, therefore, seems to be that the idea of ownership of land is essentially one of
the 'better right' to be in possession and to obtain it, whereas with chattels the concept is a
more absolute one. Actual possession implies a right to retain it until the contrary is proved,
and to that extent a possessor is presumed to be owner."

"Again, at p.404, the learned author says:

"Special attention should also be drawn to the distinction between 'legal' ownership
recognised at common law and 'equitable' ownership recognised at equity. This occurs
principally when there is a trust, which is purely the result of the peculiar historical
development of English Law. A trust implies the existence of two kinds of concurrent
ownerships, that of the trustee at law and that of the beneficiary at equity."

We are not concerned in this case with any case of trust either under the equitable principles
or under the law as engrafted in the Indian Trusts Act. Because, the "beneficiary might
himself be a trustee of his interest for a third person, in which case his equitable ownership is
as devoid of advantage to him as the legal ownership is to the trustee. So, when described in
terms of ownership, the distinction between legal and equitable ownership lies in the his-
torical factors that govern their creation and function; in terms of advantage, the distinction is
between the bare right, whether legal or equitable, and the beneficial right" (vide pp.404-405
of Dias on Jurisprudence, 4th Edn.).

We, therefore, need not go into the questions involving trusts where a person holds the
property and receives the income in trust for others who are the legal beneficiaries. The crux
of the matter is as to whether, as already stated above, the actual possession in a given
particular case gives a right to retain such a possession until the contrary is proved and so
long as that is not done, to that extent a possessor is presumed to be the owner.

Incidentally, although the Supreme Court in the case of Jodha Mal (1971) 82 ITR 570 merely
mentioned that Stroud's Judicial Dictionary had given several definitions and illustrations of
owner-ship, it refrained from going into the details on account of the practical approach that
was made in that case, to which we shall hereinafter refer and dilate upon. We think it
worthwhile, the matter having been canvassed at length at the Bar, to give a full illustration of
the definitions of "ownership" as Stroud puts it. One such definition is that the "owner" or
"proprietor" of a property is the person in whom (with his or her assent) it is for the time
being beneficially vested, and who has the occupation, or control, or usufruct, of it, e.g., a
lessee is, during the term, the owner of the property demised. Yet another definition that has
been given by Stroud is that :

"'Owner' applies to every person in possession or receipt either of the whole, or of any part,
of the rents or profits of any land or tenement; or in the occupation of such land or tenement,
other than as a tenant from year to year or for any less term or as a tenant at will''. (Stroud's
Judicial Dictionary, 3rd Edn., Vol. 3, p.2060).

The Rajasthan High Court in Maharani Yogeshwari Kumari's case again considered the same
question and after referring to various judg-ments held as follows :

"Section 22 of the Income Tax Act has created a charge on the income in respect of annual
value of the property consisting of any buildings or lands appurtenant thereto of which the
assessee is the owner, other than such portions of such property as he may occupy for the
 171

purposes of any business or profession carried on by him the profits of which are chargeable
to income tax under the head "income from house property". The question, therefore, arises
as to whether the words "of which the assessee is the owner" can be applicable only to a
registered owner or also to such person in whose favour the registered sale- deed has not been
executed but a sale agreement has been executed, possession of the property has been given
and consideration for sale has been paid. Section 53A of the Transfer of Property Act
contemplates that when any person contracts to transfer for consideration any immovable
property by writing signed by him or on his behalf from which the terms necessary to
constitute the transfer can be ascertained with reasonable certainty, and the transferee has, in
part performance of the contract, taken possession of the property or any part thereof, or the
transferee, being already in possession, continues in possession in part performance of the
contract and has done some act in furtherance of the contract, and the transferee has
performed or is willing to perform his part of the contract, then, notwithstanding that the
contract, though required to be registered, has not been registered, or where there is an
instrument of transfer, that the transfer has not been completed in the manner prescribed
therefor by the law for the time being in force, the transferor or any person claiming under
him shall be debarred from enforcing against the transferee and persons claiming under him
any right in respect of the property of which the transferee has taken or continued in
possession, other than a right expressly provided by the terms of the contract. The proviso to
the aforesaid section contemplates that nothing in that section shall affect the rights of a
transferee for consideration who has no notice of the contract or of the part performance
thereof. If the view that without there being conveyance, the transferor continues to be the
owner is taken, still a question arises that the income has not been received by the owner and,
therefore, whether the assessment of the transferee could be made by considering that there
was diver-sion of income or the transferor has ceased to have any right in respect of the
income received? This Section debars the transferor from enforcing his right to the property.
In the case of Hamda Ammal v. AvadiappaPathar, [1991] 1 SCC 715, it was held by the apex
court that the document after its registration relates back to the date of execution of the sale
deed. Though under the income tax law, the benefit of ownership is unknown, but still if the
income is assessed in the hands of the transferor who has not received the income from the
property whether such a transferor can be made liable to make the payment of tax. Various
decisions given by the different High Courts have taken different views. The view of the
Calcutta, Bombay, Delhi and Allahabad High Courts as mentioned above is on one hand,
whereas the view of the Andhra Pradesh Court in the case of CIT v. Nawab Mir Barkat Ali
Khan, (1974) Tax LR 90 and the Karnataka High Court in the case of Ram- kumar Mills P.
Ltd. v. CIT, (1989) 180 ITR 464 is different. So far as the view taken by the apex court in the
case of Osman Ali Khan, (1986) 162 ITR 888 is concerned that was in the context of
the Wealth Tax Act where the language of the section was different. Section 53A debars a
transferor from exercising the rights of an owner after he has received full consideration and
handed over possession under the contract. The transferor in a case where he has executed the
document and received consideration and even handed over possession of the property,
cannot exercise any right of an owner. This Court in the case of Rajputana Hotels Pvt. Ltd. v.
State of Rajasthan, (D.B. Civil Writ Petition No. 511 of 1989 decided on May 27, 1992),
while interpreting the provisions of Rajasthan Land and Building Tax Act, 1964, has held that
the person who is entitled to receive the rent is assessable in respect of a property even if it is
not registered in his name.

We do not think that it is necessary to set out extracts from the judgments of other High
Courts taking similar view.
 172

The contrary view taken by the other High Courts was mainly based on the facts that unless
there is a registered deed conveying the property, the person in possession/enjoyment of the
property cannot be considered as legal owner and, therefore, he cannot be called upon to pay
the tax under Section 22 of the Act.

The law laid down by this Court in JodhaMal's case according to us, has been rightly
understood by the High Courts of Punjab and Haryana, Patna, Rajasthan, etc. The
requirement of registration of the sale-deed in the context of the Section 22 is not warranted.

At this juncture, we can also refer to the judgment cited by Mr. Syali regarding updating
construction of the words used in the statute. In State (Through CBI/New Delhi) v. S.J.
Choudhary, [1996] 2 SCC 428, this Court has quoted the following passage with approval in
support of updating construction.

"Statutory Interpretation by Francis Bcnnion, 2nd Edn., Section 288 with the heading
"Presumption that updating construction to be given" states one of the rules thus : (p.617) "x
xxxxxx (2) It is presumed that Parliament intends the court to apply to an ongoing Act a
construction that continuously updates its wording to allow for changes since the Act was
initially framed (an updating construction). While it remains law, it is to be treated as always
speaking. This means that in its application on any date, the language of the Act, though
necessarily embedded in its own time, is nevertheless to be construed in accordance with the
need to treat it as current law.

"

Accordingly, we hold that the views taken by the High Courts of Allahabad, Patna,
Rajasthan, Punjab and Haryana are the correct views. The contrary view taken by the Delhi
High Court is not correct.

It may not be out of place to extract a passage from the judgment of the Delhi High Court
under Appeal (C.A. No. 4549/95). The High Court in a way conceded the correctness of the
Patna view by observing as follows :

"It can be contended, in view of the agreements of sale and the handing over of the
possession to various persons who are, in fact entitled to enjoy these flats and the income
therefrom in any manner they like and against whom the company has lost all rights of
recourse because of the provisions of section 53A of the Trans-fer of Property Act, that the
company is the owner of nothing but the husk of title over the property and should not be
assessed on the principle of the decision of the Supreme Court and this contention may
perhaps have to be accepted."

In spite of the above observation, the Delhi High Court took a contrary view mainly on the
ground that the earlier decisions of that Court has consistently taken such a contrary view
which has to be followed.

The view expressed supra by us is strengthened/supported by a subsequent amendment

to Section 27 of the Act. The said amendment was introduced to Section 27 of the Act by
the Finance Act, 1987 by substituting Clauses

(iii), (iiia) and (iiib) in the place of old clause (iii) w.e.f. 1.4.88.
 173

In our view, the circumstances under which the amendment was brought into existence and
the consequences of the amendments will have a greater bearing in deciding the issue placed
before us. In other words, if after discussion we come to a conclusion that the amendment
was clarificatory/declaratory in nature and, therefore, it will have retrospective effect then it
will set at rest the controversy finally.

We have seen that the High Courts are sharply divided on this issue, one set of High Courts
taking the view that the promoters/contractors after parting with possession on receipt of full
consideration thereby enabling the 'purchasers' to enjoy the fruits of the property, even
though no registered document as required under Section 54 of the Transfer of Property Act
was executed, can be 'owners' for the purpose of Section 22 of the Act. The other set of the
High Courts had taken a contrary view holding unless a registered sale document transferring
the ownership as required under the Transfer of Property Act the so called purchasers cannot
become owners for the purpose of Section 22 of the Act. As a matter of fact, the judgment of
the Delhi High Court in I.T.R. No. 84/77 reported in Sushil Ansal v. CIT, Delhi-III, 160 ITR
308, the appeal against which is C.A. No. 4549/95 (supra) the learned Judge has made the
follow-ing observation:

"Before we conclude, we may mention that, during the course of the hearing, we suggested to
the standing counsel for the Department that the Central Board should consider various prac-
tical aspects of this problem and formulate guidelines which would be equitable to the
various classes of persons concerned. Perhaps, as suggested by this Court in CIT v. Hans Raj
Gupta, (1981) 137 ITR 195, the time has even come for legislative amendment, if necessary,
possibly with retrospective effect. Serious consideration at the highest administrative level
was warranted in view of the recurrent nature of the problem, its magnitude and the conflict
of judicial decisions. However, after taking sufficiently long adjourn-ments, counsel
informed us that no decision could be taken by the Board and requested that we should decide
the reference. We have, therefore, proceeded to do so."

May be this is one of the reasons for the Parliament to bring in the amendment referred to
above to Section 27 of the Act. At any rate the admitted position when the amendment was
brought in, was that there was divergence of opinion between the High Courts on the issue at
hand.

In the Memorandum explaining provisions in Finance Bill 1987 con-cerning Section 27 reads
as follows :

SIMPLIFICATION AND RATIONALISATION OF PROVISIONS Enlarging the meaning

of "owner of house property''

27. Under the existing provisions of section 22 of the Income Tax Act, any income from
house property is chargeable to tax only in the hands of the legal owner. As per section 27 of
the Income Tax Act, certain persons who are not otherwise legal owners are deemed to be the
owners for the purposes of these provisions.

Under the Transfer of Property Act, the transfer of ownership can be effected only by means
of a registered instrument. However, in the recent times various other devices are sought to
be employed for transferring one's ownership in property. As a result, there are situations in
which the actual owner, say, of an apartment in a multi-storeyed building, or a holder of a
power of attorney is not the legal owner of a property. In some cases, pending resolution of
 174

disputes, the legal as well as the beneficial owners are assessed to tax in respect of the same
income.

As a measure of rationalisation, the Bill seeks to enlarge further the meaning of the
expression "owner of house property", given in clause (iii) of section 27 by providing that a
person who comes to have control over the property by virtue of such transactions as are
referred to in clause (f) of section 269 UA will also be deemed to be the owner of the
property. The amendment also seeks to enlarge the applicability of this clause to a member of
company or other association of persons.

Corresponding amendments have also been proposed in regard to the definition of "transfer"
in section 2(47) of the Income Tax Act, section 2(m) of the Wealth Tax Act defining "net
wealth" and section 2(xii) of the Gift Tax Act defining "gift".

These amendments will take effect from 1st April, 1988, and will, accordingly, apply in
relation to the assessment year 1988-89 and subsequent years."

If this much is clear, the next thing to be considered is what is the effect of the amendment. In
Crawford's Statutory Construction, at page 107 paragraph 74 reads as follows :

"74. Declaratory Statutes.-Generally speaking, declaratory statutes can be divided into two
clauses : (1) those declaratory of the common law, and (2) Those declaring the meaning of an
existing statute. Obviously, those declaratory of the common law should be construed
according to the common law. Those of the second class are to be construed as intended to
lay down a rule for future cases, and to act retrospectively. They closely resemble
interpretation clauses, and their paramount purpose is to remove doubt as to the meaning of
existing law, or to correct a construction considered erroneous by the legislature."

(Emphasis supplied) In Francis Bennion Statutory Interpretation, (second edition) 1992, page
105, the learned author says "Declaratory Acts - A declaratory Act or enactment declares
what the law is on a particular point, often 'for the avoidance of doubt'."

In Justice G.P. Singh's (Sixth Edition 1996) 'Principles of Statutory Interpretation' under the
heading "declaratory statutes", the learned author has summed up as follows :

"Declaratory statutes The presumption against retrospective operation is not ap-plicable to

declaratory statutes. As stated in CRAIES and ap-proved by the Supreme Court : "For
modern purposes a declaratory Act may be defined as an Act to remove doubts existing as to
the common law, or the meaning or effect of any statute. Such Acts are usually held to be
retrospective. The usual reason for passing a declaratory Act is to set aside what Parliament
deems to have been a judicial error, whether in the statement of the common law or in the
interpretation of statutes. Usually, if not invariably, such an Act contains a preamble, and also
the word 'declared' as well as the word 'enacted'. But the use of the words 'it is declared' is not
conclusive that the Act is declaratory for these words may, at times, be used to introduce new
rules of law and the Act in the latter case will only be amending the law and will not
necessarily be retrospective. In determining, therefore, the nature of the Act, regard must be
had to the substance rather than to the form. If a new Act is 'to explain' an earlier Act, it
would be without object unless construed retrospective. An explanatory Act is generally
passed to supply an obvious omission or to clear up doubts as to the meaning of the previous
Act. It is well settled that if a statute is curative or merely declaratory of the previous law
 175

retrospective operation is generally intended. The language 'shall be deemed always to have
meant' is declaratory, and is in plain terms retrospective. In the absence of clear words
indicating that the amending Act is declaratory, it would not be so construed when the pre-
amended provision was clear and unambiguous. An amending Act may be purely
clarificatory to clear a meaning of a provision of the principal Act which was already
implicit. A clarificatory amendment of this nature will have retrospective effect and,
therefore, if the principal Act was existing law when the constitution came into force, the
amending Act also will be part of the existing law."

The above summing up is factually based on the judgments of this Court as well as English
decisions.

A Constitution Bench of this Court in KeshavlalJethalal Shah v. Mohanlal

Bhagwandas&Anr., [1968] 3 SCR 623, while considering the nature of amendment to
Section 29(2) of the Bombay Rents, Hotel and Lodging House Rates Control Act as amended
by Gujarat Act 18 of 1965, observed as follows :

"The amending clause does not seek to explain any pre-existing legislation which was
ambiguous or defective. The power of the High Court to entertain a petition for exercising
revisional juris-diction was before the amendment derived from s. 115, Code of Civil
Procedure, and the legislature has by the amending Act attempted to explain the meaning of
that provision. An explanatory Act is generally passed to supply an obvious omission or to
clear up doubts as to the meaning of the previous Act."

(Emphasis supplied) From the circumstances narrated above and from the Memorandum
explaining the Finance Bill, 1987 (supra), it is crystal clear that the amend-ment was intended
to supply an obvious omission or to clear up doubts as to the meaning of the word "owner"
in Section 22 of the Act. We do not think that in the light of the clear exposition of the
position of a declara- tory/clarificatory Act it is necessary to multiply the authorities on this
point. We have, therefore, no hesitation to hold that the amendment introduced by the
Finance Bill, 1988 was declaratory/clarificatory in nature so far as it relates to Section 27(iii),
(iiia) and (iiib). Consequently, these provisions are retrospective in operation. If so, the view
taken by the High Courts of Patna, Rajasthan, and Calcutta, as noticed above, gets added
support and consequently the contrary view taken by the Delhi, Bombay and Andhra Pradesh
High Courts is not good law.

We are conscious of the settled position that under the common law owner means a person
who has not valid title legally conveyed to him after complying with the requirements of law
such as Transfer of Property Act, Registration Act etc. But in the context of section 22 of the
Income-tax Act having regard to the ground realities and further having regard to the object
of the Income-tax Act, namely, 'to tax the income', we are of the view, owner' is a person who
is entitled to receive income from the property in his own right.

In the light of the above narration and discussion, we do not think it necessary to discuss any
more separately the submissions advanced across the bar.

In-time, we answer the question referred to this court in T.R.C. Nos. 9-10/88 in the negative
and in favour of the Revenue. The Civil Appeal No. 4165/94 filed by the Revenue stands
dismissed and Civil Appeal No. 4549/95 by an assessee stands allowed. However, there will
be no order as to costs.
 176

Revenue in T.R.C. Nos. 9-10/88 allowed.

C.A. No. 4165/94 dismissed. C.A. No. 4549/95 allowed.

Chennai Properties and Investment Limited V. C.I.T 277 CTR 185 (SC)]
Supreme Court (SC) decision in which the SC reaffirmed its decision in an earlier case , that
income from the business of leasing out properties for rental income should be treated as
“profits and gains from business or profession” and not as “income from house property.”
The taxpayer, a private limited company, had a house property and was receiving income
from that property as rent. The taxpayer had stopped all other business activities except
leasing of properties, and was earning only rent from the properties. On appeal before the
High Court (HC), it held that the rental income earned by the taxpayer should have been
treated as “income from house property.” On further appeal before the SC, the taxpayer
contended that the rental income was taxable as “profits and gains from business or
profession” as the taxpayer was in the business of renting out properties. The taxpayer placed
reliance on the SC’s earlier rulings.[ Chennai Properties and Investments Ltd. v.
Commissioner of Income Tax “profits and gains from business or profession” as the taxpayer
was in the business of renting out properties. The taxpayer placed reliance on the SC’s
earlier rulings. The taxpayer also submitted that even as per its Memorandum of Association,
its business was to deal in real estate and to earn income by way of rent from leasing or
renting properties belonging to it. On the other hand, the Revenue, relying on another SC
ruling, contended that rent should be the primary source of income, or that the purpose for
which the company was incorporated should be to earn rental [2015] 373 ITR 673 (SC) and
Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362 (SC)] The taxpayer also
submitted that even as per its Memorandum of Association, its business was to deal in real
estate and to earn income by way of rent from leasing or renting properties belonging to it.
On the other hand, the Revenue, relying on another SC ruling, [M/s S.G. Mercantile
Corporation (P) Ltd. v. CIT, Calcutta (1972) 1 SCC 465] contended that rent should be the
primary source of income, or that the purpose for which the company was incorporated
should be to earn rental income, for rental income to be taxable under the head “profits and
gains of business or profession.” The Revenue contended that leasing and letting out of
shops and properties was not the taxpayer’s primary business as per the Memorandum of
Association, and therefore, the income earned by the taxpayer should be treated as income
earned from house property.
Issue before the SC Should the rental income from letting property earned by the
taxpayer be taxed as “profits and gains of business or profession” or as “income from
house property”?
On a recent SC decision in which the SC reaffirmed its decision in an earlier case considering
the previous SC decisions referred to by the taxpayer, it was observed that the law laid down
in the case of Chennai Properties [Chennai Properties and Investments Ltd. v. Commissioner
of Income Tax [2015] showed the correct position. The taxpayer’s case was squarely covered
by the aforesaid ruling, wherein it was held that if letting out of properties was the business of
the taxpayer, then its income would be chargeable to tax under the head “profits and gains of
business or profession” as opposed to “income from house property.” Keeping in view the
above judgment and the facts of the taxpayer’s case, the SC ruled that the business of the
company was to lease its property and to earn rent, and therefore, the income so earned
should be treated as its business income.
 177

The recent judicial trend, including this ruling, appears to affirm the position that income
from letting property should be taxed as “profits and gains from business or profession” and
not as “income from house property” if the taxpayer is in the business of leasing property.
However, we expect that this issue would continue to be litigated on account of possible
divergent views. One has to look at the specific facts of each case, including the objects of
the company as per its charter documents, to take a position on the taxability of rental income
Income from Other Sources (Section 56)
CIT v. Rajasthan Wires (P) Ltd. (2003) 130 Taxman 93 DP (Mag.) - S Chandra, B
Jain

1. These cross-appeals have been preferred against the order dt. 1st March, 2001 passed by
Shri B.S. Dhillon, the learned CIT(A) for asst. yr. 1995-96.

2. The Hon'ble Single Judge of the High Court of Judicature has directed the Tribunal in SB
Civil Writ Petn. No. 9483/02 dt. 24th Jan., 2003 to dispose of the appeal within a period of 15
days from the receipt of the judgment after giving opportunity of being heard to the petitioner
in accordance with law. The said order of the Hon'ble Judge was served on the Tribunal on
3rd Feb., 2003, and accordingly the case which had already been adjourned for hearing on
26th Feb., 2003 for taking a remand report from the AO has been directed to be preponed for
hearing on 14th Feb., 2003. Notices were served on the parties who have been heard on two
sittings i.e., on 14th Feb., 2003, and on 17th Feb., 2003, in compliance to the directions of the
Hon'ble High Court.

3. The Tribunal on 23rd Jan., 2003 had given a direction to the assessee to produce the excise
register containing entries of its stock of raw-material and manufactured goods etc. before the
AO on 5th Feb., 2003 as he sought to adduce this register as evidence for the first time before
the Tribunal. The AO was also directed to verify entries of the same and send his comments
thereon on or before 26th Feb., 2003. The learned Departmental Representative Smt. Kavita
Pandey has produced a report from the AO stating that the assessee did not make any
appearance on the appointed day in spite of directions given to him by the Tribunal. On the
contrary, the assessee's counsel Shri G.M. Mehta produced an affidavit from the assessee's
counsel Shri Rakesh Gupta, C.A. in practice. He has deposed that he went to the office of the
AO Shri D.L. Malhotra in room No. 208 on 2nd Floor of Central Revenue Bldg. on 5th Feb.,
2003, along with the requisite register but the AO was not available in his office. The
assessee's counsel Shri Mehta also makes a statement at Bar that on that day he has seen Shri
Rakesh Gupta waiting outside the room of the AO between 12-12.30 noon and stands as a
witness to his appearance in compliance to the directions of the Tribunal. When the case
came for hearing again on 17th Feb., 2003, which was an adjourned date, the learned
Departmental Representative Smt. Kavita Pandey produced on her own the AO Shri Malhotra
and informed the fact that the AO was very much on duty on the appointed date i.e., 5th Feb.,
2003 and was in his chamber throughout the day. However, it might be possible that he might
have gone out for Bathroom etc. for a few minutes only. She, therefore, alleges that the
assessee's counsel Shri Rakesh Gupta has filed a wrong affidavit before the Tribunal and a
stringent action needs to be taken against him, besides rejection of the additional evidence
sought to be placed on record.

4. After hearing the parties and careful consideration of the material brought on record and at
this stage, we consider it unnecessary to delve deep whether there has really been wrong
affidavit made by the assessee's counsel or that the AO was not available in his chamber on
 178

the appointed day, moreso when such an exercise is not going to resolve the real controversy
before the T'ribunal. Even otherwise the allegation made by the learned Departmental
Representative is not supported by any material evidence. No cognisance of such prayer is,
therefore, being taken. The assessee's counsel, however, for the reasons stated in the affidavit
did not produce the requisite register before the AO on the appointed day nor thereafter, He
also did not make a prayer before the Tribunal for making modification in the directions prior
to the date of hearing on 14th Feb., 2003. No attempt appears to have been made to produce
the register between 5th Feb., 2003 to 17th Feb., 2003, though he has been seeking to
introduce the excise register as an additional evidence, which was neither produced before the
AO nor before the learned CIT(A). We are bound by the direction of the Hon'ble High Court.
The issue cannot be kept pending beyond the limitation period, which is expiring on 18th
Feb., 2003 and, therefore, on the basis of material available and the circumstances which
have been brought before us, we are of the view that it is too late in the day to admit the stock
register of excise of the assessee as an additional evidence. The prayer of the assessee for
admitting such stock register as an additional evidence is, therefore, rejected.

5. In assessee's ground 1, the challenge is to sustenance of trading addition of Rs. 1,44,286

which was the loss shown by the assessee and reduced to NIL by the learned CIT(A).

6. Parties have been heard with reference to material on record. Before the AO, the assessee
did not produce the stock register nor any bills and entries regarding purchase, sales,
expenses and receipts, etc. However, some bills regarding consumption of power were
produced. Since the assessee did not produce vouchers, the books of account were liable to be
rejected. The genuineness of the purchases, receipts and expenses were not verifiable. The
learned CIT(A) was, therefore, justified in not deleting the trading addition of Rs. 1,44,286
which was on account of gross loss of trading account and reduced to Nil by him. The
assessee's ground, therefore, stands rejected.

7. Ground 2 has not been pressed by the assessee. The same also stands dismissed as not
pressed.

8. In Revenue's appeal in ITA No. 352/Jp/2001, the appeal was filed on 31st May, 2001, by
raising the following three grounds:

The CIT(A) has erred on facts and circumstances of the case and in law ;

(i) in deleting the addition of Rs. 8,22,806 to the trading account by holding that provisions of
Section 145 were not attracted and there was no justification for the addition;

(ii) in deleting the disallowance of telephone expenses to the extent of Rs. 69,614 by holding
that no disallowance can be made in the case of the company;

(iii) in deleting the disallowance of Rs. 4,78,702 made on account of foreign travel expenses
by holding that the entire expenses were allowable under Section 37 of the Act."

9. No authorisation was placed on record. Shri Chopra, the learned CIT Departmental
Representative joining Ms Kavita Pandey, stated that the appeal has been filed on 17th Aug.,
2001 which is pursuant to the authorisation dt. 29/30th May, 2001 given by the CIT, Jaipur
setting out the following two grounds :
 179

"The CIT(A) Raj-I, Jaipur has erred in facts and the circumstances of the case and in law :

(i) in reducing the trading addition by Rs. 60,000 by admitting fresh evidence in violation of
Rule 46A of the IT Rules, 1962;

(ii) in deleting the disallowance of Rs. 1,25,442 made under Section 43B of the Act by
admitting fresh evidence without following the provisions of Rule 46A of the IT Rules,
1962."

This has been challenged by way of filing the fresh appeal memo on 17th May, 2001. The
earlier AO had filed appeals with three grounds. These grounds did not relate to the assessee
but were wrongly filed by the AO along with the assessee's appeal. The Revenue may,
therefore, be heard on the grounds taken through the fresh appeal memo filed on 17th Aug.,
2001 by treating it as amended appeal.

10. On the other hand, the learned counsel for the assessee has objected to hear the Revenue's
appeal and prayed that the same needs to be dismissed in limine.

11. Parties have been heard with reference to material on record. M/s Kavita Pandey, the
learned Departmental Representative has not pressed all the three . grounds taken by the
Revenue in their appeal originally filed on 31st May, 2001. The learned CIT-Departmental
Representative Shri Chopra has also narrated before us that these grounds do not relate to the
assessee before us. The ground so raised in Revenue's appeal were also not supported by any
authority from the learned CIT, Jaipur. On these facts, and as these have not been pressed, the
Revenue's ground Nos. 1, 2 and 3 are dismissed as not pressed.

12. Before us, the Revenue has filed a fresh memo of appeal in Form No. 36 on 17th Aug.,
2001. These grounds cannot be treated as additional ground also, as there is no such prayer on
record for trading the same as additional ground. No explanation has been given by any
amendment nor any letter has been placed before us for showing the nature of mistake, if any,
committed by the AO which warranted any such amendment. Under such circumstances, the
fresh memo of appeal so filed on 17th Aug., 2001 has to be treated as a new appeal. The
order of the first appellate authority was communicated on 3rd April, 2001, as is borne out
from the appeal memo. The appeal was due to be filed on 2nd June, 2001 but the same has
been filed in this office on 17th Aug., 2001 and the appeal is barred by limitation. There is no
application for condonation of delay. No reasons have also been advanced for filing the
appeal late. The appeal of the Revenue, therefore, was dismissed by the order of the Bench.

13. As a result the Revenue's appeal in ITA No. 352 stands dismissed as also announced on
the Bench at the time of hearing itself.

14. Ground No. 3 in assessee's appeal relates to treating of Rs. 9,84,936 as dividend within
the meaning of Section 2(22)(e) of the IT Act, 1961. Shri Mehta contends that the assessee is
a shareholder having shares of the value of Rs. 5,50,000 out of the total paid up capital of Rs.
22,05,200 and admits that the assessee is having a substantial interest and voting power of
more than 10 per cent in the company M/s Supreme Metprodes Ltd. That company was
suffering heavy losses since 1992. It has received state capital investment subsidy for Rs.
8,37,000 out of sanctioned sum of Rs. 11,17,240 sanctioned by the director of industries vide
their No. F13(246)/Sub/Actt/1990-91. This amount is not chargeable to tax. The AO has not
taxed the receipt as revenue receipt in any of the year in the past nor in the year in which it
 180

was received earlier. This has been so stated at Bar by the learned counsel for the assessee.
The reserve has been created for capital subsidy as is borne from the assessee's paper book
under the head "Reserve and Surplus". The subsidy so received has been utilised for the
purpose for which it was granted and is not refundable. In case of non-utilisation of the
subsidy for the purpose for which it was granted, the Government could recall it prior to the
year ended 31st March, 1995 only. This period has elapsed and the amount has not been
recalled. The Hon'ble Andhra Pradesh High Court in the case of CIT v. Tirumala Bricks &
Tiles Factory (1996) 217 ITR 547 (AP) has also taken a view that the incentive granted by
the State was a capital receipt in the hands of the assessee as such not revenue receipt.

15. He further stated that the balance sheet of M/s Supreme Meprodes Ltd. reveals profit of
Rs. 1,25,936 which were profits of the year under appeal. The same cannot be termed as
accumulated profits for the purpose of deemed dividend. Reliance been placed on the
decision of apex Court in the case of CIT v. V. Damodaran (1980) 121 ITR 572 (SC).

16. Further, it was contended that the depreciation as per income-tax assessment has to be set
off and the assessee had unabsorbed depreciation and losses of Rs. 22,30,842 which will
leave no accumulated profit with that company for the amount of alleged advance to the
assessee. Reliance has been placed on the decision of Bombay High Court in the case
of Navnitlal C. Jhaveri v. CIT (1971) 80 ITR 582 (Bom). The assessee's counsel has also
relied on the decision of P.K. Badiani v. CIT (1976) 105 ITR 642 (SC) where accumulated
profits have been defined in analogous provision as contained in Section 2(6A)(e) of the old
Act of 1922. The assessee has not taken any advance or loan. He has incurred certain
expenses which could not be treated as advance or loans so as to fall in the category of
deemed dividend within the meaning of Section 2(22)(e) of the IT Act, 1961. Another plea
made by the learned counsel for the assessee is that the income on account of subsidy is not
chargeable to tax as it has also not been charged to tax, The same cannot be treated as
accumulated profit in view of the decision of the apex Court in the case of Tea Estate India
(P) Ltd. v. CIT (1976) 103 ITR 785 (SC).

17. On the other hand, the learned Departmental Representative contends that the decision of
apex Court in P.K. Badiani, (supra) speaks of profits in commercial sense and not assessed
profits as canvassed by the learned counsel for the assessee. No set off of depreciation as per
income-tax, assessment can be given. Profits to be taken are in the commercial sense. The
balance sheet of M/s Supreme Metprodes Ltd. reveals that the amount was noted under the
head "advance". That being so, it cannot be said that the amount has been received by the
assessee for any other purpose than what has been stated by the company Supreme Meprodes
Ltd. The assessee's plea that it is not an advance is, therefore, incorrect. She further contends
that the Hon'ble High Court in the case of CIT v. Roshanlal (1975) 98 ITR 349 (All), has held
that the accumulated profits are those which are available for distribution. The subsidy
amount was not refundable by the assessee and therefore, this was available for distribution
amongst the shareholders. This has to be treated as accumulated profit. Another decision
relied upon in that of CIT v. K. Srinivasan and Ors. (1963) 50 ITR 788 (Mad) where it has
been stated that general reserves are also included in the accumulated profit unless the
capitalisation in one form or the other. The amount of subsidy has to be treated as part of the
general reserve. Reference has also been made to the decision of the Andhra Pradesh High
Court in the case of CIT v. Jaldu Rama Rao (1983) 140 ITR 168 (AP) and in the case of 43
ITR 426 (sic). In any event, the learned Departmental Representative wants more time to
verify the facts from the assessment record, as to whether the subsidy is chargeable to tax or
not. Reference to the decision of Sahney Steel & Press Works Ltd. (1997) 228 ITR 253 (SC)
 181

has also been made. It was contended that whether the amount of subsidy is capital or
revenue receipt has to be decided before accepting the assessee's plea. Another decision
referred is of CIT v. Udaya Pictures (P) Ltd. (1997) 225 ITR 394 (Ker), where subsidy for
production of films was held as taxable. It was, therefore, contended that the plea that the
amount of subsidy is not chargeable to tax, cannot be accepted and the order of the authorities
below needs to be upheld.

18. In rejoinder the assessee's counsel Shri Mehta contends that the Revenue is using
delaying tactics by seeking more time. The AO present in the Court room is also assessing
M/s Supreme Metprodes Ltd. He personally is present without bringing the records. In case
the Revenue sought to rely on the record or it had anything adverse against the assessee, that
could have been done at least on the adjourned date today. He, therefore, contends that no
adverse view can be taken against the assessee for the inabilities on the part of the Revenue
more particularly when there is no adverse material available on record. He, therefore, prays
that the assessee's ground needs to be decided on the basis of material evidence on record at
the time of hearing of appeal by the Tribunal.

19. Parties have been heard with reference to material on record and case laws cited. The
Revenue's prayer that some more time may be granted to locate the fact as to whether the
amount of subsidy has been brought to tax as revenue receipt or chargeable to tax in the
hands of Supreme Metprodes Ltd. cannot be accepted at this stage, as also because the AO
has not brought any record in spite of Revenue being aware that the issue is to be concluded
and decided before 18th Feb., 2003, being a limitation matter in the light of the directions of
the Hon'ble High Court. We, therefore, proceed to decide the issue on the basis of available
material before us.

20. It is not disputed that the assessee is holding substantial interest and voting power in the
company namely Supreme Metprodes Ltd. as required under Section 2(22)(e) of the IT Act,
1961, A perusal of the balance sheet of that company placed at APB pp 4-15 reveals that in
Schedule G to the balance sheet placed at p. 12 the amount has been shown under the head
'advances'--the other advance at Rs. 16,06,683. Copy of account of the assessee in their books
has been placed at APB 27-29 which shows debit balance of Rs. 16,07,738. On the other
hand, the assessee's balance sheet reveals that it has shown under the head 'current liabilities'-
-other creditor at Rs. 15,96,867. The books of account have not been produced when asked to
do so at the time of hearing nor any details of other advances or other liabilities so stated have
been filed nor the differences reconciled between the amount of other advances at Rs.
16,06,683 and that the copy of account showing debit balance at Rs. 16,07,738 in the name of
the assessee in the books of M/s Supreme Metprodes Ltd. In view of the fact that M/s
Supreme Metprodes Ltd. has disclosed the amount under their head 'loans and advances' and
for want of production of books or any other reconciliation etc. the assessee's plea that the
amount paid is for expenses and a current account cannot be accepted. The amount so
outstanding in the name of the assesses in the accounts of the company Supreme Metprodes
Ltd. under the head 'loans and advances' has necessarily to be treated as the amount of
advance/loan to shareholders as envisaged under Section 2(22)(e) of the IT Act, 1961.

21. The AO however, restricted the amount to Rs. 9,48,922 standing to the credit under the
head 'Reserve and Surplus' in the books of Supreme Metprodes Ltd. as against the
advance/loan of Rs. 16,06,683 as disclosed in their balance sheet at the close of the year
ended on 31st March, 1995. The aforesaid amount of Rs. 9,84,936 includes current profits for
the year ended 31st March, 1995, at Rs. 1,25,036 as is evident from the copy of the audited
 182

accounts placed before us. The assessee's counsel contends that current profits cannot be
included in accumulated profits as has been held by the Supreme Court in the case of CIT v.
Damodaran (supra). It is seen that the Hon'ble Court decided the issue in the context of
the Indian IT Act, 1922, and Section 2(6A)(e) of this Act was interpreted for coming to such
a conclusion. The relevant Section 26{A)(e) of 1922 Act reads as under :

"(6A) 'Dividend' includes -

"(e) any payment by a company, not being a company in which the public are substantially
interested within the meaning of Section 23A of any sum (whether as representing a part of
the assets of the company or otherwise) by way of advance or loan to a shareholder or any
payment by any such company on behalf or for the individual benefit of a shareholder, to the
extent to which the company in either case possesses accumulated profits."

However, the provisions of Section 2(22)(e) inserted in the IT Act, 1961, and as applicable in
the year under consideration, Expln. 2 has also been added where the expression
"accumulated profits" appearing in Sub-clause (e) of Section 2(22) includes all profits of the
assesseeupto the date of distribution or payment referred in this sub-clause. Section
2(22)(e) reads as under :

'dividend'-

(a) xxxxxx

(b) xxxxxx

(c) xxxxxx

(d) xxxxxx

(e) any payment by a company, not being a company in which the public are substantially
interested of any sum whether as representing a part of the assets of the company or
otherwise made after the 31st May, 1987, by way of advance or loan to a shareholder, being a
person who is the beneficial owner of shares (not being shares entitled to a fixed rate of
dividend whether with or without a right to participate in profits) holding not less than ten per
cent of the voting power, or to any concern in which such shareholders is a member or a
partner and in which he has a substantial interest (hereafter in this clause referred to as the
said concern) or any payment by any such company on behalf, or for the individual benefit,
of any such shareholder, to the extent to which the company in either case possesses
accumulated profits;"

Explanation 2--The expression "accumulated profits" in Sub-clauses (a)(b)(d) and (e) shall
include all profits of the company upto the date of distribution or payment referred to in those
sub-clauses, and in Sub-clause (c) shall include all profits of the company upto the date of
liquidation, but shall not, where the liquidation in consequent on the compulsory acquisition
of its undertaking by the Government or a corporation owned or controlled by the
Government under any law for the time being in force, include any profits of the company
prior to three successive previous years immediately preceding the previous year in which
such acquisition took place."
 183

The present definition of accumulated profits by Expln. 2 to Section 2(22) of the IT Act,
1961, only clarifies that the words "accumulated profits" shall also include current profits of
the company which are upto the date of distribution or payment referred in Section
2(22)(e) of the IT Act, 1961. This explanation was not available in the old Act and, therefore,
the relevant provisions being different, the decision of the Supreme Court that current profits
cannot be included in accumulated profits shall not apply in the present provisions of law.
M/s Supreme Metprodes Ltd. made payment to the extent of Rs. 10,07,738 (APB p. 29) as is
borne out from the copy of account upto 31st March, 1995, and a date of arriving at current
profits of the year under consideration. This amount, therefore, is held to be part of the
accumulated profits, liable to be treated as deemed dividend within the mischief of Section
2(22)(e) of the IT Act, 1961.

22. The assessee has contended that he has unabsorbed depreciation and losses as per
income-tax assessment at Rs. 22,30,842. These are required to be set off before calculating
accumulated profit. Reliance has been placed on the decision of Hon'ble Bombay High Court
in the case of Navneet Lal Jhaveri v. CIT (supra). In this case the Malegaon Electric Co.
prepared its balance sheet on the basis of depreciation allowance as calculated under
the Electricity Supply Act '1948' for the purpose of making certain calculations under that
Act. It has resulted in not correctly representing the position of the Malegaon Electricity Co.
insofar as amount of depreciation. It is under such circumstance the Hon'ble Bombay High
Court came to the conclusion that an allowance for depreciation should be made by way of
deduction at the rates provided for by the IT Act itself. In the assessee's case before us,
however, depreciation has been set apart as per Indian Companies Act, 1956 so as to replace
the actual assets which is lost by the reason of the wear and tear of the machinery and plant
and like assets and the profits so drawn as per Indian Companies Act cannot be said to have
not been correctly representing the position of M/s Supreme Metprodes Ltd., under which
such balance sheet statutorily required to be made. Even the Supreme Court in the case
of P.K. Badiani v. CIT (supra) accepted the view of the Gujarat High Court in the case of CIT
v. Viramgam Mills Co. Ltd. (1961) 43 ITR 270 (Guj) that the normal depreciation reserve of
the company does not form part of the accumulated past profits. It also came to the
conclusion that the expression "accumulated profits" occurring in Clause (e) of Section
2(6A) of 1922 Act means profits in the commercial sense and not assessable or taxable
profits liable to tax as income under that Act. Before us it is also not the case of the assessee
that the profits arrived at by the company is not per depreciation provided in its accounts to
the extent specified under Section 350 of the Indian Companies Act, 1956; or that it is not in
the manner as prescribed under Section 205 of that Act for the purpose of dividend to be paid
only out of profits. Keeping in view the aforesaid position, Expln. 2 to Section 2(22)(e) of the
IT Act, 1961, under which the issue has come for consideration in contra-distinction to the
provisions contained in old Act and the concept of commercial profits as set out in the
aforesaid judgment of the Supreme Court, unabsorbed depreciation and losses as per IT
Act cannot be allowed to be set off against the accumulated profits arrived at by the assessee
after making provision of depreciation and charging expenses which has given rise ultimately
to the profits in the books of the assessee at Rs. 1,25,936. The assessee's plea to allow set off
of such assessed unabsorbed depreciation and loss, therefore, does not find favour.

23. The Revenue before us has, however, relied on the decision of Hon'ble Allahabad High
Court in CIT v. Roshanlal (decd.) (supra) contending that the amount of capital reserve has to
be taken as profits available for distribution. In this judgment, we find that the AO treated Rs.
82,642 as the accumulated profit and deemed dividend to the extent of Rs. 74,642 advanced
to one of its shareholders, whereas the Tribunal took the view that only Rs. 8,082 could be
 184

treated as accumulated profit which was a sum left over after deducting the sum of Rs. 74,560
declared as dividend by the company. The Hon'ble Allahabad High Court did not agree with
the view of the Tribunal for the reason that the profits can accumulate even within a single
year, "Accumulated" means earned bit by bit and accumulated. The entire amount which is
available for distribution as profits on a particular date would be the accumulated profit and
any amount paid as advance or loan to the shareholder to the extent of this amount of
accumulated, profit will be dividend within the meaning of Section 2(6A)(e) of the 1922 Act.
The Hon'ble High Court, therefore, has referred to the earned profit and not any other amount
like receipts provided by the State Government. We, therefore, do not agree that such capital
receipts can be said to be available with the assessee as earned profits available for
distribution.

24. By another judgment referred by the Revenue in the case of CIT v. K. Sreenivasan (supra)
it was contended that accumulated profits included a general reserve. In this case the Hon'ble
Court opined that the mere transfer of profits to any other reserve account will not take away
from the profits the character of accumulated profits. It is for this reason, the Hon'ble Court
came to the conclusion that for the purpose of Section 2(6A)(e) of the 1922 Act, accumulated
profits include general reserve. Before us, the capital reserve on account of state capital
investment subsidy, lab equipment subsiay and ISI subsidy provided by the State
Government is not a profit earned by the assessee and transferred to capital reserve account
so as to say it as "accumulated profits" in the light of aforesaid judgment.

25. The Revenue has also relied on the decision of Sahney Steel & Press Works Ltd. v.
CIT (supra) and also another decision in the case of CIT v. Udaya Pictures (P) Ltd. (supra)
saying that the subsidy was taxable. Sufficient time was available with the Revenue to bring
material on record to show as to whether the said amount of Rs. 8,37,000 received on account
of state capital investment subsidy, on account of lab equipment subsidy and Rs. 2,000 out of
ISI subsidy received from the State Government by the assessee was charged as revenue
receipt in the hands of M/s Supreme Metprodes Ltd. which was being assessed by the same
AO who assessed the appellant before us also but was present in the hearing without bringing
any such record. The assessee's counsel Shri Mehta has, however, also made statement at Bar
that the amount of subsidy has not been charged to tax in any year. In the absence of any
material contrary to the statement made by the assessee's counsel, and also because it is not
the issue before us whether the receipt on this account is revenue receipt or not in the hands
of Supreme Metprodes Ltd., no adverse inference can be drawn against the assessee by
treating the amount of subsidy so received as accumulated profits available with that
company. Accordingly the decisions cited by the Revenue are of no consequence at this
stage. Since the Revenue has not treated the amount of subsidy as revenue receipt in any of
the earlier years, nor it was shown that the amount of these subsidies has been credited as its
profits in the accounts of M/s Supreme Metprodes Ltd. in any of the earlier years, the
assessee's plea that the amounts of subsidy were capital receipt of the company of which
assessee is a shareholder has to be accepted. The subsidy amount on capital account is,
therefore, outside the scope and ambit of word "profits" nor this can be termed as capitalized
profits of the company. M/s Supreme Metprodes Ltd, cannot be said to possess any
"accumulated profits" to that extent for the purpose of Section 2(22)(e) of the IT Act, 1961.
It, therefore, leaves only Rs. 1,25,936 as accumulated profit on account of current years profit
as decided hereinbefore to be treated as deemed dividend within the mischief of Section
2(22)(e) of the IT Act, 1961 r/w Expln. (2) thereof. We, therefore, modify the order of the
learned CIT(A) accordingly which results into treating the amount of Rs. 1,25,936 as a
 185

deemed dividend in the hands of the assessee. Accordingly, the assessee's ground stand partly
allowed.

26. In the result the Revenue's appeal stands dismissed and that of the assessee stands partly
allowed.

Capital Gains

(i)Vodafone International Holdings B.V vs. Union of India [2012] 204- S.H. Kapadia, K.S.
Radhakrishnan, Swatanter Kumar

This matter concerns a tax dispute involving the Vodafone Group with the Indian Tax
Authorities [hereinafter referred to for short as "the Revenue"], in relation to the acquisition
by Vodafone International Holdings BV [for short "VIH"], a company resident for tax
purposes in the Netherlands, of the entire share capital of CGP Investments (Holdings) Ltd.
[for short "CGP"], a company resident for tax purposes in the Cayman Islands ["CI" for
short] vide transaction dated 11.02.2007, whose stated aim, according to the Revenue, was
"acquisition of 67% controlling interest in HEL", being a company resident for tax purposes
in India which is disputed by the appellant saying that VIH agreed to acquire companies
which in turn controlled a 67% interest, but not controlling interest, in Hutchison Essar
Limited ("HEL" for short). According to the appellant, CGP held indirectly through other
companies 52% shareholding interest in HEL as well as Options to acquire a further 15%
shareholding interest in HEL, subject to relaxation of FDI Norms. In short, the Revenue seeks
to tax the capital gains arising from the sale of the share capital of CGP on the basis that
CGP, whilst not a tax resident in India, holds the underlying Indian assets.

Correctness of Azadi Bachao case - Re: Tax Avoidance/Evasion

57. Before us, it was contended on behalf of the Revenue that Union of India v. Azadi
BachaoAndolan (2004) 10 SCC 1 needs to be overruled insofar as it departs from McDowell
and Co. Ltd. v. CTO (1985) 3 SCC 230 principle for the following : i) Para 46 of McDowell
judgment has been missed which reads as under: "on this aspect Chinnappa Reddy, J. has
proposed a separate opinion with which we agree". [i.e. Westminster principle is dead].

ii) That, Azadi Bachao failed to read paras 41-45 and 46 of McDowell in entirety. If so read,
the only conclusion one could draw is that four learned judges speaking through Misra, J.
agreed with the observations of Chinnappa Reddy, J. as to how in certain circumstances tax
avoidance should be brought within the tax net. iii) That, subsequent to McDowell, another
matter came before the Constitution Bench of five Judges in Mathuram Agrawal v. State of
Madhya Pradesh (1999) 8 SCC 667, in which Westminster principle was quoted which has
not been noticed by Azadi Bachao.

Our Analysis

58. Before coming to Indo-Mauritius DTAA, we need to clear the doubts raised on behalf of
the Revenue regarding the correctness of Azadi Bachao (supra) for the simple reason that
certain tests laid down in the judgments of the English Courts subsequent to The
Commissioners of Inland Revenue v. His Grace the Duke of Westminster 1935 All E.R. 259
and W.T. Ramsay Ltd. v. Inland Revenue Commissioners (1981) 1 All E.R. 865 help us to
 186

understand the scope of Indo-Mauritius DTAA. It needs to be clarified, that, McDowell dealt
with two aspects. First, regarding validity of the Circular(s) issued by CBDT concerning
Indo-Mauritius DTAA. Second, on concept of tax avoidance/evasion. Before us, arguments
were advanced on behalf of the Revenue only regarding the second aspect.

59. The Westminster principle states that, "given that a document or transaction is genuine,
the court cannot go behind it to some supposed underlying substance". The said principle has
been reiterated in subsequent English Courts Judgments as "the cardinal principle".

60. Ramsay was a case of sale-lease back transaction in which gain was sought to be
counteracted, so as to avoid tax, by establishing an allowable loss. The method chosen was to
buy from a company a readymade scheme, whose object was to create a neutral situation. The
decreasing asset was to be sold so as to create an artificial loss and the increasing asset was to
yield a gain which would be exempt from tax. The Crown challenged the whole scheme
saying that it was an artificial scheme and, therefore, fiscally in-effective. It was held that
Westminster did not compel the court to look at a document or a transaction, isolated from
the context to which it properly belonged. It is the task of the Court to ascertain the legal
nature of the transaction and while doing so it has to look at the entire transaction as a whole
and not to adopt a dissecting approach. In the present case, the Revenue has adopted a
dissecting approach at the Department level.

61. Ramsay did not discard Westminster but read it in the proper context by which "device"
which was colourable in nature had to be ignored as fiscal nullity. Thus, Ramsay lays down
the principle of statutory interpretation rather than an over-arching anti-avoidance doctrine
imposed upon tax laws.

62. Furniss (Inspector of Taxes) v. Dawson (1984) 1 All E.R. 530 dealt with the case of
interpositioning of a company to evade tax. On facts, it was held that the inserted step had no
business purpose, except deferment of tax although it had a business effect. Dawson went
beyond Ramsay. It reconstructed the transaction not on some fancied principle that anything
done to defer the tax be ignored but on the premise that the inserted transaction did not
constitute "disposal" under the relevant Finance Act.

Thus, Dawson is an extension of Ramsay principle.

Craven (Inspector of Taxes) v. White (Stephen) (1988) 3 All. E.R. 495 it was held that the
Revenue cannot start with the question as to whether the transaction was a tax
deferment/saving device but that the Revenue should apply the look at test to ascertain its
true legal nature. It observed that genuine strategic planning had not been abandoned.

64. The majority judgment in McDowell held that "tax planning may be legitimate provided
it is within the framework of law" (para 45). In the latter part of para 45, it held that
"colourable device cannot be a part of tax planning and it is wrong to encourage the belief
that it is honourable to avoid payment of tax by resorting to dubious methods". It is the
obligation of every citizen to pay the taxes without resorting to subterfuges. The above
observations should be read with para 46 where the majority holds "on this aspect one of us,
Chinnappa Reddy, J. has proposed a separate opinion with which we agree". The words "this
aspect"
 187

express the majority's agreement with the judgment of Reddy, J. only in relation to tax
evasion through the use of colourable devices and by resorting to dubious methods and
subterfuges. Thus, it cannot be said that all tax planning is illegal/illegitimate/impermissible.
Moreover, Reddy, J.

himself says that he agrees with the majority. In the judgment of Reddy, J. there are repeated
references to schemes and devices in contradistinction to "legitimate avoidance of tax
liability" (paras 7-10, 17 & 18). In our view, although Chinnappa Reddy, J. makes a number
of observations regarding the need to depart from the "Westminster" and tax avoidance -
these are clearly only in the context of artificial and colourable devices. Reading McDowell,
in the manner indicated hereinabove, in cases of treaty shopping and/or tax avoidance, there
is no conflict between McDowell and Azadi Bachao or between McDowell and Mathuram
Agrawal.

International Tax Aspects of Holding Structures

65. In the thirteenth century, Pope Innocent IV espoused the theory of the legal fiction by
saying that corporate bodies could not be ex-communicated because they only exist in
abstract. This enunciation is the foundation of the separate entity principle.

66. The approach of both the corporate and tax laws, particularly in the matter of corporate
taxation, generally is founded on the abovementioned separate entity principle, i.e., treat a
company as a separate person. The Indian Income Tax Act, 1961, in the matter of corporate
taxation, is founded on the principle of the independence of companies and other entities
subject to income-tax. Companies and other entities are viewed as economic entities with
legal independence vis-a-vis their shareholders/participants. It is fairly well accepted that a
subsidiary and its parent are totally distinct tax payers. Consequently, the entities subject to
income-tax are taxed on profits derived by them on standalone basis, irrespective of their
actual degree of economic independence and regardless of whether profits are reserved or
distributed to the shareholders/ participants. Furthermore, shareholders/ participants, that are
subject to (personal or corporate) income-tax, are generally taxed on profits derived in
consideration of their shareholding/participations, such as capital gains. Now a days, it is
fairly well settled that for tax treaty purposes a subsidiary and its parent are also totally
separate and distinct tax payers.

67. It is generally accepted that the group parent company is involved in giving principal
guidance to group companies by providing general policy guidelines to group subsidiaries.

8. The common law jurisdictions do invariably impose taxation against a corporation based
on the legal principle that the corporation is "a person" that is separate from its members. It is
the decision of the House of Lords in Salomon v. Salomon (1897) A.C. 22 that opened the
door to the formation of a corporate group. If a "one man"

corporation could be incorporated, then it would follow that one corporation could be a
subsidiary of another. This legal principle is the basis of Holding Structures. It is a common
practice in international law, which is the basis of international taxation, for foreign investors
to invest in Indian companies through an interposed foreign holding or operating company,
such as Cayman Islands or Mauritius based company for both tax and business purposes. In
doing so, foreign investors are able to avoid the lengthy approval and registration processes
required for a direct transfer (i.e., without a foreign holding or operating company) of an
 188

equity interest in a foreign invested Indian company. However, taxation of such Holding
Structures very often gives rise to issues such as double taxation, tax deferrals and tax
avoidance. In this case, we are concerned with the concept of GAAR. In this case, we are not
concerned with treaty-shopping but with the anti-avoidance rules. The concept of GAAR is
not new to India since India already has a judicial anti-avoidance rule, like some other
jurisdictions. Lack of clarity and absence of appropriate provisions in the statute and/or in
the treaty regarding the circumstances in which judicial anti-avoidance rules would apply has
generated litigation in India. Holding Structures are recognized in corporate as well as tax
laws. Special Purpose Vehicles (SPVs) and Holding Companies have a place in legal
structures in India, be it in company law, takeover code under SEBI or even under the income
tax law.

When it comes to taxation of a Holding Structure, at the threshold, the burden is on the
Revenue to allege and establish abuse, in the sense of tax avoidance in the creation and/or use
of such structure(s). In the application of a judicial anti-avoidance rule, the Revenue may
invoke the "substance over form" principle or "piercing the corporate veil" test only after it is
able to establish on the basis of the facts and circumstances surrounding the transaction that
the impugned transaction is a sham or tax avoidant. To give an example, if a structure is used
for circular trading or round tripping or to pay bribes then such transactions, though having a
legal form, should be discarded by applying the test of fiscal nullity. Similarly, in a case
where the Revenue finds that in a Holding Structure an entity which has no
commercial/business substance has been interposed only to avoid tax then in such cases
applying the test of fiscal nullity it would be open to the Revenue to discard such inter-
positioning of that entity.

Transfer of HTIL's property rights by Extinguishment?

72. The primary argument advanced on behalf of the Revenue was that the SPA,
commercially construed, evidences a transfer of HTIL's property rights by their
extinguishment. That, HTIL had, under the SPA, directly extinguished its rights of control
and management, which are property rights, over HEL and its subsidiaries and, consequent
upon such extinguishment, there was a transfer of capital asset situated in India. In support,
the following features of the SPA were highlighted: (i) the right of HTIL to direct a
downstream subsidiary as to the manner in which it should vote. According to the Revenue,
this right was a property right and not a contractual right. It vested in HTIL as HTIL was a
parent company, i.e., a 100% shareholder of the subsidiary; (ii) According to the Revenue,
the 2006 Shareholders/ Framework Agreements had to be continued upon transfer of control
of HEL to VIH so that VIH could step into the shoes of HTIL. According to the Revenue,
such continuance was ensured by payment of money to AS and AG by VIH failing which AS
and AG could have walked out of those agreements which would have jeopardized VIH's
control over 15% of the shares of HEL and, consequently, the stake of HTIL in TII would
have stood reduced to minority; (iii) Termination of IDFC Framework Agreement of 2006
and its substitution by a fresh Framework Agreement dated 5.06.2007, as warranted by SPA;
(iv) Termination of Term Sheet Agreement dated 5.07.2003. According to the Revenue, that
Term Sheet Agreement was given effect to by clause 5.2 of the SPA which gave Essar the
right to Tag Along with HTIL and exit from HEL. That, by a specific Settlement Agreement
dated 15.03.2007 between HTIL and Essar, the said Term Sheet Agreement dated 5.07.2003
stood terminated. This, according to the Revenue, was necessary because the Term Sheet
bound the parties; (v) the SPA ignores legal entities interposed between HTIL and HEL
enabling HTIL to directly nominate the Directors on the Board of HEL; (vi) Qua
 189

management rights, even if the legal owners of HEL's shares (Mauritius entities) could have
been directed to vote by HTIL in a particular manner or to nominate a person as a Director,
such rights existed dehors the CGP share; (vii) Vide clause 6.2 of the SPA, HTIL was
required to exercise voting rights in the specified situations on the diktat of VIH ignoring the
legal owner of CGP share [HTIHL (BVI)]. Thus, according to the Revenue, HTIL ignored its
subsidiaries and was exercising the voting rights qua the CGP and the HEL shares directly,
ignoring all the intermediate subsidiaries which are 100% held and which are non-
operational. According to the Revenue, extinguishment took place dehors the CGP share. It
took place by virtue of various clauses of SPA as HTIL itself disregarded the corporate
structure it had set up; (viii) As a holder of 100% shares of downstream subsidiaries, HTIL
possessed de facto control over such subsidiaries. Such de facto control was the subject
matter of the SPA.

73. At the outset, we need to reiterate that in this case we are concerned with the sale of
shares and not with the sale of assets, item-wise. The facts of this case show sale of the entire
investment made by HTIL, through a Top company, viz. CGP, in the Hutchison Structure. In
this case we need to apply the "look at" test. In the impugned judgment, the High Court has
rightly observed that the arguments advanced on behalf of the Department vacillated. The
reason for such vacillation was adoption of "dissecting approach" by the Department in the
course of its arguments. Ramsay (supra) enunciated the look at test.

Role of CGP in the transaction

78. The main contention of the Revenue was that CGP stood inserted at a late stage in the
transaction in order to bring in a tax-free entity (or to create a transaction to avoid tax) and
thereby avoid capital gains. That, in December, 2006, HTIL explored the possibility of the
sale of shares of the Mauritius entities and found that such transaction would be taxable as
HTIL under that proposal had to be the prime mover behind any agreement with VIH - prime
mover in the sense of being both a seller of shares and the recipient of the sale proceeds
therefrom. Consequently, HTIL moved upwards in the Hutchison structure and devised an
artificial tax avoidance scheme of selling the CGP share when in fact what HTIL wanted was
to sell its property rights in HEL. This, according to the Revenue, was the reason for the CGP
share being interposed in the transaction. We find no merit in these arguments.

The report of Ernst & Young dated 11.02.2007 inter alia states that when they were asked to
conduct due diligence by VIH, it was in relation to Array and its subsidiaries. The said report
evidences that at the negotiation stage, parties had in mind the transfer of an upstream
company rather than the transfer of HEL directly. The transfer of Array had the advantage of
transferring control over the entire shareholding held by downstream Mauritius companies
(tier I companies), other than GSPL. On the other hand, the advantage of transferring the
CGP share enabled VIH to indirectly acquire the rights and obligations of GSPL (Indian
company) in the Centrino and NDC Framework agreements.

This was the reason for VIH to go by the CGP route. One of the arguments of the Revenue
before us was that the Mauritius route was not available to HTIL for the reason indicated
above. In this connection, it was urged that the legal owner of HEL (Indian company) was not
HTIL. Under the transaction, HTIL alone was the seller of the shares.

VIH wanted to enter into an agreement only with HTIL so that if something goes wrong,
VIH could look solely to HTIL being the group holding company (parent company).
 190

Further, funds were pumped into HEL by HTIL. These funds were to be received back in the
shape of a capital gain which could then be used to declare a special dividend to the
shareholders of HTIL. We find no merit in this argument. Firstly, the tier I (Mauritius
companies) were the indirect subsidiaries of HTIL who could have influenced the former to
sell the shares of Indian companies in which event the gains would have arisen to the
Mauritius companies, who are not liable to pay capital gains tax under the Indo-

Mauritius DTAA. That, nothing prevented the Mauritius companies from declaring dividend
on gains made on the sale of shares. There is no tax on dividends in Mauritius.

86. Applying the "nature and character of the transaction"

test, the High Court came to the conclusion that the transfer of the CGP share was not
adequate in itself to achieve the object of consummating the transaction between HTIL and
VIH. That, intrinsic to the transaction was a transfer of other "rights and entitlements" which
rights and entitlements constituted in themselves "capital assets"

within the meaning of Section 2(14) of the Income Tax Act, 1961. According to the High
Court, VIH acquired the CGP share with other rights and entitlements whereas, according to
the appellant, whatever VIH obtained was through the CGP share (for short "High Court
Approach").

87. At the outset, it needs to be mentioned that the Revenue has adopted the abovementioned
High Court Approach as an alternative contention.

88. We have to view the subject matter of the transaction, in this case, from a commercial and
realistic perspective.

The present case concerns an offshore transaction involving a structured investment. This
case concerns "a share sale"

and not an asset sale. It concerns sale of an entire investment. A "sale" may take various
forms. Accordingly, tax consequences will vary. The tax consequences of a share sale would
be different from the tax consequences of an asset sale. A slump sale would involve tax
consequences which could be different from the tax consequences of sale of assets on
itemized basis. "Control"

is a mixed question of law and fact. Ownership of shares may, in certain situations, result in
the assumption of an interest which has the character of a controlling interest in the
management of the company. A controlling interest is an incident of ownership of shares in a
company, something which flows out of the holding of shares. A controlling interest is,
therefore, not an identifiable or distinct capital asset independent of the holding of shares.
The control of a company resides in the voting power of its shareholders and shares represent
an interest of a shareholder which is made up of various rights contained in the contract
embedded in the Articles of Association. The right of a shareholder may assume the character
of a controlling interest where the extent of the shareholding enables the shareholder to
control the management. Shares, and the rights which emanate from them, flow together and
cannot be dissected.

Scope and applicability of Sections 195 and 163 of IT Act

 191

89. Section 195 casts an obligation on the payer to deduct tax at source ("TAS" for short)
from payments made to non-

residents which payments are chargeable to tax. Such payment(s) must have an element of
income embedded in it which is chargeable to tax in India. If the sum paid or credited by the
payer is not chargeable to tax then no obligation to deduct the tax would arise. Shareholding
in companies incorporated outside India (CGP) is property located outside India. Where such
shares become subject matter of offshore transfer between two non-residents, there is no
liability for capital gains tax. In such a case, question of deduction of TAS would not arise. If
in law the responsibility for payment is on a non-resident, the fact that the payment was
made, under the instructions of the non-

resident, to its Agent/Nominee in India or its PE/Branch Office will not absolve the payer of
his liability under Section 195 to deduct TAS. Section 195(1) casts a duty upon the payer of
any income specified therein to a non-resident to deduct therefrom the TAS unless such payer
is himself liable to pay income-tax thereon as an Agent of the payee.

Section 201 says that if such person fails to so deduct TAS he shall be deemed to be an
assessee-in-default in respect of the deductible amount of tax (Section 201). Liability to
deduct tax is different from "assessment" under the Act.

Thus, the person on whom the obligation to deduct TAS is cast is not the person who has
earned the income.

Assessment has to be done after liability to deduct TAS has arisen. The object of Section
195 is to ensure that tax due from non-resident persons is secured at the earliest point of time
so that there is no difficulty in collection of tax subsequently at the time of regular
assessment. The present case concerns the transaction of "outright sale"

between two non-residents of a capital asset (share) outside India. Further, the said
transaction was entered into on principal to principal basis. Therefore, no liability to deduct
TAS arose. Further, in the case of transfer of the Structure in its entirety, one has to look at it
holistically as one Single Consolidated Bargain which took place between two foreign
companies outside India for which a lump sum price was paid of US$ 11.08 bn. Under the
transaction, there was no split up of payment of US$ 11.08 bn. It is the Revenue which has
split the consolidated payment and it is the Revenue which wants to assign a value to the
rights to control premium, right to non-compete, right to consultancy support etc. For FDI
purposes, the FIPB had asked VIH for the basis of fixing the price of US$ 11.08 bn. But here
also, there was no split up of lump sum payment, asset-wise as claimed by the Revenue.
There was no assignment of price for each right, considered by the Revenue to be a "capital
asset" in the transaction. In the absence of PE, profits were not attributable to Indian
operations. Moreover, tax presence has to be viewed in the context of the transaction that is
subjected to tax and not with reference to an entirely unrelated matter. The investment made
by Vodafone Group companies in Bharti did not make all entities of that Group subject to
the Indian Income Tax Act, 1961 and the jurisdiction of the tax authorities. Tax presence
must be construed in the context, and in a manner that brings the non-resident assessee under
the jurisdiction of the Indian tax authorities. Lastly, in the present case, the Revenue has
failed to establish any connection with Section 9(1)(i).

Under the circumstances, Section 195 is not applicable.

 192

Summary of Findings

90. Applying the look at test in order to ascertain the true nature and character of the
transaction, we hold, that the Offshore Transaction herein is a bonafide structured FDI
investment into India which fell outside India's territorial tax jurisdiction, hence not taxable.
The said Offshore Transaction evidences participative investment and not a sham or tax
avoidant preordained transaction. The said Offshore Transaction was between HTIL (a
Cayman Islands company) and VIH (a company incorporated in Netherlands). The subject
matter of the Transaction was the transfer of the CGP (a company incorporated in Cayman
Islands). Consequently, the Indian Tax Authority had no territorial tax jurisdiction to tax the
said Offshore Transaction.

Conclusion

91. FDI flows towards location with a strong governance infrastructure which includes
enactment of laws and how well the legal system works. Certainty is integral to rule of law.
Certainty and stability form the basic foundation of any fiscal system. Tax policy certainty is
crucial for taxpayers (including foreign investors) to make rational economic choices in the
most efficient manner. Legal doctrines like "Limitation of Benefits" and "look through" are
matters of policy. It is for the Government of the day to have them incorporated in the
Treaties and in the laws so as to avoid conflicting views. Investors should know where they
stand. It also helps the tax administration in enforcing the provisions of the taxing laws. As
stated above, the Hutchison structure has existed since 1994. According to the details
submitted on behalf of the appellant, we find that from 2002-03 to 2010-11 the Group has
contributed an amount of `20,242 crores towards direct and indirect taxes on its business
operations in India.

Order

92. For the above reasons, we set aside the impugned judgment of the Bombay High Court
dated 8.09.2010 in Writ Petition No. 1325 of 2010. Accordingly, the Civil Appeal stands
allowed with no order as to costs. The Department is hereby directed to return the sum of
`2,500 crores, which came to be deposited by the appellant in terms of our interim order, with
interest at the rate of 4% per annum within two months from today. The interest shall be
calculated from the date of withdrawal by the Department from the Registry of the Supreme
Court up to the date of payment. Consequently, the demand of nearly Rs.12,000 crores by
way of capital gains tax, in my view, would amount to imposing capital punishment for
capital investment since it lacks authority of law and, therefore, stands quashed and I also
concur with all the other directions given in the judgment delivered by the Lord Chief Justice.
The Registry is directed to return the Bank Guarantee given by the appellant within four
weeks.

(ii) ITO v. M/s Zinger Investments (P) Ltd [TS-437-ITAT-2013(Hyd)]

This appeal is filed by the Revenue against the Order of the CIT(A)-IV, Hyderabad dated
10.12.2012 for the assessment year 2007-2008.

2. Briefly the facts are that the assessee-company earlier known as M/s. GVK Novapan
Industries Pvt. Ltd. is a Private Limited Company. For the impugned assessment year, the
assessee filed its return of income declaring NIL income. Initially, the return was processed
 193

under section 143(1) on 05.02.2009. Subsequently, action was initiated under section 147 of
the Act by issuing a notice under section 148 calling upon the assessee to submit a return of
income. In response to such notice, the assessee filed a letter dated 30.12.2010 requesting the
Assessing Officer to treat the return filed originally as a return in response to the notice under
section 148 of the Act. In the course of assessment proceedings, the Assessing Officer
noticed that during the year under dispute, the assessee had transferred its manufacturing
division to M/s. Novapan Industries Limited under a scheme of amalgamation approved by
the Hon'ble High Court of A.P. w.e.f. 01.04.2006. It was further noticed that as on
31.03.2006 the assessee-company had total assets of Rs.3219.89 lakhs and total liabilities of
Rs.2538.67 lakhs. Hence, the net worth of the assessee-company was Rs.681.22 lakhs. The
Assessing Officer further noted that as per the scheme of amalgamation both the assets and
the liabilities were transferred by the assessee company to M/s. Novapan Industries Limited.
As a consideration for the transfer of the division the amalgamated company M/s. Novapan
Industries Limited allotted 38 shares for every 100 shares of the amalgamated company.
Besides allotment of shares, the amalgamated company M/s. Novapan Industries Limited also
transferred certain investments held by it amounting to Rs.25,24,05,000/- to the assessee
company. The balance-sheet of the assessee company as on 31.03.2007 shows share capital
of Rs.6,28,07,500/- and reserve amount of demerger at Rs.18,42,87,883/-.

3. The Assessing Officer on examining the above facts felt that the transfer of the
manufacturing division to M/s. Novapan Industries Limited tantamount to a "slump sale"
within the meaning of section 50B of the Act attracting liability of capital gains therein. The
Assessing Officer referring to the definition of "Slump Sale" under section 2(42C) and the
definition of "Undertaking" as in Explanation to 1 to Section 2 (19AA) defining demerger,
was of the view that the transfer of manufacturing division by the assessee company
amounted to "slump sale" and the capital gain arising therefrom has to be brought to tax
under the provisions of section 50B of the Act. Though the assessee objected to the aforesaid
view taken by the Assessing Officer by submitting that the manufacturing unit of the assessee
was not transferred for a slump sale consideration and the same is amalgamated with M/s.
Novapan Industries Limited as a part of scheme of arrangement and there was no
consideration received in terms of money value, the Assessing Officer, however, did not
accept such contention of the assessee by holding that the transfer of the manufacturing
division by the assessee to M/s. Novapan Industries Limited is a 'slump sale' attracting
liability under section 50B(1) of the Act and therefore, to be charged to capital gains tax. The
Assessing Officer, accordingly, proceeded to determine the capital gain by adopting the sale
consideration for the purpose of computing capital gain, the share capital allotted and the
value of investment transferred to the assessee by the amalgamated company M/s. Novapan
Industries Limited amounting to Rs.6,28,07,500/- and Rs.25,24,05,000/- respectively totalling
to Rs.31,52,12,500 /- and after reducing the cost of acquisition of Rs.6,81,22,000/-
determined long term capital gain at Rs.24,70,90,500/-. The assessee being aggrieved of the
assessment order, preferred appeal before the CIT(A).

4. In the course of hearing of the appeal, it was submitted by the assessee that the assessee
company as well as the transferee company were engaged in manufacturing and sale of
particle boards upto 31.03.2006 and therefore, the management of the two companies felt it
would be economical and effective to combine their operations. Accordingly, as per a scheme
of arrangement under section 391/394 of the Companies Act, duly approved by the Hon'ble
High Court of A.P. by an Order dated 27.12.2006, all the assets and liabilities of the assessee
were vested with M/s. Novapan Industries Limited against which, the assessee was given
investments valued at Rs.25,24,05,000/- held by M/s. Novapan Industries Limited besides
 194

allotment of 68,12,200 equity shares of Rs.10/- each of the face value to Rs.6,81,22,000/- to
the share holders of the assessee. It was submitted by the assessee that the provisions
of section 50B were applicable only in the case of sale of an undertaking and not in the case
of an arrangement between two companies under section 391/394 of the Companies Act,
1956. In this context, learned A.R. relied upon certain judicial precedents including the
decision of Hon'ble Supreme Court in the case of CIT vs. Motors and General Stores Pvt.
Ltd. 66 ITR 692 (S.C.) wherein the Hon'ble Supreme Court held that the term 'sale' connotes
a transfer of property in goods or of the ownership in immovable property for a money
consideration and the presence of money consideration is an essential element in a transaction
of sale. It was further held that if the consideration was not money but some other valuable
consideration, it may be an 'exchange or barter' but not a 'sale'. The assessee further relied
upon the decision of ITAT, Mumbai Bench in the case of Avaya Global Connection Ltd. vs.
ACIT 7(3), Mumbai 26 SOT 397 wherein it was held that the expression 'transfer' as defined
in section 2(47) of the Act include several forms of transfer and sale is only one such form of
transfer. It was further held that the definition of "slump sale" under section 2(42)(C) would
mean that it is only a transfer as a result of sale that can be construed as a slump sale.
Therefore, any transfer of an undertaking otherwise than as a result of sale will not qualify as
a slump sale. The CIT(A) on following the aforesaid decisions relied upon by the assessee
allowed the appeal by holding as under :

"5.6. The judicial view is thus clear that money consideration is an essential element of sale
and there being no money consideration being passed between the transferor and transferee in
an arrangement u/s. 391 r.w.s. 394 of the Companies Act, a scheme of arrangement or
amalgamation does not amount to a 'sale'. It is therefore held that the transaction in the case
of the appellant, being a result of a scheme of arrangement u/s. 391 r.w.s. 394 of
the Companies Act was not a sale. Consequently, it did not fall within the definition of a
'slump sale' u/s. 2(42C), and therefore, the provisions of sec.50B did not apply to the
transaction in question."

5. Being aggrieved, the department is in appeal before us. The learned D.R. supporting the
conclusion arrived at by the Assessing Officer submitted that demerger is nothing but slump
sale coming within the ambit of section 2(42C) of the Act. He, therefore, contended that the
Assessing Officer was correct in treating the transfer as a slump sale and bringing it to tax
under the head "Capital Gain" under section 50B of the Act. .

6. The learned A.R. on the other hand, at the outset, submitted that the grounds raised by the
department are not on the issue in dispute as they relate to demerger only whereas, the
Assessing Officer has completed the assessment by treating it as a slump sale under section
50B of the Act. Hence, the grounds cannot be entertained. He further submitted that the
assessment was completed under section 143(3) read with section 147 of the Act. In the
reasons recorded, the Assessing Officer has made no reference to demerger. It is also
admitted by the Assessing Officer that there is no money consideration involved for transfer
of the assets. It was submitted that the assessee has never claimed it as demerger. Under these
circumstances, the grounds raised cannot be entertained. It was further contended by the
learned A.R. that if these grounds are allowed to be adjudicated, it would amount to
confirming the addition on an item in respect of which no reasons were recorded
under section 148 of the Act as no addition has been made on that account.

7. So far as the merit of the case is concerned, the learned A.R. submitted that the transaction
cannot be treated as slump sale under section 2(42C) of the Act as the amalgamation of the
 195

assessee with M/s. Novapan Industries Limited is by operation of Law as a result of a scheme
of arrangement approved by the Hon'ble High Court of A.P. in a proceeding under section
391 and 394 of the Companies Act, 1956. It was submitted that the amalgamation was not
contractual. It was submitted that the scheme of amalgamation would make it clear that there
was no flow of money consideration for transferring the manufacturing division to M/s.
Novapan Industries Limited as the manufacturing division was merged with the M/s.
NovapanIndustries Limited as a going concern with the term that 'M/s. Novapan Industries
Limited shall transfer the investments appearing in its books of accounts as on 31.03.2006 to
the assessee company and allot 38 equity shares at Rs.10/- each for every 100 equity shares
held in the assessee company to the shareholders'. Therefore, it is very much evident that no
monetary consideration is involved in the scheme of amalgamation. In this context, the
learned A.R. referred to the decision of the Hon'ble Supreme Court in the case of CIT vs.
Motors & General Stores Pvt. Ltd. 66 ITR 692 (SC). He further referred to a decision of the
Hon'ble Supreme Court in the case of CIT vs. R.R. Ramakrishna Pillai 66 ITR 725 wherein it
was held that where a person carrying on business transfers assets to a company in
consideration of allotment of shares, it would be a case of exchange, but not sale. In the light
of aforesaid decision, it was submitted that since the transaction between the assessee and the
M/s. Novapan Industries Ltd. does not involve any monetary consideration it cannot be
considered as sale.

8. We have considered the rival submissions of the parties and perused the materials on
record. We have also carefully examined the decisions relied upon by both the parties. On
perusal of the assessment order, it is very much clear that the entire assessment is based on
the fact that the Assessing Officer has treated the transfer of assets to M/s. Novapan
Industries Ltd. as a slump sale attracting the provisions of section 50B of the Act. In this
scenario, we have to confine ourselves to the issue as to whether the transfer of the
manufacturing division M/s. Novapan Industries Ltd. is a 'slump sale' within the meaning
ascribed under section 2(42C) of the Act so as to attract the provisions of section 50B of the
Act. It is undisputed that under the scheme of amalgamation approved by the Hon'ble High
Court of A.P. under section 391 and 394 of the Companies Act, the manufacturing division of
the assessee company was transferred to M/s. Novapan Industries Ltd. with all its assets and
liabilities as per the terms of the scheme of amalgamation approved by the Hon'ble High
Court. The assessee in return for the transfer of the assets received the investments of
Rs.25,24,05,000/- besides allotment of 38 equity shares of Rs.10/- each to the shareholders of
the assessee-company for every 100 equity shares held in the assessee company. From the
aforesaid facts, it is very much clear that as per the scheme of amalgamation, there is no
monetary consideration received by the assessee-company for transfer of the manufacturing
division. Section 50B of the Act provides for computation of capital gains in the case of
'slump sale'. The definition of 'Slump Sale' under section 2(42C) reads as under :

"Slump Sale" means the transfer of one or more undertakings as a result of the sale for a lump
sum consideration without values being assigned to the individual assets and liabilities in
such sales."

9. A plain reading of the aforesaid provision makes it clear that to qualify as slump sale, two
conditions have to be satisfied viz., (1) there must be transfer of one or more undertaking as a
result of sale and (2) the sale should be for a lumpsum consideration without values being
assigned to the individual assets and liabilities. In the case of the assessee it is not disputed
that there is no monetary consideration received for transfer of the assets and liabilities of the
manufacturing division to M/s. Novapan Industries Ltd. though there may be a transfer of an
 196

undertaking. In that view of the matter, it has to be examined in the light of ratio laid down
by the various judicial precedents whether the transaction would assume the character of sale
? The Hon'ble Supreme Court in the case of CIT vs. Motors and General Stores Pvt. Ltd.
(supra) held as under :

"Sale is a transfer of property in goods or of the ownership in immovable property for a

money consideration. But, in exchange there is a reciprocal transfer of interest in immovable
property, a corresponding transfer of interest in movable property being denoted by the word
'barter'. The difference between a sale and an exchange is this that in the former the price is
paid in money, whilst in the latter it is paid in goods by way of barter.
The presence of money consideration is an essential element to a transaction of sale. If the
consideration is not money but some other valuable consideration it may be an exchange or
barter but not a sale."

10. The same view was again expressed by the Hon'ble Supreme Court in the case of CIT vs.
R.R. Ramakrishna Pillai 66 ITR 725 wherein it was held that where a person carrying on
business, transfers assets to a company in consideration of allotment of shares, it would be a
case of exchange but not of sale. The ITAT, Mumbai Bench in the case of Avaya Global
Connect Ltd. vs. ACIT 26 SOT 397 (Mum.) after following the decision of the Hon'ble
Supreme Court in the case of CIT vs. Motor General Stores Pvt. Ltd. (supra) and the decision
of the Hon'ble Bombay High Court in the case of Sadanand S. Varde vs. State of
Maharashtra 247 ITR 609 held as under :

"30. In the light of the principle laid down in the aforesaid judicial pronouncements, we are
of the view that the transfer of TTD by assessee to ITEL consequent to scheme of
amalgamation approved by Hon'ble Bombay High Court cannot said to be a sale of
undertaking by the assessee. Consequently, the transfer could not be said to be as a result of
sale and therefore the provisions of section 2(42C) of the Act did not apply. The provisions
of section 50B were also not therefore applicable to the facts and circumstances of the present
case."

11. Therefore, considering the facts of the present case in the light of ratio laid down as above
by the Hon'ble Supreme Court and the Tribunal since there is no monetary consideration
involved in transferring the manufacturing division with all its assets and liabilities to M/s.
Novapan Industries Ltd. under scheme of amalgamation approved by the Hon'ble High Court
of A.P. it cannot be considered to be a slump sale within the meaning ascribed under section
2(42C) of the Act so as to attract the liability of the capital gain under section 50B of the Act.
In the aforesaid view of the matter, we do not find any reason to interfere with the finding of
the CIT(A) which is accordingly upheld.

12. In the result, grounds raised by the Revenue are dismissed and the appeal is also
dismissed.

14. Clubbing of Income

Yashwant Chhajta v. CIT[2013] 214 Taxman 280 (HP)
Income Tax - Section 64(1)(ii) - 'interpretation of statutes' - Whether the requirement of
technical or professional qualification as mentioned under section 64(1)(ii), is general in
nature - Whether a mere degree qualification is sufficient in case of qualification referred as
 197

of a professional or technical nature - Whether the income arising to spouse, having

professional qualification, which is solely attributable to the application of his or her
technical or professional knowledge and experience will be out of the purview of clubbing -
Whether for the purpose of clubbing income u/s 64, knowledge and experience are relevant -
Whether it is a cardinal rule of interpretation of statutes that a construction which would
leave without effect any part of the statute should be rejected.
The High Court held that mere possession of technical or professional qualification is not
enough to provide benefit of proviso to Section 64(1) (ii) and application of such technical or
professional knowledge and experience is to be demonstrated. Hence in addition to
possession of qualification, income derived must be attributable to the technical or
professional knowledge and experience.

(ii)Jcitvs Shri Govind Rohira Alias Srichand -(2005) 96 TTJ Mum 346
Bench: K Thangal, A Garodia

ORDER K.P.T. Thangal, Judicial Member

1. In this appeal by the revenue the only effective ground urged is directed against the order
of the CIT (A) in directing the Assessing Officer to allow deduction under Section 54F of the
I.T.Act, 1961 to an amount of Rs. 26,98,983/-.

2. The grievance of the revenue is that the benefit under Section 54F could be made
applicable only to assessee and the benefit should not been extended to minor. It is the case of
the revenue that the CIT (A) ignored the fact that the assessee has been defined in Section
2(7) of the I.T.Act to mean a person by whom any tax or any other sum of money is payable
under the Act. In the case of the minor, no tax is payable as his entire income is clubbed with
that of the other person. The facts leading to the dispute briefly is as under.

3. In this case, the assessee has filed return by declaring income of Rs. 49,28,997/- on 30-8-
1995. The assessee is an individual, derived income during the year from the property
concerned M/s.Fine Food, interest from private parties, salary from Lucky Enterprise.
However, the Assessing Officer noticed the main source of income of the assessee was from
long term capital gain on sale of shares and on sale of land. He, further noted that tine
assessee is also included long term capital gain of minor son Hitesh and minor daughter
Aparna in his total income. So also short term capital gain of minors and interest income of
minor which have been included in his total income under Section 64 of the Act. During the
assessment proceedings, assessee was asked to explain as to why deduction under Section
54F claimed minor to Rs. 23,31,000/- n. respect of Master Hitesh G. Rohra should not be
disallowed. This was for the reason that the assessee was already having residence of his own
in whose case the minors income was assessed. It was replied that the minor was not owning
residence and since the minor does not own a residence, the condition was satisfied
under Section 54F of the Act. The claim of the assessee was disallowed by the Assessing
Officer holding that the 'assessee' is defined in Section 2(7) to mean a person by whom any
tax or any other sum of money is payable under the I.T.Act. However, in the case of minor,
no tax is payable by them as their income is clubbed with that of other person. Hence,
disallowed the claim of the assessee. While disallowing the claim of the assessee, the
 198

Assessing Officer also placed reliance on the decision of Supreme Court in the case of CIT,
Bangalore v. J.H. Gotla (156 ITR 323) wherein their Lordships held as under :

"On a consideration of scheme of the Act and the provisions therein as noted before, the share
income of the wife and minor children included in the assessee's total income under the Act
should be regarded as business income derived from business carried on by the assessee and
in that view of the matter, the assessee is entitled to set off his loss carried forward from the
previous year. "

Hence, disallowed the claim of the assessee. The matter was carried before the first appellate
authority.

4. It was submitted before the CIT (A) that the assessee has claimed deduction under Section
54F in the hands of the minor as the minor has no other residential premises of his own. It
was further submitted the observation of the Assessing "Officer that only a person who has
assessed to tax could avail the benefit is incorrect. It was submitted that an individual
includes a minor, a lunatic or an Idiot, the assessment of such person however requires to be
done in accordance with the provisions of Section 160. It does not mean that such an
individual losses his status of assessee though such persons are considered as deemed
assessees under Section 2(7) of the I.T.Act, 1961. He, further submit that under Section 64(1-
A) while computing total income of an individual, shall included of such incomes as arise or
accrues to his minor, (not being a minor children having or any disability of nature satisfied
under Section 80U). The word income which occur in Section 64 has the meaning attached to
it in Clause (24) of Section 2 of the Act, under which income includes any capital gains
chargeable under Section 45. Section 45 in turn provides that any profit or gains arising from
the transfer of capital asset property of any kind held by assessee etc., vide Section
2(14) effected in the previous year shall save as otherwise provided in Section 54, 54B, 54D.
54E, 54F, 54G and 54H be chargeable to I.T.Act, 1961 under the head capital gains and shall
be deemed to be income of the previous year in which the transfer took place. For the above
prepositions assessee also relied on the decision reported in 145 ITR 791 in the case of CIT v.
S.K. Naik, CIT v. Segu Harnath, 171 ITR 318, 321 (A.P.). Thus, it was submitted minor is an
assessee and he is entitled for all the deductions contemplated under the Act while computing
the income taxable even if such incomes are clubbed with other person under Section 64 of
the Act. The learned CIT (A) held the issue is assessee's favour. He held that income includes
capital gains. He held that though income is to be clubbed in the hands of the parents as per
the settled law, the clubbed income shall be include under the same head of income as in the
hands of the real owner of the income for all purposes, is also a settled law. He held placing
reliance on the decision of Kerala High Court in the case of CIT v. S.K. Nayak 145 ITR 791
that what ever deductions due to a person even if his/her income is clubbed with other person,
the deduction due to him should be allowed. This was a case where a wife received salary
being Director of the Company for which the assessee was the Managing Director. The
Hon'ble High Court held that the salary of the wife could be clubbed with that of her husband
only after allowing the standard deduction. In the case reported in 171 ITR 318 in the case
of CIT v. Segu Harnath, the Hon'ble A.P. High Court held that if minor assessee borrows
income for the business benefit, his income is clubbed with that of his parent. He is entitled
for deduction before fixing the taxable income. Thus he held in sum and substance the
judicial decisions are that the income to be clubbed should be computed as per the provisions
of the Act in the hands of the real owner of the income and the resultant income only should
be clubbed. He, further held the minors income as claimed is entitled to be exempted
under Section 54F as he was not having a house of his own. He further held that there is no
 199

bar in the case of minor owning house and if he has permitted to own a house definitely he is
also entitled for deduction. In the instant case, since he was not having house of his own, he
held the exemption claimed is to be accrued. Aggrieved by the above order, revenue is in
appeal before the Tribunal.

5. The assessee's representative made a written submission almost reiterating the submissions
before the first appellate authority. It is further submitted that individual includes minor,
lunatic and an Idiot and the assessment of such persons recurred to be done in accordance
with the provisions of Section 160. However, this does not mean that such persons loose the
status of being an assessee. It is further submitted that Section 64(1A) says that in computing
total income of an individual, there shall be inclusion of such income as arised or accrues to
his minor children. The word income occur in Section 64 has the same meaning as found.
Clause (24) of Section 2, under which income includes any capital gains chargeable
under Section 45. Under Section 45 any profits or gains arising from the transfer of capital
asset effected in the previous year shall same as otherwise provided in Section
54, 54B, 54D and 54EB, 54F, 54G and 54H be chargeable to income tax under the head
capital gains and shall be deemed to be the income of the previous year in which such
transfer took place. Thus Section 64(1A) authorises the inclusion of the share of an income of
a minor, refers to the share income determined in the hands of the minor child by applying all
the provisions of the Act. The assessee also reiterated the decisions placed before the CIT (A)
particularly following - (a) CIT v. S.K. Nayak, 145 ITR 791, (b) CIT v. Segu Hasmath 171
ITR 318, 321 (A.P.). Hence, he has submitted that the order of CIT (A) should be upheld.

6. As against this, the.DR supported the order of the Assessing Officer. If the minor is really
an assessee and if he could be assessed, as such, there was no need of clubbing his income to
his parent. For him, the income is earned by business, by activity some body else and as such
there is no meaning in saying that it's minor's income. This is all the more clear, the ld.DR is
submitted by virtue of the decision of the Hon'ble Supreme Court in the case of CIT v. J.H.
Ghotla supra, In this case, the ld.DR has submitted the Hon'ble Supreme Court that the share
of the income of the wife and minor children include in the assessee's total income under the
I.T.Act because it is recorded as assessee's income derived from the business carried on by
the assessee.

7. We heard the rival submissions and gone through the order of the revenue authorities.
After hearing the submissions, we are of the view that the order of the CIT (A) is to be
upheld.

8. Firstly, it is to be noted that a minor is entitled to have of his own income. Minor could be
an owner of house of his own. If the minor in case was having such a house of his own, there
was no difficulty in allowing his claim under Section 54F of the Act. Only because minor is
not having a house of his own, it cannot be said that he is not entitled for the benefits
contemplated under this section. The business is carried on behalf of the minor by his parent.
The CIT (A) in para 3 records that shares were held by assessee in Ramani Hotels Pvt. Ltd.,
bought on different dates between 1988 and 1993. Such shares were sold on 21/4/1994 for a
consideration of Rs. 37,21,000/-. The capital gain worked out to Rs. 31,37,392/-, but, a
residential house was bought for Rs. 31,99,000/-in the name of assessee's minor son and it
was claimed the benefit under Section 54 of the Act. The income arises from the sale of the
shares stood in the name of the assessee's minor son. If he could legally purchases and sell
the shares, through his father the income realized from this sale also can be utilised for the
purchase of the house property acting through his father. Merely because the income is
 200

clubbed with the income of the assessee's father, there is no meaning in saying that he is not
entitled for the benefits contemplated under the section as rightly contended by the assessee.
The minor son is not a non-entity, but, he acts only through his parent. In the case reported in
145 ITR 791 supra, the Hon'ble High Court held that "it would be contrary to the scheme of
the Act itself not to allow deductions before clubbing the income of the wife with that of her
husband". This was the case where we find income was clubbed in the hands of her husband
and where the revenue did not allow the standard deduction. The Hon'ble High Court held
concurring with the Tribunal that the standard deduction is to be allowed.

9. In the case reported in 171 ITR 318 supra, the Hon'ble A.P. High Court held "Where the
assessee was a partner in a firm and his minor daughter was admitted to the benefit of
partnership in the firm and assessee borrowed funds and invested the same in the partnership
firm in the name of his minor daughter, the interest payable by the assessee on capital
borrowed by the assessee on behalf of the minor daughter was deductable under Section
67(3) from the share income arising to the minor child and it was only the resultant income,
after deduction which was to be included in the total income of the assessee under Section
64(1)(iii). The above judgment clearly shows that even if the income of the minor is clubbed
with the income of the other individual, all the deductions are to be allowed while
computation of income of the minor/spouse and only the net taxable income is to be clubbed
under Section 64.

10. For the reasons stated herein above, we find, no flow in the Order of the learned first
appellate authority and hence we dismiss the revenue's appeal.

10. In the result, revenue's appeal is dismissed.

VI. Minimum Alternate Tax (MAT):

Apollo Tyres Limited vs CIT(255 ITR 273) (SC)

Bench: S Bharucha, N S Hegde, D Dharmadhikari

1. These appeals arise out of a common judgment delivered by a Division Bench of the
Kerala High Court in ITR Nos. 70/1994 and 43/1997.

2. Civil Appeal No. 6100/1998 is preferred by the assessee company and Civil Appeal Nos.
2518-19-1999 are preferred by the C.I.T., Ernakulam.

3. Though a number of questions came up for consideration before the High Court, in these
appeals, based on the arguments addressed before us, we are mainly concerned with the
following three questions :

(i) Can an Assessing Officer while assessing a company for income tax under Section 115-
J of the Income Tax Act question the correctness of the profit and loss account prepared by
the assessee company and certified by the statutory auditors of the company as having been
prepared in accordance with the requirements of Parts II and III of Schedule VI to
the Companies Act ?
 201

(ii) Whether the dividend income earned by the assessee company from its investment made
in the units of Unit Trust of India, can be included in computing the profit of the eligible
business under Section 32AB of the Income Tax Act ?

(iii) Whether the business of buying and selling of units of Unit Trust of India by the assessee
company amounts to a speculation business or not, for the purpose of allowing set off as to
the loss suffered by the company in such a business ?

4. Brief facts necessary for the disposal of first of the above questions are as follows :

5. The assessee company while determining its net profit for the relevant accounting year has
provided for arrears of depreciation in its profit and loss account which according to the
Revenue is not in accordance with Part II and III of Schedule VI to the Companies Act, 1956
(the 'Companies Act'). Hence, the assessing officer while considering the case of the assessee
company under Section 115-J of the IT Act recomputed the said profit and loss account of the
company so as to exclude the provisions made for arrears of depreciation. The said action of
the assessing officer in questioning the correctness of the accounts maintained by the
company was challenged by the company before the Income Tax Appellate Tribunal ('the
tribunal') which among other things held that the assessing officer has no authority to reopen
the accounts of a company which is certified by the auditors of the company as having been
maintained in accordance with the provisions of the Companies Act and which account has
been accepted in the General Meeting of the Company as well as by the Registrar of
Companies. This view of the tribunal was not accepted by the High Court which held that the
assessing officer has the authority to examine whether the accounts of the company have
been maintained in accordance with the requirement of Sub-section (1A) of Section 115-
J and in that process if he finds that the accounts of the company are not in accordance with
the provisions of the Companies Act, he could make the necessary changes before proceeding
to assess the company for tax under the Explanation to Section 115-J of the IT Act.

6. The relevant part of Section 115-J of the IT Act reads as follows:-

"115-J. (1) Notwithstanding anything contained in any other provision of this Act, where in
the case of an assessee being a company [(other than a company engaged in the business of
generation or distribution of electricity)], the total income, as computed under this Act in
respect of any previous year relevant to the assessment year commencing on or after the 1st
day of April, 1988 [but before the 1st day of April, 1991] (hereinafter in this section referred
to as the relevant previous year), is less than thirty per cent of its book profit, the total income
of such assessee chargeable to tax for the relevant previous year shall be deemed to be an
amount equal to thirty per cent of such book profit.

[(1A) Every assessee, being a company, shall, for the purposes of this section, prepare its
profit and loss account for the relevant previous year in accordance with the provisions of
Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956).] Explanation.- For
the purposes of this section, "book profit" means the net profits as shown in the profit and
loss account for the relevant previous year [prepared under Sub-section (1A)], as increased by
--

(a) the amount of income-tax paid or payable, and the provision therefor; or
 202

(b) the amounts carried to any reserves [(other than the reserves specified in Section
80HHD [or Sub-section(1) of Section 33AC])], by whatever name called; or

(c) the amount or amounts set aside to provisions made for meeting liabilities, other than
ascertained liabilities; or

(d) the amount by way of provision for losses of subsidiary companies; or

(e) the amount or amounts of dividends paid or proposed; or

(f) the amount or amounts of expenditure relatable to any income to which any of the
provisions of Chapter III [applies; or]

(g) the amount withdrawn from the reserve account under Section 80HHD, where it has been
utilised for any purpose other than those referred to in Sub-section (4) of that section; or

(h) the amount credited to the reserve account under Section 80HHD, to the extent that
amount has not been utilised within the period specified in Sub-section (4) of that section;

[(ha) the amount deemed to be the profits under Sub-section (3) of Section 33AC;] [If any
amount referred to in Clauses (a) to (f) is debited or, as the case may be, the amount referred
to in Clauses (g) and (h) is not credited] to the profit and loss account, and as reduced by --

(i) the amount withdrawn from reserves [(other than the reserves specified in Section
80HHD)] or provisions, if any such amount is credited to the [profit and loss account :

Provided that, where this section is applicable to an assessee in any previous year (including
the relevant previous year), the amount withdrawn from reserves created or provisions made
in a previous year relevant to the assessment year commencing on or after the 1st day of
April, 1988 shall not be reduced from the book profit unless the book profit of such year has
been increased by those reserves or provisions (out of which the said amount was withdrawn)
under this Explanation; or]

(i) the amount of income to which any of the provisions of Chapter III applies, if any such
amount is credited to the profit and loss account; or

(ii) the amounts [as arrived at after increasing the net profit by the amounts referred to in
Clauses (a) to (f) and reducing the net profit by the amounts referred to in Clauses (i) and (ii)]
attributable to the business, the profits from which are eligible for deduction under Section
80HHC or Section 80HHD; so, however, that such amounts are computed in the manner
specified in Sub-section (3) or Sub-section (3A) of section 80HHC or Sub-section (3)
of Section 80HHD, as the case may be; or] [(iv)] the amount of the loss or the amount of
depreciation which would be required to be set off against the profit of the relevant previous
year as if the provisions of Clause (b) of the first proviso to Sub-section (1) of Section 205 of
the Companies Act, 1956 (1 of 1956), are applicable.

(2) Nothing contained in Sub-section (1) shall affect the determination of the amounts in
relation to the relevant previous year to be carried forward to the subsequent year or years
under the provisions of Sub-section (2) of Section 32 or Sub-section (3) of Section 32A or
 203

Clause (ii) of Sub-section (1) of Section 72 or Section 73 or Section 74 or Sub-section (3)

of Section 74A or Sub-section (3) of Section 80J.]"

7. For deciding this issue, it is necessary for us to examine the object of introducing Section
115-J in the IT Act which can be easily deduced from the Budget Speech of the then Hon.
Finance Minister of India made in the Parliament while introducing the said Section which is
as follows:

"It is only fair and proper that the prosperous should pay at least some tax. The phenomenon
of so-called "zero-tax" highly profitable companies deserves attention. In 1983, a
new Section 80VVA was inserted in the Act so that all profitable companies pay some tax.
This does not seem to have helped and is being withdrawn. I now propose to introduce a
provision whereby every company will to have to pay a "minimum corporate tax" on the
profits declared by it in its own accounts. Under this new provision, a company will pay tax
on at least 30% of its book profit. In other words, a domestic widely held company will pay
tax of at least 15% of its book profit. This measure will yield a revenue gain of approximately
Rs. 75 crores."

8. The above Speech shows that the income tax authorities were unable to bring certain
companies within the net of income-tax because these companies were adjusting their
accounts in such a manner as to attract no tax or very little tax. It is with a view to bring such
of these companies within the tax net that Section 115-J was introduced in the IT Act with a
deeming provision which makes the company liable to pay tax on at least 30% of its book
profits as shown in its own account. For the said purpose, Section 115-J makes the income
reflected int he companies books of accounts as the deemed income for the purpose of
assessing the tax. If we examine the said provision in the above background, we notice that
the use of the words "in accordance with the provisions of Part II and III of Schedule VI to
the Companies Act" was made for the limited purpose of empowering the assessing authority
to rely upon the authentic statement of accounts of the company. While so looking into the
accounts of the company, an assessing officer under the IT Act has to accept the authenticity
of the accounts with reference to the provisions of the Companies Act which obligates the
company to maintain its account in a manner provided by the Companies Act and the same to
be scrutinised and certified by statutory auditors and will have to be approved by the
company in its General Meeting and thereafter to be filed before the Registrar of Companies
who has a statutory obligation also to examine and satisfy that the accounts of the company
are maintained in accordance with the requirements of the Companies Act. Inspite of all these
procedures contemplated under the provisions of the Companies Act, we find it difficult to
accept the argument of the Revenue that it is still open to the assessing officer to re-scrutinize
this account and satisfy himself that these accounts have been maintained in accordance with
the provisions of the Companies Act. In our opinion, reliance placed by the Revenue on Sub-
section (1A) of Section 115-J of the IT Act in support of the above contention is misplaced.
Sub-section (1A) of Section 115-J does not empower the assessing officer to embark upon a
fresh inquiry in regard to the entries made in the books of account of the company. The said
sub-section, as a matter of fact, mandates the company to maintain its account in accordance
with the requirements of the Companies Act which mandate, according to us, is bodily lifted
from the Companies Act into the IT Act for the limited purpose of making the said account so
maintained as a basis for computing the company's income for levy of income-tax. Beyond
that, we do not think that the said sub-section empowers the authority under the Income-tax
Act to probe into the accounts accepted by the authorities under the Companies Act. If the
statute mandates that income prepared in accordance with the Companies Act shall be
 204

deemed income for the purpose of Section 115-J of the Act, then it should be that income
which is acceptable to the authorities under the Companies Act. There can not be two
incomes one for the purpose of Companies Act and another for the purpose of income tax
both maintained under the same Act. If the legislature intended the assessing officer to
reassess the company's income, then it would have stated in Section 115-J that "income of the
company as accepted by the assessing officer". In the absence of the same and on the
language of Section 115-J, it will have to held that view taken by the tribunal is correct and
the High Court has erred in reversing the said view of the tribunal.

9. Therefore, we are of the opinion, the assessing officer while computing the income
under Section 115-J has only the power of examining whether the books of account are
certifies by the authorities under the Companies Act as having been properly maintained in
accordance with the Companies Act. The assessing officer thereafter has the limited power of
making increases and reductions as provided for in the Explanation to the said section. To put
it differently, the assessing officer does not have the jurisdiction to go behind the net profit
shown in the profit and loss account except to the extent provided in the Explanation
to Section 115-J.

10. The second question framed by us hereinabove arises for our consideration in the
following factual background. The assessee company in its books of account had shown
certain sums of money representing as "dividend" from units of the UTI and had included the
said sums in the computation of its profit as an income from "eligible business". It also
claims that out of such income from "eligible business" it had purchased certain new
machineries for its factory because of which it claimed a deduction of 20% of the said income
as provided in Section 32AB of the IT Act. This claim of the company has been allowed by
the tribunal and confirmed by the High Court. The argument of the Revenue in this regard is
that the income received by the assessee company from its investment in the UTI has been
declared by the company itself as an "income from other sources" which head of income is
different from income from "profits and gains of business or profession" and under Section
32AB, income from business alone is entitled for the benefit of that Section. The assessee
contends that its income from sale and purchase of units of the UTI is part of its regular
business and that it has held these units as stock-in-trade and has been doing the business of
buying and selling the same. The assessee also contends that its income from this business of
investment in the units of the UTI and its business of manufacture and sale of tyres are
pooled together in a common account of funds which is managed by one common
Management. It is also the submission of the assessee that these two business, namely, the
business of buying and selling units of the UTI and the manufacture and sale of tyres are so
intertwined and interlaced that the same cannot be separated and treated independently,
therefore, this income from the UTI being part of its business income, it is entitled to claim
the benefit of Section 32AB.

11. A perusal of Section 32AB, as it stood at the relevant time, shows that if an assessee has a
total income including the income chargeable to tax under the head "profits and gains of
business or profession" and if the income from such business is derived from an "eligible
business" and if the assessee has out of such income utilised any amount during the previous
year for purchase of new plant or machinery then it is entitled to a set off of a sum equal to
20% of the profit of such eligible business as computed in the accounts of the assessee which
account has been audited in accordance with Sub-section (5) of Section 32AB.
 205

12. The dispute in the present case is in regard to the question whether the assessee's
investment in the UTI is business, and if so, is it a business which qualifies to be an "eligible
business" under Section 32AB ? In regard to the first aspect, we must note that the tribunal as
a question of fact based on material on record has come to the conclusion that the investment
in the UTI by the assessee company is in the course of its business and its business of
manufacture and sale of tyres and sale and purchase of units of the UTI are common in nature
and both the businesses are intertwined and interlaced. This finding is accepted by the High
Court also. We also find that this business of the assessee company of buying and selling of
units is a business as contemplated under Section 32AB of the Act. The question then is: is it
an eligible business under the said section ? The term "eligible business" is defined under
Sub-section (2) of Section 32AB. As per that definition, all business of an assessee company
will be an eligible business unless it falls under the type of business enumerated in Sub-
clauses (a) and (b) of Section 32AB(2). It is nobody's case that this business of the assessee
company is one of those businesses which fall under business enumerated in Clauses (a) and
(b) of Sub-section (2) of Section 32AB.

Therefore, there is no doubt that the business of the assessee company is an eligible business.
The fact that it is shown under a different head of income would not deprive the company of
its benefit under Section 32AB so long as it is held that the investment in the units of the UTI
by the assessee company is in the course of its "eligible business". Therefore, in our opinion,
the dividend income earned by the assessee company from its investment in the UTI should
be included in computing the profits of eligible business under Section 32AB of the Act.

13. The last point for our consideration is: whether buying and selling of units by the assessee
company can be treated as a speculative business ? For this purpose, the Revenue argues that
the units purchased by the assessee company from the UTI are shares, therefore, as per
Explanation to Section 73 of the Act, the said business of purchasing and selling of shares
will have to be treated as a business of speculation. The Revenue in support of this argument,
relies on Section 32(3) of the UTI Act which reads as follows :

"(3) Subject to the foregoing sub-sections, for the purposes of the Income-tax Act, 1961, --

(a) any distribution of income received by a unit holder from the Trust shall be deemed to be
his income by way of dividends; and

(b) the Trust shall be deemed to be a company."

14. Relying on the above provision of the UTI Act, the Revenue contends that if the UTI is a
company and income from its units is dividend then ipso facto the units will have to be
shares, therefore, the business of purchase and sale of units conducted by the assessee
company will have to be deemed to be a business in shares which business, according to the
Revenue, attracts Explanation to Section 73. On this basis, it is contended that the business of
purchase and sale of units by the assessee company amounts to a business of speculation.
Both the tribunal and the High Court have considered this argument as also the effect of
Section 32(3) of the UTI Act and have come to the conclusion that the provision of the said
Act is limited for the purpose of assessment of dividend income under the Act, and for
deduction of tax at source. They have held that the legal fiction created by Section 32(3) of
the UTI Act cannot be carried any further. We have examined the provisions of the UTI Act
and we are of the opinion that even though the said Section creates a fiction to make the UTI
as a deemed company and distribution of income received by the unit holder as a deemed
 206

dividend, by virtue of these deemed provisions, it cannot be said that it also makes the unit of
the UTI a deemed share. In our opinion, a deeming provision of this nature as found in
Section (3) should be applied for the purpose for which the said deeming provision is
specifically enacted, which in the present case is confined only to deeming the UTI as a
company and deeming the income from the units as a dividend. If as a matter of fact, the
Legislature had contemplated making the units as also a deemed share then it would have
stated so. In the absence of any such specific deeming in regard to the units as shares it would
be erroneous to extend the provisions of Section (3) of the UTI Act to the units of UTI for the
purpose of holding that the unit is a share. For these reasons, we are in agreement with the
finding of the High Court on this point also.

15. For the reasons stated above, we allow C.A. No. 6100/98 preferred by the assessee to the
extent of our finding in the first point formulated by us but without costs.

16. Based on our finding in regard to point Nos. 2 and 3 formulated by us hereinabove, C.A.
Nos. 2518-19/99 are dismissed with costs.

VII. Tonnage Tax:

(i)Trans Asian Shipping Services Pvt. Ltd. vs. Commissioner of Income Tax– I.T.A. 128/2012
and I.T.A.. 129/2012 - T.S. Thakur, A.K. Sikri, R. Banumathi

Chapter XIIG of the Income Tax Act, 1961 (hereinafter referred to as the 'Act') contains
special provisions for assessments relating to income of shipping companies. Under this
Chapter, shipping companies are given a choice to either get income from the shipping
business computed in accordance with the provisions contained in the Act meant for
computation of income in respect of business or profession or opt for methodology of
computing income as per the special formula provided in that Chapter which accords a
different treatment and different manner of computation of income for the shipping business.

Chapter IV of the Act deals with 'Computation of Total Income' and as per the scheme of the
Act, such a computation of total income is governed by five heads which are provided in
Section 14 of the Act. These are: (i) Salaries; (ii) Income from House Property; (iii) Profits
and Gains of Business or Profession; (iv) Capital Gains and (v) Income from Other Sources.
Thereafter, manner of computation of the income under the aforesaid heads is stipulated in
various sections falling under Chapter IV. As far as Income from Profits and Gains of
Business or Profession is concerned, Sections 28 to 44DB of the Act contain the procedure
for computation of income under this head. Therefore, any person, natural or juristic, who
earns income from business in India is supposed to get the income from the said business
computed in the manner provided in those sections. However, Chapter XIIG makes an
exception thereto by carving out special provisions relating to income of shipping companies.
It would mean that those companies which are shipping companies are permissible to get
their income computed under the said Chapter. Section 115VA of the Act gives this option
and reads as under:

“115VA. Computation of profits and gains from the business of operating qualifying ships. -
Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of a
company, the income from the business of operating qualifying ships, may, at its option, be
computed in accordance with the provisions of this Chapter and such income shall be deemed
 207

to be the profits and gains of such business chargeable to tax under the head "Profits and
gains of business or profession".

As is clear from the bare reading of this Section, option is given to the shipping company,
which is operating “qualifying ships”, to get its income computed in accordance with the
provisions of Chapter XIIG, irrespective of those stipulations otherwise contained in Sections
28 to 43C for computation of business income. Once such an option is exercised and income
is computed in accordance with the provisions of the said Chapter, a fiction is created by
deeming the said income to be the profits and gains of such business chargeable to tax under
the head 'Profits and Gains of Business or Profession'. To put it otherwise, though the income
of such shipping company would be computed in the manner provided under Chapter XIIG,
the same would be treated as income from business which is chargeable to tax as provided
under the head 'Profits and Gains of Business or Profession' and would be treated as
chargeable to tax under that head.

For a shipping company to be eligible to exercise such an option, there are certain conditions
to be fulfilled, which are as under:

(i) In the first place, the assessee has to be a 'company'. The word 'company' is defined in
Section 2(17) of the Act. Such a company may have various businesses and one such
business may be the business of operating qualifying ships. However, it is only that income
which is generated from 'The Business of Operating Qualifying Ships' that will be computed
as per the special provisions in Chapter XIIG. Income from other businesses will be
computed in the same manner as provided in Sections 28 to 43C. In case the business of the
company is to operate qualifying ships only, then the income from that sole business will be
under this Chapter.

(ii) Income from the business of operating qualifying ships shall be computed under Chapter
XIIG only if such an option is specifically exercised by the assessee company. This
requirement is particularly mentioned in Section 115VP of the Act. Such an option, when
given, is to remain in force for a period of ten years from the date on which the said option is
exercised, and this period is prescribed in Section 115VQ of the Act. However, it can be
renewed within one year from the end of the previous year in which the option ceases to have
effect (Section 115VR). In certain circumstances stipulated in Section 115VS of the Act,
there is a prohibition to opt for the scheme.

The scheme that is to be opted for computation of income under this Chapter is known as
'Tonnage Tax Scheme' (for short 'TTS') as defined in sub-section (m) of Section 115V of the
Act.

(iii) Though, these special provisions relate to income of shipping companies, it is only that
income which is received from business of “operating qualifying ships” that is eligible for
computation under this Chapter.

“115VD. Qualifying ship.- For the purposes of this Chapter, a ship is a qualifying ship if—

(a) it is a sea going ship or vessel of fifteen net tonnage or more;

(b) it is a ship registered under the Merchant Shipping Act, 1958 (44 of 1958), or a ship
registered outside India in respect of which a licence has been issued by the Director-General
 208

of Shipping under section 406 or section 407 of the Merchant Shipping Act, 1958 (44 of
1958); and

(c) a valid certificate in respect of such ship indicating its net tonnage is in force, but does not
include—

(i) a sea going ship or vessel if the main purpose for which it is used is the provision of goods
or services of a kind normally provided on land;

(ii) fishing vessels;

(iii) factory ships;

(iv) pleasure crafts;

(v) harbour and river ferries;

(vi) offshore installations;

(vii) (Clause (vii) omitted by the Finance Act, 2005 (18 of 2005), sec. 36 (w.e.f. 1-4-2006).
Clause (vii), before omission, stood as under: “(vii) dredgers”.

a qualifying ship which is used as a fishing vessel for a period of more than thirty days during
a previous year.” Which ship should be treated as 'operating ship', is to be understood from
the prescription thereof as mentioned in Section 115VB which reads as under:

“115VB. Operating ships.- For the purposes of this Chapter, a company shall be regarded as
operating a ship if it operates any ship whether owned or chartered by it and includes a case
where even a part of the ship has been chartered in by it in an arrangement such as slot
charter, space charter or joint charter :

Provided that a company shall not be regarded as the operator of a ship which has been
chartered out by it on bareboat charter-cum-demise terms or on bareboat charter terms for a
period exceeding three years.” As per this, a ship would be treated as 'operating ship' if a
company:

(a) operates any ship, whether owned or chartered by it;

(b) where even a part of the ship has been chartered by that company in an arrangement such
as slot charter, space charter or joint charter. The only exception is that if a ship has been
chartered out by the company on bareboat charter-cum-demise terms or on bareboat charter
terms for a period exceeding three years, then that company shall not be regarded as the
operator of that particular ship.

(iv) The company operating such ships has to be a “qualifying company” as defined in clause
(g) of Section 115V of the Act which says qualifying company means a company referred to
in Section 115VC of the Act. Section 115VC lays down certain conditions to be fulfilled for a
company to be qualifying company. It reads as under:
 209

“115VC. Qualifying company. - For the purposes of this Chapter, a company is a qualifying
company if—

(a) it is an Indian company;

(b) the place of effective management of the company is in India;

(c) it owns at least one qualifying ship; and

(d) the main object of the company is to carry on the business of operating ships.

Explanation.—For the purposes of this section, "place of effective management of the

company" means— (A) the place where the board of directors of the company or its
executive directors, as the case may be, make their decisions; or (B) in a case where the board
of directors routinely approve the commercial and strategic decisions made by the executive
directors or officers of the company, the place where such executive directors or officers of
the company perform their functions.” As may be seen from the reading of the aforesaid
provision, apart from the conditions that a company has to be an Indian company with
effective management of the company in India and main objective of the company is to carry
on business of operating ships, the other significant condition is that the company itself
should own 'at least one qualifying ship'. The description of qualifying ship is contained
in Section 115VD, as already noted above, and owning at least one qualifying ship is one of
the eligibility conditions for getting the income computed under these special provisions.

Once aforesaid conditions are fulfilled, the income from the business of operating qualifying
ships is to be computed under Chapter XIIG. The manner of computation of such income, as
provided under this Act, is under 'TTS'. Clause (m) of Section 115V defines TTS as under:

“(m) "tonnage tax scheme" means a scheme for computation of profits and gains of business
of operating qualifying ships under the provisions of this Chapter.” The provisions for TTS
are contained in Section 115VE onwards. For our purposes, it is not necessary to take stock
of all these provisions. As we are primarily concerned with Section 115VE and Section
115VG of the Act, we shall discuss the schemes with reference to these provisions. The TTS
talks of 'Tonnage Income' which is to be computed under Section 115VG of a Tonnage Tax
Company. This Tonnage Income, as per Section 115VG of the Act, is the income of each
qualifying ship. The formula of calculating this Tonnage Income of each qualifying ship is
stipulated in sub-sections (2) and (3) of Section 115VG. Sub-section (4) of Section
115VG defines 'Tonnage' to mean tonnage of a ship indicated in the certificate referred to
in Section 115VX and 'includes the deemed tonnage computed in the prescribed manner'.
Explanation to sub-section (4) of Section 115VG clarifies that deemed tonnage shall be the
tonnage in respect of an arrangement of purchase of slots, slot charter and an arrangement of
sharing of break-bulk vessel.

Section 115VE deals with the manner of computation of income under TTS. In nutshell, such
company which has exercised option under this Chapter is known as a 'Tonnage Tax
Company' and its income from the business of operating qualifying ships shall be considered
as a separate business distinct from all other activities of the business carried on by the
company. The income from this particular business only is to be computed separately from
the profits and gains from any other business. The income for this activity under TTS is
known as 'tonnage income' (Section 115VF). The computation of tonnage income is to be
 210

done in the manner prescribed in Section 115VG. As this is an important provision for the
purposes of deciding the instant appeal, same is reproduced below:

“115VG. Computation of tonnage income.- (1) The tonnage income of a tonnage tax
company for a previous year shall be the aggregate of the tonnage income of each qualifying
ship computed in accordance with the provisions of sub-sections (2) and (3).

For the purposes of sub-section (1), the tonnage income of each qualifying ship shall be the
daily tonnage income of each such ship multiplied by—

(a) the number of days in the previous year; or

(b) the number of days in part of the previous year in case the ship is operated by the
company as a qualifying ship for only part of the previous year, as the case may be.

(4) For the purposes of this Chapter, the tonnage shall mean the tonnage of a ship indicated in
the certificate referred to in section 115VX and includes the deemed tonnage computed in the
prescribed manner. Explanation.—For the purposes of this sub-section, "deemed tonnage"
shall be the tonnage in respect of an arrangement of purchase of slots, slot charter and an
arrangement of sharing of break-bulk vessel.

The tonnage shall be rounded off to the nearest multiple of hundred tons and for this purpose
any tonnage consisting of kilograms shall be ignored and thereafter if such tonnage is not a
multiple of hundred, then, if the last figure in that amount is fifty tons or more, the tonnage
shall be increased to the next higher tonnage which is a multiple of hundred and if the last
figure is less than fifty tons, the tonnage shall be reduced to the next lower tonnage which is a
multiple of hundred; and the tonnage so rounded off shall be the tonnage of the ship for the
purposes of this section.

(6) Notwithstanding anything contained in any other provision of this Act, no deduction or
set off shall be allowed in computing the tonnage income under this Chapter.” We would also
like to point out at this stage that Section 115V-I deals with 'relevant shipping income' and as
per Section 115VF, such relevant shipping income shall not be chargeable to tax.

After narrating the scheme of Chapter XIIG containing special provisions for computation of
profits and gains from the business of operating qualifying ships by a company, we advert to
the precise nature of dispute that has arisen in the instant appeal. As mentioned above, it is
only income from the business of operating qualifying ship that has to be computed in
accordance with the provisions of Chapter XIIG. As per Section 115VB of the Act, a
company is regarded as operating a ship if it operates any ship which is owned by it or a ship
which is chartered by it and it also includes a case where even a part of the ship has been
chartered by it in an arrangement such as slot charter, space charter or joint charter etc. The
question that has arisen for consideration pertains to 'slot charter' i.e. should the 'slot charter'
operations of a 'Tonnage Tax Company' be carried on only in 'qualifying ships' to include the
income from such operations to determine the 'tonnage income' under 'TTS' in terms of the
provisions of Chapter XIIG of the Act? In other words, is the income derived from 'slot
charter' operations of a 'Tonnage Tax Company' liable to be excluded while determining the
'Tonnage Income' under the 'TTS' if such operations are carried on in ships which are not
'qualifying ships' in terms of the provisions of that Chapter of the Act and the relevant
provisions of the Income Tax Rules, 1962?
 211

As a matter of fact, the respondent-assessee owns a qualifying ship and fulfills all other
conditions as well to make it a qualifying company under Section 115VC. The income that is
generated from the said qualifying ship is exigible to tax as per the special provisions
contained in Chapter XIIG, as assessee has exercised the requisite option in this behalf.
However, in addition to operating its qualifying ship, in the relevant Assessment Years i.e.
2005-2006 and 2008-2009 it had also 'slot charter' arrangements in other ships. In the relevant
income tax returns filed by the assessee, the assessee had also included the income earned
from such slot charter arrangements for the purpose of computation thereof under Chapter
XIIG. It is in this context the question has arisen as to whether the assessee was eligible to
include the income derived from activities through 'slot charter' arrangements as relevant
shipping income to determine the deemed tonnage in terms of Rule 11Q of the Income Tax
Rules.

The Assessing Officer was of the view that the income earned under slot charter arrangement
did not qualify for coverage to be given special treatment in Chapter XIIG as this income was
not generated by the assessee from its own ship, i.e., it is neither from the ship owned by the
assessee nor from the entire ship chartered by the assessee. He took the view that in order to
avail the benefit of Chapter XIIG, the assessee was supposed to show that the ship operated
by it was qualifying ship and for this purpose it was incumbent upon the assessee to produce
a 'valid certificate indicating its net tonnage' as provided in Section 115VX(1)(b) of the Act.
However, the assessee had submitted such valid certificate only in respect of its own ship and
did not submit the same in respect of ship chartered by the assessee under the slot charter
arrangement. The contention of the assessee was that the requirement of producing 'valid
certificate' is to be insisted only for assessee's own ships and for the ships hired fully. This
contention was not accepted by the Assessing Officer. The assessee had also argued that as
per the method of computation provided under Section 115VG of the Act read with Rule 11Q
of the Rules income for full ship is to be computed on the basis of 'net tonnage' shown in the
valid certificate, whereas income of part of the ship is computed as 'deemed tonnage'. This
argument was also rejected by the Assessing Officer on the ground that there was a
requirement of producing valid certificate even for part of the ship and in the absence thereof
income from slot charter arrangement could not be included for the purpose of computation
of tonnage income under the TTS.

The order of the Assessing Officer was upheld by the Commissioner of Income Tax
(Appeals) resulting into dismissal of appeal filed by the assessee. Even the ITAT accepted the
view taken by the Assessing Officer and dismissed the appeal filed before it by the assessee
thereby upholding the order of the Assessing Officer. However, in further appeal that was
preferred by the assessee to the High Court under Section 260A of the Act, the assessee has
succeeded in getting its way through as the High Court has found merit in its contention.
Thus, the High Court, vide impugned judgment and order dated 23.01.2015, has allowed the
appeal of the assessee holding that the income earned by the assessee under slot charter
arrangement comes under the definition of 'deemed tonnage tax' as per explanation to sub-
section (4) of Section 115 VG of the Act and, therefore, exclusion of this income while
assessing the same under the said special provisions was not appropriate. In other words, the
High Court has held that the assessee is eligible for tonnage on slot charter related income
also. This view taken by the High Court is under examination in the present proceedings.

Mr. Rohatgi, learned Attorney General who appeared for the Income Tax
Department/Revenue, at the outset referred to the reasoning which was adopted by the ITAT
and submitted that the ITAT had rightly interpreted the provisions even in respect to deemed
 212

tonnage and came to the correct conclusion that even slot charter arrangement has to be in
respect of a qualifying ship. He read out the relevant portions of the discussion contained in
the order of ITAT in this behalf and submitted that in order to get a particular income covered
under these special provisions, it was necessary to fulfill all the conditions which are
stipulated in various provisions of this Chapter. His argument was that it is only the business
of operation of qualifying ships that was covered by the Chapter. Therefore, even the slot
charter arrangement had to necessarily be in respect of 'qualifying ship'. It was submitted that
unless this threshold is crossed and the test of eligibility as per the conditions stipulated
under Section 115VA to Section 115VE of the Act are fulfilled, the question of crossing over
to the second stage of computation of income as per the method of determination of tonnage
would not arise. On that basis, he argued that the entire approach of the High Court by solely
relying upon explanation to sub-section (4) of Section 115VG was erroneous.

Per contra, Shri Porus Kaka, senior advocate appearing for the assessee, made an endeavour
to justify the view taken by the High Court by adopting the reasons which are given in the
impugned judgment. In the process, the learned senior counsel went into the background as to
how TTS was introduced in the scheme on the basis of the recommendations contained in the
Report given in January, 2002 by the Rakesh Mohan Committee, which was appointed by the
Government. He emphasised that the main purpose of introducing TTS was to ameliorate the
hardships suffered by the Indian shipping companies vis-a-vis foreign shipping lines because
of the stiff competition faced by the Indian companies and also to ensure an easily acceptable
fixed rate low tax regime for shipping companies. His submission was that Chapter XIIG
incorporating this TTS which was introduced by the Finance Act, 2004, had to be interpreted
keeping in view the aforesaid objective. He also argued that the legal fiction created by sub-
section (4) of Section 115VG along with Rule 11Q of the Rules had to be given its proper and
sensible meaning and read in this manner and the insistence of the Income Tax Authorities
requiring production of valid certificates even in respect of slot charter was a totally
inappropriate demand and that would render redundant and otiose many provisions of this
Chapter.

Dilating the aforesaid submissions, he argued that explanation to Section 115VG(4) which
clarifies 'deemed tonnage' to include slot charter had to be read along with Circular No.
05/2005 which was a contemporaneous expositio circular issued after inserting the said
Chapter and clarifies that “the tonnage income shall be further increased by the deemed
tonnage” which is to be computed in the manner prescribed in Rule 11Q. Deemed tonnage
means the tonnage in respect of an arrangement of purchase of slots, slot charter, and an
arrangement of sharing of break-bulk vessels. He, thus, argued that arrangements of slot
charter even on non-qualifying ship are statutorily included within the ambit of the term
'income from the business of operating qualifying ship'.

We have given our earnest consideration to the respective submissions.

To recapitulate briefly, the assessee is a company as defined under Section 2(17) of the Act
and is also in the business of operating qualifying ship(s). It is also not in dispute that it owns
a qualifying ship and fulfillment of this condition permits the assessee to exercise its option
for computation of income from the business of operating qualifying ships under Chapter
XIIG of the Act. The assessee exercised the option in this behalf, as per Section 115VP of the
Act in respect of Assessment Years in question. Therefore, the assessee is a 'qualifying
company' under Section 115VC of the Act. In fact, the income that is generated from the
qualifying ship owned by the assessee is also assessed under the special provisions contained
 213

in Chapter XIIG of the Act. The dispute, however, pertains to the income from the slot
charter arrangements which the assessee has made in other ships during the concerned
Assessment Years. The ships where slot charter are arranged are obviously not owned by the
assessee. Further, as only some slots are chartered, full ships are not chartered.

In this context, the first question would be as to whether such a slot charter can be treated as
'operating ships' within the meaning of Section 115VB of the Act? This provision specifically
provides that for the purpose of Chapter XIIG, a company would be regarded as operating a
ship 'if it operates any ship whether owned or chartered by it and includes a case where even
a part of the ship has been chartered by it in an arrangement such as slot charter, space charter
or joint charter'. It is clear from the above that slot charter is specifically included as an
instance of a ship chartered by the company.

Next comes the issue as to whether it would be treated as a 'qualifying ship' as defined
under Section 115VD of the Act. A perusal of the provisions of Section 115VD of the Act
would indicate that all the conditions laid down therein are fulfilled by the assessee, except
the conditions stipulated in clause (c) which impose an obligation on the assessee to produce
a valid certificate in respect of such a ship where slot is chartered, indicating its net tonnage
in force. The entire controversy revolves around the production of this certificate. As per the
Revenue, this is an essential requirement contained in Section 115VD of the Act which
cannot be done away with because of the formula that is contained in Section 115VG of the
Act for the computation of Tonnage Income. It is argued that computation of Tonnage
Income under TTS has to be as for the provisions of Section 115VG and sub-section (4)
thereof defines 'Tonnage' to mean tonnage of a ship indicated in the certificate referred to
in Section 115VX. This Section makes the following reading:

“115VX. (1) For the purposes of this Chapter,—

(a) the tonnage of a ship shall be determined in accordance with the valid certificate
indicating its tonnage;

(b) "valid certificate" means,— in case of ships registered in India—

(a) having a length of less than twenty-four metres, a certificate issued under the Merchant
Shipping (Tonnage Measurement of Ship) Rules, 1987 made under the Merchant Shipping
Act, 1958 (44 of 1958);

(b) having a length of twenty-four metres or more, an international tonnage certificate issued
under the provisions of the Convention on Tonnage Measurement of Ships, 1969, as specified
in the Merchant Shipping (Tonnage Measurement of Ship) Rules, 1987 made under
the Merchant Shipping Act, 1958 (44 of 1958);

(ii) in case of ships registered outside India, a licence issued by the Director-General of
Shipping under section 406 or section 407 of the Merchant Shipping Act, 1958 (44 of 1958)
specifying the net tonnage on the basis of Tonnage Certificate issued by the Flag State
Administration where the ship is registered or any other evidence acceptable to the Director-
General of Shipping produced by the ship owner while seeking permission for chartering in
the ship.” This argument seems to be convincing in the first blush as requirement of
producing a valid certificate is specified in Section 115VD as well as in sub-section (4)
of Section 115VG. However, a little closer scrutiny of the aforesaid provisions would take
 214

away the sheen of this submission and negate the contention of the Revenue, thereby
persuading us to accept the reasoning given by the High Court as well as the manner in which
aforesaid statutory provisions are interpreted by it. In this behalf, we reproduce sub-section
(4) of Section 115VG of the Act which is a provision regarding computation of tonnage
income:

(4) For the purposes of this Chapter, the tonnage shall mean the tonnage of a ship indicated in
the certificate referred to in section 115VX and includes the deemed tonnage computed in the
prescribed manner. Explanation.—For the purposes of this sub-section, "deemed tonnage"
shall be the tonnage in respect of an arrangement of purchase of slots, slot charter and an
arrangement of sharing of break-bulk vessel.

Aforesaid provision is in two parts insofar as computation of tonnage is concerned. When it

comes to tonnage of a ship, a certificate as mentioned in Section 115VX is to be produced.
Second part of this provision talks about 'deemed tonnage' in contradistinction to the 'actual
tonnage' mentioned in the certificate. Thus, it is not only the actual tonnage that is mentioned
in the certificate referred to in Section 115VX of the Act which this provision deals with. In
addition, deemed tonnage is also to be included if there is such a deemed tonnage, and that
deemed tonnage is to be added to the actual tonnage which is indicated in the certificate.
Explanation to sub-section (4), inter alia, mentions that insofar as slot charter arrangements
are concerned, purchase of such slot charter shall be treated as deemed tonnage. The
Legislature has, thus, clearly visualised that insofar as deemed tonnage is concerned, there
would not be any possibility of producing a certificate referred to in Section 115VX of the
Act. When we read the provision in this manner, it becomes amply clear that Section
115VD of the Act which talks of a qualifying ship, contemplates the situation in which entire
ship is either owned or chartered. Similar is the position which inheres in Section 115VX of
the Act as it refers to 'the tonnage of a ship'. Therefore, whenever the question of a tonnage of
a ship crops up and the said tonnage is to be determined, it has to be in accordance with the
valid certificate indicating its tonnage and it is a compulsory obligation of the assessee to
produce such a certificate. However, this requirement of producing a certificate would not
apply when entire ship is not chartered and the arrangement pertains only to purchase of slots,
slot charter and an arrangement of sharing of break-bulk vessel. The contention of the senior
counsel for the assessee is right that the legal fiction created by sub- section (4) of Section
115VG is to be given its proper and sensible meaning. This position becomes abundantly
clear by reading Rule 11Q of the Rules which specifies the basis/formula of computing
deemed tonnage in respect of arrangement of slot charter and reads as under:

“11Q. (1) For the purpose of the Explanation to sub-section (4) of section 115VG, deemed
tonnage in respect of an arrangement of purchase of slots and slot charter shall be computed
(illustrative formula given in Note 3 appearing after the corresponding Form No. 66) on the
following basis :

TEU = 1 Net Tonnage (1 NT) where TEU is Twenty foot Equivalent Unit (Container of this
size) Computation of deemed tonnage (illustrative formula given in Note 4 appearing after
the corresponding Form No. 66) in respect of an arrangement of sharing of break-bulk vessel
shall be made on the following basis :

(i) in case where cargo is restricted by volume:

19 cubic meter (cbm) = 1 net tonnage (1 NT); and

 215

(ii) in case where cargo is restricted by weight 14 metric tons = 1 net tonnage (1 NT)” In
Karimtharuvi Tea Estates Ltd. v. State of Kerala and Ors.[1], a Constitution Bench of this
Court, while interpreting conflicting tax provisions held that the Rules made under the Act,
must be taken to be prescribed by the Act and the definitions contained therein must apply to
other provisions. In the same judgment, it was held that if two provisions are in conflict, they
must be interpreted in a harmonious manner. The calculation of income arising from carriage
of goods on slot basis has, in the wisdom of the Legislature, been disconnected from the
capacity of a ship, on account of impossibility of getting such information in relation to ships
on which slot charter is undertaken. This aspect has due recognition in Note 3 of the said
Form 66. Thus, the Act and the Rules for computation on tonnage tax specifically and
categorically differentiate the requirement of the Certificate with regards to owned ship and
slot charter. In law, the said Rule also recognizes that identification of the vessel for slot
charter cannot be done.

It would also be pertinent to mention that Note 3 below Form No. 66, in terms of Rule 11D,
recognizes the reason for prescribing a separate formula for slot charter by mentioning: “3.
Formula for conversion of TEUs into NT (Slot Charter)

(i) In addition to loading containers on their own container vessels, shipping companies also
hire slots on container ships (not owned by them) plying on various routes. These slots could
be hired for a sector voyage or on long term basis, all round the year, in various vessels and
in varying numbers and thus cannot be converted to net tonnage identifying the particular
vessel on which the slot is hired. Thus, a formula has been worked out to convert the slots
hired into net tonnage.” The position is taken beyond any pale of doubt with the following
Note in Form No. 66:

“There is no need to mention the name of the ship, income from which is computed on
deemed tonnage basis.” We may also point out that in terms of Section 115VI(2), relevant
shipping income of a Tonnage Tax Company means its profits from core activities and its
profits from incidental activities. Core activities of a Tonnage Tax Company have been
specified in sub-section (2) of the said section. These include its activities from operating
qualifying ships and other ship related activities including slot charter.

When the scheme of the aforesaid special provision for computation of income under TTS is
exempted, we find the balance tilted in favour of the assessee as that was the precise purpose
in introducing TTS in India. It may be stated in brief that in view of the stiff competition
faced by the Indian shipping companies vis-a-vis foreign shipping lines, and in order to
ensure an easily accessible, fixed rate, low tax regime for shipping companies, the Rakesh
Mohan Committee in its report (of January, 2002) recommended the introduction of the TTS
in India, which was similar to, and adopted some of the best global practices prevalent. The
whole purpose of introduction of the Scheme was to make the Indian shipping industry more
competitive in the global space by rationalising its tax cost. For the reason that it is
impossible to cater to all shipping routes on owned ships, it is an accepted and widely
prevalent practice globally and in India that shipping companies engage in slot charter
operations. If such slot charter arrangements are not entered into, then Indian shipping
companies will not be able to take up contract of affreightments and these contracts would
have fallen to only foreign shipping lines thereby making Indian shipping industry
uncompetitive. Such slot charter arrangements being with a shipping company but not in
relation to or for a particular ship, it is impossible for the Indian shipping company to identify
 216

the cargo ship, which carried the goods. This peculiarity has been duly recognized at Note 3
of Form 66 and reproduced as under:

“In addition to loading containers on their own container vessels, shipping companies also
hire slots on container ships (not owned by them) plying on various routes. These slots could
be hired for a sector voyage or on long term basis, all round the year, in various vessels and
in varying numbers and thus cannot be converted to net tonnage identifying the particular
vessel on which the slot is hired. Thus, a formula has been worked out to convert the slots
hired into net tonnage”.

Similarly, for space charter also, this business aspect has been recognized at Note 4(b) to
Form 66 as under:

“Since the entire vessel is not chartered and only a small space is booked in the vessel,
conversion of chartered space into net tonnage is not available. Hence, a conversion formula
of cargo carried on a ship to its net tonnage has been worked out”.

Accordingly, there is no requirement of the certificate under the Scheme in relation to the
vessel on which slot charter operations are carried out.

We would also like to refer to Circular No. 05/2005 dated 15.07.2005 explaining the need
and essence of the introduction of these provisions which was issued contemporaneously by
the Central Board of Direct Taxes (CBDT). The Circular clarifies that the Scheme is a
“preferential regime of taxation”. It also clarifies that “charging provision is under Section
115VA read with Section 115VF and Section 115VG.” Circulars of CBDT explaining
the Scheme of the Act have been held to be binding on the Department repeatedly by this
Court in a series of judgments including Azadi BachaoAndolan v. Union of India, Navnit Lal
Jhaveri v. K.K. Sen, and UCO Bank v. CIT.

We, thus, agree with the decision of the High Court and find no merit in the instant appeals.
The same are hereby dismissed. There shall, however, be no order as to cost.

(ii)West Asia Maritime Ltd., Chennai vs Department Of Income Tax - ITA No. 1195 / Mds/10

This is an appeal by the Revenue against the order of the CIT(A)-III, Chennai for assessment
year 2006-07.

2. Grievance of the Revenue is that the CIT(A) directed the AO to treat ship named "M.V.
Gem of Ennore" as one qualifying for Tonnage Tax Scheme under Chapter XII-G of the
Income-tax Act, 1961 ('the Act" for short). According to the Revenue, the main activity of
this ship was to transport thermal coal from one location to another location within the
country itself and the ports from which the coal was shipped as also the ports to which it was
shipped were connected by roads/rail. Hence, as per the Revenue, such ship was transporting
goods normally routed through land, by road or rail, and would not come within the ambit of
a "qualifying ship" for availing of the Tonnage Tax Sceme.

3. Notice of hearing of the case was sent to the assessee and in its' reply letter dated 08-11-
2010, assessee has requested for rescheduling of the hearing to 26-11-2010. Since 26-11-
2010 is a Friday, on which day this Tribunal is taking up only Misc. Petitions, it was
intimated to the assessee by letter dated 01-11- 2010 that such rescheduling was not possible.
 217

Assessee was also intimated that the appeal would be heard on 23-11-2010 itself. On 22-11-
2010 assessee has filed an adjournment petition stating that Shri Percy Pardiwala, who was to
appear for it, was attending a matter at Bangalore High Court and requesting for an
adjournment. However, we find from record that no authorization has been filed by the
assessee authorizing Shri Percy Pardiwala to appear on its behalf. When the case was called
upon for hearing today, nobody appeared on behalf of the assessee. Hence, we are not
inclined to accept the adjournment petition filed and therefore, we are proceeding to dispose
of the appeal of the Revenue on merits.

4. Short facts apropos are that assessee, a company, engaged in the business of shipping and
port services, had filed its return declaring tonnage income of `76,85,246/- under sec.115VG
of the Act. During the course of assessment proceedings, it was noted by the AO that out of
the ten ships operated by the assessee one ship called "M.V.Gem of Ennore" was transporting
thermal coal from one location to another location within the country. He came to this
conclusion based on a letter dated 22-12-2008 submitted by the assessee, wherein it was
submitted as under:

"The ship M.V.Gem of Ennore is employed with M/s Poompuhar Shipping Corporation,
Chennai on long term charter for a period of ten years from February 2002 for moving
thermal coal, for Tamilnadu Electricity Board from Haldia, Paradip and Vizag to Ennore and
Tuticorin."

A.O was of the opinion that definition of "qualifying ship" given in sec.115VD of the Act
specifically excluded a sea going ship or vessel used mainly for provision of goods or
services of a kind normally provided on land. According to the AO, coal was moved within
the ports in India, and such ports were connected by rail as well as road. AO also noted that
movement of coal between such ports could normally be routed through land and hence the
ship 'M.V.Gem of Ennore' was not eligible for tonnage tax scheme. He, therefore,
apportioned the total shipping income declared by the assessee under the Tonnage Tax
Scheme and 1/10th thereof was attributed by the ship M.V.Gem of Ennore and denied the
Tonnage Tax benefit.

5. In its appeal before the CIT(A), argument of the assessee was that the Tonnage Tax
Scheme was drafted by a Core Committee of which one Shri D.P. Sengupta, IRS, Chief
Commissioner of Income-tax (Rtd.) was a Member. Relying on the opinion given by the said
Shri D.P.Sengupta, assessee argued that the AO grossly erred in considering 'M.V.Gem of
Ennore' to be not a qualifying ship. According to the assessee, carrying of cargo from one
Indian port to another would not disentitle the assessee from returning the income of a ship
under the Tonnage Tax Scheme, especially since, there was no disabling provision in Chapter
XIIG of the Act. Contention of the assessee was that goods and services normally provided
on land, mentioned in Sec. 115VD, was those like retail selling, restaurants, hotels, prisons,
radio stations, casinos, financial services and offices. Therefore, it was argued that the
activity which was normally provided on land and which could be easily be shifted to a ship,
just for taking advantage of the preferential tax treatment provided under Chapter XIIG of the
Act, could alone be excluded. CIT(A) was appreciative of this contention. According to him,
as pointed out by the assessee, Chapter XIIG of the Act was based on U.K. model to allow
the benefit of Tonnage Tax Scheme and that the statement of practice issued by the HMRC in
respect of Tonnage Tax clearly substantiated the argument of the assessee. He held that
'M.V.Gem of Ennore' was a ship which was qualified under sec. 115VD of the Act and
 218

directed the AO to allow such ship benefit of Tonnage Tax Scheme under Chapter XIIG of
the Act.

6. Now before us, the ld. DR strongly assailing the order of the CIT(A) submitted that
transportation of coal from one port to another was normally by lorries or trains which
operated on land. According to him, goods which could be moved on such modes of land
transport, if transported by ocean, the ships transporting such goods automatically stood
excluded from the benefit of Tonnage Tax Scheme under Chapter XIIG of the Act. As
already mentioned by us, nobody appeared on behalf of the assessee.

7. We have perused the orders and heard the ld. D.R. There is no dispute that in respect of the
ship 'M.V. Gem of Ennore' as also other ships owned by the assessee, all the conditions
stipulated under Chapter XIIG pf the Act for availing TonnageTax Scheme were satisfied,
except in the case of the above named ship, which as per the AO, was not a qualified one
under sec.115VD of the Act. For availing of the beneficial provision of Chapter XIIG of the
Act, which gives a fixed method of computing income based on tonnage , one of the
necessary condition is that the related ship should be a qualified one. Section 115VD of the
Act is reproduced hereunder:

"115VD. For the purposes of this Chapter, a ship is a qualifying ship if -

(a) it is a sea going ship or vessel of fifteen net tonnage or more;
(b) it is a ship registered under the Merchant Shipping Act, 1958 (44 of 1958), or a ship reg
istrered outside India in respect of which a licence has been issued by the Director-General of
Shipping under sec.406 or sec.407 of the Merchant Shipping Act, 1958(44 of 1958); and
(c) a valid certificate in respect of such ship indicating its net tonnage is in force, but does not
include-
(i) a sea going ship or vessel if the main purpose for which it is used is the provision opf
goods or service of a king normally provided on land;
(ii) fishing vessels;

(iii) factory ships;

(iv) pleasure crafts;

(v) harbour and river ferries;

(vi) offshore installations;

(vii) Dredgers (omitted w.e.f. 01-04-2006);

(viii) qualifying ship which is used as a fishing vessel for a period of more than thirty days
during a previous year."
8. AO had relied on clause (i) above for coming to a conclusion that the ship 'M.V.Gem of
Ennore' was not eligible for returning income based on tonnage.
 219

There is no dispute that the said ship was transporting coal from ports within India, to be
more specific, from ports Haldia, Paradip and Vizag to the ports at Ennore and Tuticorin.
There is also no dispute that these places were connected by both rail/road. There cannot also
be any doubt that coal can be transported by road as well as rail and transportation by rail is a
method adopted for movement of coal. But the question here is whether cl. (i) of sec. 115VD
is meant for taking out of the ambit of Chapter XIIG, those sea going ships or vessels which
were transporting goods which could also be transported through land. Let us take an
example of petroleum products. The situation is similar. Petroleum products can also be
moved by land or sea. It is at this juncture that it becomes necessary to very carefully analyze
cl.(i) of sec.115VD. The ship which is excluded by this clause is one which is used for the
provision of goods or services of a kind normally provided on land. Providing goods or
services on land and transporting goods on land are entirely different. Goods or services have
been used together with the interjection 'or'. It can in the normal commercial sense only mean
goods or services which are provided from a specific place in land. It could not be stretched
to include transportation of goods between different places on land. Even if we presume that
it would include transportion of goods, it would not be possible to say that transportation of
goods like coal or petroleum are though a kind of transport method which is normally
provided on land only. The mode of transport that is to be used is a commercial decision to be
taken by a businessman based on the cost factors involved. If transportation by land is
cheaper no body would transport the goods by ship. If transport by ship is cheaper, then we
cannot say that such goods which are cheaper to be transported on sea, has to be treated as
goods normally transported by land. If we look at the Budget Speech dated 3rd February,
2004 of the Finance Minister, on the scheme of tonnage tax it was mentioned as under:

"More than 90 per cent of world shipping tonnage is subject to very low levels of taxation. To
provide a level playing field so that Indian shipping becomes internationally competitive, a
tonnage tax scheme with notional income at a fixed rate, on the basis of net registered
tonnage, should be considered."

9. Before introduction of Chapter XIIG of the Act, shipping companies were taxed at a rate of
35 per cent with a surcharge of 2.5 per cent on the tax determined. An Indian public limited
company or a Government company, engaged in the business of operation of ships, could
claim deduction under sec. 33AC upto 100 per cent of profit derived from the business of
operation of ships for the asst. years 2001-02 to 2005-06 by crediting the amount to a reserve
account. However, the deduction ceased when the aggregate of the amounts carried to reserve
account from time-to-time exceeded twice the aggregate of the amounts of paid-up share
capital, the general reserve and the amount credited to share premium account. The amount in
reserve account was to be utilized before the expirty of eight years for the purpose of
acquisition of new ships. Sanctions were provided for not complying with this condition.
However, where the taxable profits fall below the 'book profits', tax was to be paid on 'book
profit' at the rate of 7.5 per cent under the MAT Scheme. In contrast to these provisions under
the tonnage tax scheme, introduced through Chapter XIIG of the Act, the liability of a
shipping company towards taxation has to be determined on the basis of the tonnage of the
vessel or a fleet of vessels owned, operated or charted (time charter or bare boat charter) by it
instead of profit generated by commercial operations, which generally varied from year-to-
year. Generally, this tax is levied on the basis of Net Registered Tonnage (NRT). Various
countries, following this system, have prescribed a rate structure, which multiplied by the
tonnage of the vessel, give the amount of tax payable. Some countries levy tax on Gross
Registered Tonnage (GRT) and some follow a mixture of GRT and NRT. There are other
variations in the tonnage tax scheme also such as modified tonnage tax system, optional
 220

tonnage tax system, a parallel tonnage tax system with corporation tax system. Various
countries have incorporated several typical features in their tax legislations by way of
incentives to achieve specific national objections. But the biggest merit of tonnage tax is its
simplicity and the type of interpretation that is to be given for the various provisions under
Chapter XIIG of the Act should be to accentuate the purposes of introduction of tonnage tax
scheme, and not to complicate it. Thus, in our opinion, just because a sea going ship was used
to transport coal between the ports which were connected by rail/road, would not be
sufficient enough a reason to say that it was not qualified under sec. 115VD of the Act. Cl. (i)
of sec.115VD was not intended for that purpose but only to ensure that profits from services
and sale of goods which could be effected on land did not get any unintended benefits by
shifting the business to a sea going ship, just to get the benefit of tonnage tax scheme. We are
therefore of the opinion that the CIT(A) was very well justified in directing the AO to give
the benefit of tonnage tax scheme under sec. 115VD of the Act to the assessee. No
interference is called for.

11. In the result, appeal of the Revenue is dismissed.

12. Despite best persuasion of myself, I have not been able to agree with the findings and
conclusion as drawn by the ld. Accountant Member even after reading his proposed order
time and again, I proceed to write my separate order as under:

13. In this case, the Department has challenged the action of the ld. CIT(A) in directing the
Assessing Officer to treat the ship named "M.V. Gem of Ennore" as one qualifying for
Tonnage Tax Scheme under Chapter XII-G of the Income Tax Act, 1961. According to the
Department, the main activity of the ship was to transport thermal coal from one location to
another location situated within the country itself and the ports from where the coal was
shipped has also a port to which it was shipped are connected by road/rail i.e. by land.
Therefore, as per the Department, such ship was transporting goods which could normally be
routed through land, by road or rail, as such, would not come within the purview of a
qualifying ship as defined under section 115VD(i) for availing of tonnage tax scheme.

14. Facts as emerging from the record indicate that the assessee is engaged in the business of
shipping and port services, had filed its return declaring tonnage income of `.76,85,246/-
under section 115VG of the Act. During the assessment proceeding, the Assessing Officer
noted that out of ten ships operated by the assessee, one ship called "M.V. Gem of Ennore"
has transported thermal coal from one location to another location within the country and
by placing reliance, on the letter of the assessee dated 22.12.2008 filed by the assessee
wherein it was submitted as follows:

"The ship "M.V. Gem of Ennore" is employed with M/s. Poompuhar Shipping Corporation,
Chennai on long term charter for a period of ten years from February, 2002 for moving
thermal coal, for Tamilnadu Electricity Board from Haldia, Paradip and Vizag to Ennore and
Tuticorin,"

the Assessing Officer, in view of the facts, circumstances and other relevant material, formed
the opinion that the definition of "qualifying ship", as given in section 115VD of the Act,
specifically excludes a sea going ship or vessel mainly used for the provisions of goods or
services of a kind normally provided on land. According to him the coal was moved within
the ports in India, such ports were connected by rail as well as road and he further noted that
movement of coal between such ports could be routed through land normally and as such,
 221

ship "M.V. Gem of Ennore" was not liable for tonnage tax scheme. Therefore, he apportioned
the total shipping income declared by the assessee under tonnage tax scheme and he treated
1/10th thereof as attributed by the ship "M.V. Gem of Ennore", in the absence of any
bifurcation of accounts for individual ship concerned having been furnished by the assessee,
denied the tonnage tax benefit to this extent.

15. The assessee took up the matter in appeal and challenged the action of the Assessing
Officer by raising various grounds, before the ld. CIT(A)and also relied upon the opinion of
one Mr. D.P. Sen Gupta, IRS, Ex-Chief Commissioner of Income Tax, who is stated to be a
member of Core Committee which drafted the Tonnage Tax Scheme, the assessee further
argued that the Assessing Officer grossly erred in treating the "M.V. Gem of Ennore" as not
qualifying ship when, according to the assessee, carrying of cargo from one Indian port to
another would not disentitle the assessee from getting such benefit, especially when there is
no disabling provision in the Chapter XII-G of the Income Tax Act and giving some
examples of retailers, it was argued that the activity which was normally provided on land
could not easily be shifted to the ship just for taking advantage of the preferential tax
treatment. By mentioning about this provision being based on U.K. model and this case not
falling in that exclusion category, requested CIT(A) to allow the benefit of tonnage tax
scheme . Considering and accepting all the pleas as raised by the assessee, the ld. CIT(A) has
held that "M.V. Gem of Ennore" was a qualifying ship under section 115VD of the Act and
directed the Assessing Officer to allow the benefit of tonnage tax scheme under Chapter XII-
G with regard to this ship of the assessee. The Department has come up in appeal against the
order of the ld. CIT(A).

16. The ld. DR while relying upon the order of the Assessing Officer has pleaded for setting
aside the order of the ld. CIT(A) and restoring that of the Assessing Officer. It was further
submitted that transportation of coal from one port to another port in India, could normally be
done through lorries or trains which operate on land. According to him, the coals which could
be moved on such modes of land transport, if transported by sea, such ships are excluded
from the benefit of tonnage tax scheme under relevant provision as contained in the said
Chapter of the Act and the Assessing Officer while considering and giving relevant details
has came to a proper conclusion that ship transporting goods which could be transported by
lorries or train are excluded from the benefit of tonnage tax scheme. The ld. DR has also
submitted that there is a clear and unambiguous stipulation in the relevant provision and
neither there is any ambiguity nor any flaw in the language employed in the relevant
provision of the statute, therefore, there was no scope for the ld. CIT(A) to interpret the clear
words of the statute to give any other meaning than in the words used. It was, thus pleaded
for restoring the order of the Assessing Officer after setting aside the impugned order.

16.1 However, there was no representation on behalf of the assessee before the Tribunal and
request of the assessee for adjournment has appropriately been discussed and adjudicated to
decline such request as dealt with by the ld. A.M. in detail and I have nothing to add but to
concur with him in regard to dealing with the request for adjournment of the assessee, which
came to be rejected.

17. Arguments of ld. DR in the light of facts and circumstances of the case and provisions
of sections 115VD and 115VG have been considered. It is found that during the assessment
proceedings, the assessee explained to the Assessing Officer that the assessee is the co-owner
of the ship M.V. Gem of Ennore which was engaged on a long-term charter for moving
thermal coal for Tamilnadu Electricity Board from Haldia, Paradip and Vizag ports to Ennore
 222

and Tuticorin ports in Tamil Nadu. The Assessing Officer observed that all the ports stated
above are located within the country and are well connected by road and rail. Therefore,
movement of coal between these ports can be routed through land by road or rail transport.
Accordingly, he concluded that "M.V. Gem of Ennore" is not a "qualifying ship" in terms of
115VD, if "any sea going ship or vessel transports any goods or services of a kind normally
provided on land is not a qualified ship". The Assessing Officer, thereafter, invoked
provisions of 115VI(6) and taxed the income of "M.V. Gem of Ennore" under the normal
provisions of the Act. The assessee took up the matter in appeal and while relying upon the
opinion of Shri D.P. Sengupta, IRS & Ex-Chief Commissioner of Income Tax, who is stated
to be one of the Members of the Core Committee, which drafted the Tonnage Tax Scheme
has pleaded for allowing the relief with regard to tonnage tax scheme on the ship "M.V. Gem
of Ennore" and the ld. CIT(A) allowed the benefit to the assessee against which the
Department has come up in appeal against such action of Ld CIT(A) before this Bench. 17.1
After considering the arguments of ld DR, Material on record as well as orders of authorities
below, it is found that there is no dispute about the said ship "M.V. Gem of Ennore" has
transported coal from the ports in Haldia, Paradip and Vizag to the ports at Ennore and
Tuticorin. There is also no dispute that these places are situated in India and connected both
by rail and roads and there is also no doubt that coal can be transported by road and also by
rail from one port to another as mentioned above.

17.2 For computation of profits and gains from the business of operating qualifying ships as
provided under section 115VA, section 115VD defines qualifying ship and relevant provision
defining "qualifying ship" is as under:

"115VD. For the purposes of this Chapter, a ship is a qualifying ship if--
(a) it is a sea going ship or vessel of fifteen net tonnage or more;
(b) it is a ship registered under the Merchant Shipping Act, 1958 (44 of 1958), or a ship
registered outside India in respect of which a licence has been issued by the Director-General
of Shipping under section 406 or section 407 of the Merchant Shipping Act, 1958 (44 of
1958); and
(c) a valid certificate in respect of such ship indicating its net tonnage is in force, but does not
include--
(i) a seagoing ship or vessel if the main purpose for which it is used is the provision of goods
or services of a kind normally provided on land;
(ii) fishing vessels;
(iii) factory ships;
(iv) pleasure crafts;
(v) harbour and river ferries;
(vi) offshore installations;
(vii) dredgers;
(viii) a qualifying ship which is used as a fishing vessel for a period of more than thirty days
during a previous year."
 223

17.3 From the words contained in the relevant provisions of clause (i) in section 115VD, as
reproduced above, it becomes clear that the sea going ship or vessel, if the main purpose for
which it is used is the provision of goods or services of a kind normally provided on land is
categorically excluded from being qualified ship in terms of the wording used. So far as
interpretation of statute is concerned, various High Courts and Hon'ble Supreme Court have
opined in the following decisions as under:

17.3.1 The Hon'ble Supreme Court in the case of (1) Orissa State Warehousing Corporation
and (2) Rajasthan State Warehousing Corporation v. CIT 237 ITR 589 has held as under:

"Interpretation of taxing statutes - Literal interpretation - Natural and ordinary meaning must
be ascribed to words."

17.3.2 The Hon'ble Supreme Court in the case of Padmasundara Rao (Decd.) and Others v.
State of Tamil Nadu and Others [2002] 255 ITR 147 has held as under:

"The court cannot read anything into a statutory provision which is plain and unambiguous. A
statute is the edict of the Legislature. The language employed in a statute is the determinative
factor of legislative intent. The first and primary rule of construction is that the intention of
the legislation must be found in the words used by the Legislature itself."

17.3.3 Further, the Hon'ble Supreme Court in the case of CIT v. Madurai Mills Co. Ltd. 89
ITR 49 has held as under:

"It is well-settled that considerations stemming from legislative history must not be allowed
to override the plain words of a statute."

And in the case of Controller of Estate Duty v. R. Kanakasabai and Others 89 ITR 251, it was
held by the Hon'ble Supreme Court as under:

"......... It is not permissible for the court to read into a taxing provision any words which are
not there or exclude words which are there. The words found in the provision must be given
their natural meaning."

17.3.4 Similarly in the case of Mohammad Ali Khan and Others v. CWT [1997] 224 ITR
672, the Hon'ble Supreme Court has held as under:

"Intention of the legislature is primarily to be gathered from the language used. Just as it is
not permissible to add words or to fill in a gap or lacuna, similarly it is of universal
application that effort should be made to give meaning to each and every word used by the
legislature."

17.3.5 The cardinal principle of statutory interpretation is that if the meaning of the statutory
interpretation is that if the meaning of the statutory interpretation is plain, then the court must
apply it regardless of the results. It is well settled law that if the language of a statute is clear
and unambiguous and if two interpretations are not reasonably possible, it would be wrong to
discard the plain meaning of the words used in order to meet a possible injustice - CIT v. T.V.
Sundram Iyengar & Sons (P) Ltd. (1975) 101 ITR 764(SC). 17.3.6 The Hon'ble Madras High
Court (Full Bench) in the case of CIT v. Smt. Muthu Zulaikha 245 ITR 800 has held as under:
 224

"The cardinal law of interpretation is that if the language is simple and unambiguous, it is to
be read keeping in mind the clear intention of the legislation. Any addition or subtraction of
words is not permissible. It is also not proper to use a sense which is different from what it
ordinarily conveys."

17.3.7 The Hon'ble Karnataka High Court in the case of Patil Vijaykumar and Others etc. v.
CIT 151 ITR 48 has held as under:

"When the meaning of words is clear and unambiguous, the court has to give effect to it
whatever be the consequence, as the court has no jurisdiction to mitigate harsh consequences
of the statute, if any."

17.3.8 The Hon'ble Kerala High Court in the case of CBDT v. Cochin Goods Transport
Association 236 ITR 993 has held as under:

"So long as the language employed in the statutory provision and more so in the fiscal statute
is clear, the court should interpret it on the face value and there is no warrant to go behind it.
Nothing should be added or subtracted to interpret the plain language and the semantic view
alone should be taken.
In fiscal matters there is no res judicata and no estoppels."

17.3.9 The Hon'ble Delhi High Court in the case of M.P. Poddar (HUF) and Another vs.
Appropriate Authority and Another 240 ITR 372 has held as under:

"........This is a clear mandate of the Legislature and there is no reason to depart from
applying the fundamental rule of construction of a taxing statute that the meaning and
intention of a statute must be gathered from the plain and unambiguous expression used
therein rather than to find out what is just or expedient......."

17.3.10 The Hon'ble Gujarat High Court in the case of CIT v. Gautam Sarabhai Trust [1988]
173 ITR 216 has opined in the context of interpretation of taxing statutes " Words to be given
plain grammatical meaning."

17.3.11 Further the Hon'ble Kerala High Court in the case of R. GAO Electrodes Ltd. v.
CIT [1987] 173 ITR 351 has opined as under:

"Words to be assigned their ordinary meaning - No room for intendment". 17.3.12 From the
above decisions of Courts including those of Hon'ble Supreme Court and Jurisdictional High
Court, it becomes amply clear that natural and ordinary meaning must be ascribed to the
words, Courts cannot read into a statutory provision, which is plain and unambiguous, the
language employed is determinative factor of legislative intent, the consideration stemming
from legislative history must not be allowed to override the plain words of the statute, it is not
permissible for the Courts to read into a taxing provision any words, which are not there or
exclude words which are there and words must be given their natural meaning, if language
employed in the statutory provision and more so in fiscal statute is clear than it should be
interpreted on the face value and there is no warrant to go behind it without adding or
subtracting anything to interpret the plain language and semantic view alone should be taken
- there is no room for intendment and words are to be given plain grammatical meaning.
 225

18. If clause (i) of section 115VD is gone into, it would be found that there is no ambiguity in
the language employed, which is simple, clear and unambiguous, so,in view of precedents,
the Courts/Tribunals have to give effect to it, whatever be the consequence, because there is
no jurisdiction to mitigate harsh consequences of the statute, if any, also.

18.1 So far as an opinion of one Mr. D.P. Sengupta IRS and Ex-Chief Commissioner of
Income Tax., stated to be one of the members of Core Committee which drafted the Tonnage
Tax Scheme for Indian Income Tax, (who has also represented the assessee before the ld.
CIT(A) in first appeal proceedings), portion of which has been reproduced and has mainly
been relied upon by the ld. CIT(A) is concerned, it could, at the most, be a submissions on
behalf of the assessee, which has been given to the assessee by the A.R. and the same cannot
be termed or treated as provisions of law in the absence of having been based on any specific
provision of statute or precedent in this regard. Moreover, reference of some U.K. model
provisions, as mentioned by ld CIT(A), when those are not part of provisions in relation to
Tonnage Tax Scheme in India cannot be held to be applicable. Further, the Indian Tonnage
Tax scheme has been stated to be largely adopted from UK law by the ld.CIT(A) without
defining/explaining further as to how it has been adopted here especially when the language
employed here under Income Tax Law is not same as in that contrary. Moreover the British
model on the Tonnage Tax regime, which itself is based on the Tonnage Tax scheme in the
Netherland and the language used in such legislation is not similar to the language used under
the Income Tax Law in as much as in their restrictive provision, they have incorporated
various examples of businesses named therein, which would exclude qualifying ship for the
purpose of Tonnage Tax Scheme and the list given is not exhaustive, whereas in clause (i)
of section 115VD, no such clause for exclusion naming even one business is there. And
otherwise, nowhere in the statute, either the language adopted is same or entire provision as
contained in UK or the Netherland law is lifted and incorporated in the Tonnage Tax scheme
in India under the Income Tax Law. So placing reliance on those provisions of law of the
foreign countries or taking aid there from in order to interpret the relevant provision, as done
by the ld. CIT(A) , is unwarranted and uncalled for, as such cannot be justified. Since the
language employed in the relevant provision here is plain and simple, without any ambiguity
or flaw, natural grammatical meaning has to be given, therefore, in my considered view, if a
ship, the main purpose of which it is used is the provision of goods or service of a kind
normally provided in land would disqualify that ship for the purpose of Tonnage Tax Scheme
as specifically mentioned in clause (i) of section 115VD. 18.2 Therefore, it is held that the
action of the Assessing Officer is proper and justified to hold that the ship "M.V. Gem of
Ennore" is not a qualified ship for the benefit of Tonnage Tax scheme as envisaged under
relevant provisions of law, whereas the action of the ld. CIT(A), who has interpreted the
relevant provisions to hold that the said ship is a qualified ship for the purposes of Tax
Tonnage Scheme, is neither proper nor justified in view of facts, circumstances and
precedents. As such order of the ld. CIT(A) in this regard is set aside and that of the
Assessing officer is restored.

19. As a result appeal of the department is allowed.

In the above appeal, there was a difference of opinion between the Members comprising the
Bench. Hon'ble President, ITAT, referred the following question before Hon'ble Vice
President, ITAT, Chennai, as Third Member:-

"Whether, in view of facts and circumstances of the case, ship named 'M.V. Gem of Ennore'
transporting thermal coal from one location to another location within the country, when such
 226

ports are connected by rail/road, can be excluded as "qualifying ship" in terms of the
exclusion clause (i) of section 115VD for the benefit of Tonnage Tax Scheme OR it can be
treated as "qualifying ship"."

2. Now, Hon'ble Third Member, vide his order dated 17th June, 2011, has agreed with the
view taken by the Accountant Member. Thus, based on majority opinion, the appeal of the
Revenue is dismissed.

Order pronounced in the open court after conclusion of hearing on the First Day of July,
2011.

VIII. Double Tax Avoidance Agreements (DTAAs)

C.I. T. v. Vishakhapatnam Port Trust - (1983) 144 ITR (AP) - M J Rao, S Reddy

The assessee is the Visakhapatnam Port Trust (hereinafter called the "Port Trust"). The Port
Trust is under the Ministry of Shipping and Transport, Govt. of India. The Visakhapatnam
Port exports a large amount of iron ore. In order to speed up the export operations, the Port
Trust felt it necessary to install a plant known as "Bucket Weel Reclaimer". The purpose of
this was to remove iron ore mechanically from the wharfs and put it on a conveyer belt which
takes the ore directly into the ship. Global tenders were called for by the Port Trust in June,
1967. A German company known as M/s. MaschinenfabrikBuckau R. Wilf (hereinafter called
at the "German company) tendered a contract for supply of the Bucket Wheel Reclaimer on
June 26, 1967.

Later, an Indian company incorporated under the Indian Companies Act known as the
Buckau-Wolf India Engineering Works Ltd, Pimpri, near Poona (hereinafter called the Poona
company), came into the picture. It is common ground that the Poona company is not a
subsidary of the German company nor is it, in any manner whatsoever, controlled by the
German company. This Poona company was employed to fabricate a single thick steel sheet.
Such of the items (items 13 to17 of the contract) which the German company manufactured
in Germany and dispatched to Bombay Port were to be firmly imbedded on the steel plate
(Boom) by the Poona company and delivered at Visakhapatnam where the items which
would be directly sent by the German company to the Visakhapatam Port were to be put on
the said plate under the supervision of the German engineer, Mr. Bremer.

14. The assembling at the Visakhapatnam Port was to be done at the expense of the Port
Trust. This is also clear from the fact that clause 10 of the contract provided that the Port
Trust had to provide suitable skilled and unskilled labour, scaffolds, ect., water and electricity
and pay for these items of expenditure. The Port Trust has filed a lot of documentary
evidence to prove that the Port Trust itself, as a fact, paid for all the assembling and erection
expense at Visakhapatnam as per the contract which came to Rs. 66,613.72 + Rs. 72,856 +
Rs. 33, 137.40 and Rs. 2,22,448.26 = Total of Rs. 3,97,034.66.

16. On a consideration of the terms of the contract and the mode of payment made by the Port
Trust, and other facts of the case, the ITO was of the view that the Port Trust should have
deducted tax at source in accordance with the provisions of s. 195 of the I. T. Act, 1961
(hereinafter referred to as "the Act"). The assessee raised various objections but they were
 227

overruled by the ITO who passed as order under s. 195(2) of the Act directing the assessee to
pay the tax as well as the interest under s. 20 (1A) in a sum of Rs. 2,83,44,178.

17. The assessee carried the mater in appeal before the AAC. The assessment years involved
were 1968-69 to 1974-75. In the appeal it was argued that s. 195 (2) of the Act did not apply
as the property in the money and goods passed in Germany. It was alternatively contended
that the entire amount should not be taxed inasmuch as the machinery portion was supplied in
Germany for which the payment was also made in Germany. The AAC substantially accepted
the contention of the assessee but held that so far as the interest paid along with the twenty
semi-annual instalments was concerned, it was liable to be taxed in accordance with the
provisions of s. 195 of the Act. Accordingly, he directed that the interest should be grossed-
up, i.e., the interest portion of the payment was held to fall within the mischief of s. 195 of
the Act.

18. The assesse preferred appeals to the Tribunal in so far as the interest wa concerned. The
question of interest arose only in respect of the assessment years 1970-71 to 1974-75. There
was no question of interest for the assessment years 1968-69 and 1969-70. Thus the appeal
for the assessment years 1968-69 and 1969-70 were indeed redundant. The assessee had also
filed seven appeals against the assessee. The Revenue filed seven appeals against the finding
of the appellate authority that only interest was liable to be charged to tax. That was how, in
all, the Tribunal had 21 appeals before it.

21. The Tribunal then considered the rival contentions on facts and summarised its findings
as follows :

(i) that the actual installation work or erection work or assembly work was not undertaken by
the German company to be done at their cost;

(ii) payment in respect of the sub-contract had nothing to do with the assembly, erection or
installation of the Bucket Wheel Reclaimer :

(iii) The German company merely supervised the installation :

(iv) The Port Trust did not recover any money from the German company in respect of any
part of the erection job :

(v) the activity which was carried on by the German company in relation to the supply and
delivery of the Bucket Wheel Reclaimer cannot be designated as amounting to the German
company having a permanent establishment in India within the terms and spirit of the
Agreement :

(vi) Interest is not de hors the contract and it is part of the purchase money and it is not a
separate source by itself and it forms part of the industrial and commercial profits which are
covered by the Agreement :

(vii) There is no indebtedness independent of the terms of the contract and interest is not on
any debt but it is on account of the terms of the contract itself.

22. Before this court, the learned counsel for the Department, Sri. M. Suryanarayan Murthy,
contended that the Tribunal had no jurisdiction to apply the Agreement in view of art. XVIII
 228

contained therein. He also submitted that s. 9(1) (i) of the I. T. Act was attracted as the
German company and the Poona company had "business connection" and that the Indo-
German Agreement did not override s. 9. He further submitted that art. II(1) (i) (aa), (bb), and
(dd) (1) applied to the facts of the case and thereby the German company had a "Permanent
establishment" in india, and the income was taxable by applying the latter part of the art. III.
We shall deal with the various aspects of this question a little later. He also argued that the
interest payable in DM on the 20 instalments to the German company is an independent
source income taxable under art. VIII.

23. On the other hand, the learned counsel for the assessee (Port Trust) Sri. B. V.
Subrahmanyam, contended that art. XVIII of the Agreement did not oust the jurisdiction of
the Tribunal to apply the said Agreement. He submitted further that s. 9 was subject to the
agreement and that the German company had no "permanent establishment" in India either by
itself or through the Poona company or through Mr. Bremer as contended by the Revenue. He
then argued that interest payable along with the instalments was part of the consideration for
the contract itself and was not an independent source of income on any indebtedness of the
Port Trust.

24. In our view, the points that arise for consideration are the following :

" (1) Whether, under art. XVIII of the Agreement, the remedy of moving the Competent
Authority specified therein was in substitution of the ordinary remedies of appeal, etc.,
available under the Income-tax statues of the respective countries ?

(2) Whether the German company is liable to income-tax in India on the basis that income is
deemed to accure or arise in India, directly or indirectly, through or from any 'business
connection' in India or other-wise through an agent, the Poona company, in view of section
9(1) (i) of the Income-tad Act, 1961, and, if so, what is the effect of the first part of art. III of
the Agreement on such income?

(3) Whether the German company can be said to have a 'permanent establishment' in India by
itself or through the Poona company or through Mr. Bremer so as to attract the levy of
income-tax with reference to the later part of art. II(1) (i) of the Agreement?

(4) Whether the interest payable to the German company along with each of the twenty
instalments in DM can be classified as interest arising out of any indebtedness within art. VII
of the Agreement?"

26. Model forms applicable to all countries were first prepared by the fiscal committee of the
League of Nations in 1927. Later the said committee conducted meetings at Mexico during
1943 and in London in 1946 and proposed minor variations. The model conventions were
published in Geneva in April, 1976, by the fiscal committee of the U. N. Social & Economic
Council. Later the fiscal committee of the organisation for European Economic Co-operation
(O. E. E. C.), published a draft on 6th July, 1963 (vide Halsburys Laws of England, 4th Edn.,
VOl 23, para. 1040). In the meantime in September, 1961, the organisation for Economic Co-
operation and Development (O. E. C. D.), was established to succeed the O. E. E. C. and the
draft dated 6th July, 1963, submitted to the O. E. E. C. was confirmed by the O. E. C. D.
These are called the O. E. C. D. models (vide Simon's Taxes 3rd Edn., Butterworths, p. 351,
para. F(4,401). They have been further modified in 1974 and 1977 by either the O. E. C. D.
or in individual cases by the contracting countries. The O. E. C. D. provided its own
 229

commentaries on the technical expressions and the clauses in the model conventions. Lord
Radcliffe in Ostime v. Australian Mutual Provident Society [190] AC 459, 480; 39 ITR 210,
219 (HL), has described the language employed in these Agreements as the "internal tax
language". For a complete but history of the tax treaties from 1270 in various countries and
the League of Nation and U. N. - see Dr. M. B. Rao's Books on Double Tax Treaties between
Developing and Developed Countries (Milend Publications, New Delhi, 1983). Dr. Rao
quotes M. B. Carrol to say that international tax law is "in a state of perpetual becoming" (p.
69).

48. Was the German company having a "permanent establishment" in India?

49. The word "permanent establishment" is one of those technical expressions which is
invariably used in all international Double Taxation Avoidance Agreements as these are
based on standard O. E. C. D. models.

50. In view of the standard O. E. C. D. models which are being used in various countries, a
new area of genuine "international tax law" is now in the process of developing. Any person
interpreting a tax treaty must now consider decisions and rulings worldwide relating to
similar treaties : (British Tax Review [1978] p. 394). The maintenance of uniformity in the
interpretation of a rule after its international adaption is just as important as the initial
removal of divergencies (Per Scott L. J., in Eurymedon [1938] 1 All ER 122 (CA). Therefore,
the judgments rendered by courts in other countries or ruling given by other tax authorities
would be relevant.

51. The Supreme Court of Belgium (judgment of the Supreme Court of Belgium on French-
Belgium Treaty) has held that a Belgiaan subsidiary of a French parent company was not the
parent's "permanent establishment", notwithstanding the very tight control exercised by the
parent company over the sales-territory and product lines allocated to the sub-sidiaries
notwithstanding the considerable amount of management and financial reporting which was
required of the subsidiary. This decision of the Belgium Supreme Court, if regarded as
persuasive in other countries, if of immense relief to multinational corporations (MNC)
which often do lay down strict guidelines for the operations of their subsidiaries : (vide
Michael Edwards-Ker's Book, the International Tax Treaty Service published by In-Depth
Publishing Ltd., 1978 Dublin (13)).

53. In our opinion, the words "permanent establishment" postulate the existence of a
substantial element of an enduring or permanent nature of a foreign enterprise in another
country which can be attributed to a fixed place of business in that country. It should be of
such a nature that it would amount to a virtual projection of the foreign enterprise of one
country into the soil of another country.

90. Bearing these well-settled principles in mind, it has to be seen whether interest payable on
the agreed instalments of unpaid purchase money can be treated as a separate "source" being
interest on any form of "indebtedness" contemplated in article VIII of the Agreement.

91. We are of the opinion that the interest agreed to be paid along with each of the
instalments of unpaid purchase money was agreed to be part of the sale consideration itself
and cannot be treated as an independent "source" of income. The words "any other form of
indebtedbess from sources" in the other territory can only mean interest arising or accuring as
a separate "source" of income. It cannot include interest payable on the unpaid purchase
 230

money agreed to be part of the sale consideration. There is nothing in the initial contract or
any novation converting the interest payable with the instalments as a "loan". Hence the
interest specified in clause 12(a) of the contract is, in our opinion, not liable to income-tax.

92. Therefore, we hold on the fourth point in favour of the Port Trust and against the
Department.

93. For all the above reasons, we agree with the Tribunal and answer the question referred to
us in the affirmative, in favour of the assessee, Port Trust, and against the Department, that
the assessee is immune from liability either wholly or partly to income-tax in view of the
provisions of the Double Taxation Avoidance Agreement between the Federal Republic of
Germany and India.

(ii)DCIT v. Turquoise Investment & Finance Ltd. [2008] 300 ITR 1 - S Kulshrestha, A K
Tiwari

1. The first appeals from serial Nos. 1 to 13 under Section 260A of the IT Act, 1961, have
been filed by the Department, the Dy. CIT(2) Ujjain, against the order dt. 15th July, 2003 of
the Tribunal in various income-tax appeals in the case of M/s Turquoise Investment &
Finance Ltd., Nagda, and Trapti Trading & Investment Ltd. Since all these appeals raise
similar questions, reference is being made to the facts contained in IT Appeal No. 96 of 2003.
Insofar as the appeals of the assessees are concerned, being appeals from serial Nos. 14 to 26,
the facts have been taken from IT Appeal No. 112 of 2003 which are common to all appeals.

2. Though the appeals filed by the Department have raised a large number of questions, the
appeals have been admitted on the following questions of law :

1. Whether Tribunal was justified in holding that dividend income earned by the assessee
amounting to Rs. 21,35,766 from a company called Pan Century Edible Oils SDN., BHD.
Malaysia, is not liable to be taxed in the hands of assessee in India under any of the
provisions of the IT Act ?

2. In view of Section 5(1)(c) of the IT Act, whether the finding recorded by the Tribunal that
income earned out of dividend from the company outside the country is not liable to be taxed
under the Act ?

3. Whether Tribunal was justified in law in recording a finding on an issue which was not
raised by the assessee either before the AO or before the CIT(A) but was raised for the first
time before the Tribunal and that too in an appeal filed by the Department ?

4. Having dismissed the cross-objection filed by the assessee, whether the tribunal was
justified in then proceeding to decide the issue raised by the assessee on merits in their favour
?

3. The facts lie in a narrow compass. The assessee-company filed its return of income
declaring income of Rs. 4,30,06,580 by showing its business as investment and finance,
 231

which was processed under Section 143(1)(a) on 18th Jan., 1996 on the same income and
demand amounting to Rs. 1,07,370 was issued by rejecting the credit claimed by the
assessee-company on the basis of deemed credit on dividend received from Pan Century
Edible Oils Sdn., Bhd, Malaysia.

4. The company filed an appeal before the CIT(A) against the said order which was decided
by order dt. 7th Aug., 1996, passed in IT/86/9697/204 with the finding that the claim of the
appellant for credit of deemed TDS on dividend to be allowed towards TDS for the year
under appeal. The Department, therefore, preferred an appeal before Tribunal which was
decided by order dt. 15th July, 2003 with the observation that DTAA entered into with any
country would override the provisions of IT Act, 1961, if they are at variance from the
provisions of the Act. It held that from a plain reading of art. XI of the DTAA, it was clear
that dividend income would be taxed only in the Contracting States where such income
accrued. Aggrieved by the said judgment of the Tribunal, the Department has preferred this
appeal.

12. In the above case, the assessee carried on business of rubber plantation in Malaysia and it
was held that he did not have a PE in India. The tax officer held that the income derived by
the assessee was assessable in India and brought the same to tax against which an appeal filed
to CIT(A) failed. The matter was carried to the Tribunal. The Tribunal after examining
various contentions raised before it, confirmed the order of the CIT(A) and held that : (1)
since the assessee had no PE for business in India, the business income in Malaysia could not
be included in income in India, and (2) since the property was situated in Malaysia, capital
gains cannot be taxed in India. Thereafter the matter was carried by way of a reference to the
High Court. The High Court held that the finding of the Tribunal was in accordance with the
provisions of the agreement for avoidance of double taxation of income.

13. After discussing the argument advanced before the Court, their Lordships made the
following observations :

We need not enter into an exercise in semantics as to whether the expression 'may be' will
mean allocation of power to tax or is only one of the options and it only grants power to tax
in that State and unless tax is imposed and paid, no relief can be sought. Reading the treaty in
question as a whole, when it is intended that even though it is possible for a resident in India
to be taxed in terms of Sections 4 and 5, if he is deemed to be a resident of a Contracting
State where his personal and economic relations are closer, then his residence in India will
become irrelevant, the treaty will have to be interpreted as such and prevails over Sections
4 and 5 of the Act. Therefore, we are of the view that High Court is justified in reaching its
conclusion, though for different reasons from those stated by the High Court.

14. Learned counsel for the Department has not been able to dispute that this decision of the
Supreme Court squarely upholds the decision of the Madras High Court in CIT v. VR.
S.R.M. Firm (supra). In view of the above decision, the question No. 1 is answered against
the Department and in favour of the assessee.

15. Coming to the question Nos. 3 and 4, whether the issue could be raised by the assessee
before the Tribunal for the first time and having dismissed the cross-objection, the Tribunal
could proceed to give a finding on the same, the learned counsel for the assessee has invited
our attention to the decision of the CIT(A) Ex./C in IT Appeal No. 112 of 2003 in which
reference has been made to the decision of the Hon'ble Madras High Court in CIT v. VR.
 232

S.R.M. Firm (supra), but he has erroneously stated that it was held in the said decision that
the said dividend is taxable in India under Sections 8 and 9 of the IT Act, 1961, though the
decision holds to the contrary. Learned counsel, therefore, contends that the fact that the said
decision was cited bears testimony to the fact that contention was raised with regard to the
non-taxability of the dividend earned in Malaysia in India under the agreement in question.
Learned counsel has further submitted that in the appeals filed by the respondents, they have
clearly raised the questions that the Tribunal was not justified in dismissing the cross-
objection filed by the assessee on the ground of limitation specially when it took the view that
the dividend income was not taxable in India. Attention has also been invited to Rule 27 of
the ITAT Rules, 1963. The said rule reads as under:

27. The respondent, though he may not have appealed, may support the order appealed
against on any of the grounds decided against him.

16. Reference has also been made to the decision of the apex Court in National Thermal
Power Co. Ltd. v. CIT in which their Lordships have observed that the power of the Tribunal
in dealing with appeals is expressed in widest possible terms. The purpose of assessment
proceedings before the taxing authorities is to assess correctly the tax liability of an assessee
in accordance with law. If, for example, as a result of judicial decision given while the appeal
is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible
deduction is denied, there is no reason why the assessee should be prevented from raising that
question before the Tribunal for the first time, so long as the relevant facts are on record in
respect of the item. From the above position it is clear, that if the material is on record on the
basis whereof objection can be raised, the parties to the appeal cannot be precluded from
raising such contention, especially the respondent, in view of Rule 27 of the ITAT Rules,
1963, quoted above. We are, therefore, of the considered view that both questions No. 3 and
No. 4 in the Department's appeal deserve to be answered against the Department. In view of
the wide powers that the Tribunal is invested with, as clearly referred to and spelt out by their
Lordships in their decision in National Thermal Power Co. Ltd. (supra), the Tribunal cannot
be precluded from considering the questions of law arising in an assessment proceeding not
raised earlier, and restricted to issues arising out of appeal before the CIT(A). The assessees
have also filed appeal from item Nos. 14 to 26 captioned above. Though a large number of
questions have been raised by the assessees, the appeals have been admitted on the following
questions, as formulated in IT Appeal No. 112 of 2003.

(i) Whether the Tribunal was justified in dismissing the cross-objection filed by the appellant
(assessee) on the ground of limitation and if so, whether such finding is sustainable in law ?

(ii) Having considered the case of the assessee on merits and recorded a categorical finding
on the merits of the case to the effect that dividend income received from Pan Malaysia
cannot be taxed in India, did it not result in allowing the cross-objection so submitted by the
appellant/assessee ?

(iii) Having held in favour of the assessee that the dividend income in question is not taxable
in the hands of assessee, was it not necessary for the Tribunal to have further recorded the
finding that issue relating to grant of credit sought by the assessee has become redundant and
hence need not be gone into ?

(iv). Having decided the issue in favour of the assessee, whether the Tribunal was justified in
then allowing the appeal filed by the Department or the Tribunal should have then either
 233

dismissed the appeal filed by the Revenue or should have held it to have rendered infructuous
in the light of a categorical finding recorded in favour of the assessee ?

17. Though in view of our answer to the questions formulated in the Revenue appeals, it is
not necessary to decide the questions formulated in the appeals filed by the assessees, we may
observe that since we have held that the dividend income is not chargeable under the Act in
view of the agreement, the question with regard to the grant of credit for the TDS in relation
therewith, is rendered redundant.

18. The above appeals are accordingly disposed of with no order as to cost.

18. Black Money Recovery Act:

(i) Mayawati vs. CIT (2010) 321 ITR 349 (Del)

Both these appeals are filed by the revenue. They are directed against two separate orders of
CIT (A) dated 7th April, 2010 and 19th April, 2010 in respect of assessment years 2001-02
and 2002-03 respectively. Grounds of appeal in both the appeals are as under:-

ITA No.3157/Del/2010 (A.Y. 2001-02)

1. The order of the learned CIT(A) is not correct in law and facts
2. On the facts and circumstances of the case, the learned CIT(A) has erred in law and on
facts in quashing the assessment on the grounds that the Assessing Officer did not issue and
serve notice under section 143(2) of Income- tax Act 1961 without appreciating that the
assessment was completed under section 147/144 in view of continued non compliance to
notice u/s 142(1) dated 3.11.2008, as per the provisions of section 144(1)(b) of the Income-
tax Act, 1961.

3. On the facts and circumstances of the case, the learned CIT(A) has erred in law and on
facts in holding that provisions of section 292BB of Income- tax Act 1961 were not
applicable prior to assessment year 2008-09 whereas the provisions of this section are
procedural in nature and are applicable to any proceedings after 01.04.2008.

4. On the facts and circumstances of the case, the learned CIT(A) has erred as he failed to
note the huge gap between the receipt of sale proceeds of M/s Sylverton Hotel and the gift to
the assessee and the failure of the assessee to establish an accounting link between the two.

5. On the facts and circumstances of the case, the learned CIT(A) has erred as he failed to
note that the income returned by Shri Ashok Kumar Jain was far below his capacity to give
gifts of the amounts given to the assessee and that his so called creditworthiness was based
almost entirely on the basis of market value of ancestral property which was not indicative of
his capacity to give gifts.

6. On the facts and circumstances of the case, the learned CIT(A) has erred by way of
ignoring the findings of ADIT(Inv.) Ghaziabad, which were reproduced by the Assessing
Officer in the remand report, regarding the genuineness of transactions /and creditworthiness
of donors after he had himself remanded the issue of gifts back to the Assessing Officer for
re-examination.
 234

7. On the facts and circumstances of the case, the learned CIT(A) has erred as he failed to
note that the assessee has not been able to furnish any evidence of receiving Gold
Mukuts/Talwars from her supporters in the said assessment year .

8. On the facts and circumstances of the case, the learned CIT(A) has erred by way of
ignoring the fact that not only the authenticity of the so called wills of the assessee's
grandfather and his brother could not be proved by the assessee but also the fact that the
assessee had no other proof to show that these donors were in fact the donors and had the
creditworthiness to make such gifts.

9. The appellant craves leave to add, alter or amend any/all of the grounds of appeal before or
during the course of the hearing of the appeal.

16. On merits, after examining the facts and evidence placed by the assessee on record, Ld.
CIT (A) has come to the conclusion that additions were not liable to be sustained.

17. The department in its appeal is aggrieved by such findings of the CIT (A).

20. She contended that in the present case the assessee has failed to comply with all the terms
of a notice issued under sub-section (1) of Section 142 and, therefore, the Assessing Officer
was well within his power to frame the assessment u/s 144 without adhering to the
requirement of issue of notice u/s 143 (2).

21. She submitted that non-service of notice u/s 143 (2) at best can be seen in the context of
non-grant of proper opportunity to the assessee to present her case and, according to the facts
of the present case such opportunity is not lacking. She pleaded that according to following
decisions, the failure to serve notice u/s 143 (2) is only a defect which is rectifiable in the
remand proceedings by the Assessing Officer:-

(i) Areva T and D India Ltd. 294 ITR 233 (Mad)

(ii) CIT vs. Gyan Prakash Gupta 165 ITR 501 (Raj)
(iii) CIT vs. Baba Mohan Singh 90 ITR 197 (All)

22. She pleaded that the Assessing Officer has recorded a finding in the remand proceedings
that adequate opportunity is afforded to the assessee to present her case and Ld. CIT (A) has
also considered the views of the Assessing Officer and the evidence led by the assessee in the
remand proceedings and, therefore, one fails to understand that how the assessment can be
quashed by taking recourse to judgement of Hon'ble Supreme Court in the case of CIT vs.
Hotel Bluemoon (supra) as the defect was rectified by the CIT (A) himself by remanding the
proceedings to the Assessing Officer and such plea of the department is without prejudice to
the belief that assessment was validly framed u/s 144 (1) (b) of the Act.

23. She further pleaded that provisions of Section 292 BB are procedural provisions,
therefore, applicable even prior to assessment year 2008-09. Therefore, she pleaded that Ld.
CIT (A) could not have quashed the assessment.

8. Learned CIT(A) has erred in creditworthiness and capacity to make law and on facts in
ignoring the such gifts. The CIT(A) has chosen to lay on fact that not only the the onus of the
Assessing Officer without authenticity of the so called noticing that the assessee had failed to
 235

WILLs of the assessee's discharge her own onus by furnishing any grandfather and his
brother tangible proof in support of her claims. could not be proved by the assessee but also
the fact that the assessee has no other proof to show that these donors were in fact the donors
or had the creditworthiness to make such gifts.

9 Learned CIT(A) has erred in law This issue has been detailed in para 6 and on facts in
allowing at pages number 16 & 17 of the remand expenditure on engagement of report
submitted by the Assessing Officer.

29. It was further submitted by Ld. AR that Ld. CIT (A) has rightly held that even Section
292 BB cannot be applied to hold that the assessment is valid as according to the decision of
Special Bench in the case of Kuber Tobacco Products Pvt. Ltd. (supra) the provisions
of Section 292BB are applicable from assessment year 2008-09 and the present assessment
year is only A.Y. 2001

30. He also relied upon the decision of Hon'ble Delhi High Court in the case of CIT vs. Mani
Kakar 18 DTR 145 (Del) wherein the similar proposition has been laid down. Ld. AR
submitted that Ld. Assessing Officer in remand report has mentioned that notice u/s 143 (2) is
not a statutory notice and the purpose of such notice is to give opportunity only and it is not
fatal to the validity of the assessment and to complete that irregularity the notice u/s 143 (2)
is being issued on 27th January, 2010 in the remand proceedings. He invited our attention
towards the findings recorded by Ld. CIT (A) in para 5.3 at page 26 to 28 of the appellate
order that notice u/s 143 (2) was not issued though return was filed in response to notice u/s
148. He submitted that the assessee in her letter has clearly stated that the return originally
filed may be treated as return in response to notice u/s 148 and such fact is recorded in the
assessment order itself in para 12 at page 6 and 7 of the assessment order. He submitted that
though the date of assessee's letter is not mentioned, but it is dated 26th February, 2009 and
such letter is return of income as held in the following cases:-

(i) Dr. K.C. Verma vs. ACIT 84 ITD 33

(ii) Tiwari Kanhaya Lal and Ors vs. CIT 154 ITR 109 (Raj)

45. It is also to be examined that according to facts of the case whether it was impossible for
the Assessing Officer to issue the notice u/s 143 (2) due to paucity of time as mentioned by
the Assessing Officer in para 13 of the assessment order. The sequence of date has been
tabulated in the order of CIT (A) in para 6. Section 153 (2) governs the time limit for
completion of re- assessment. According to second proviso to sub-section (2) of Section 153,
in a case where the notice u/s 148 was served on or after first day of April, 2005, the
provisions of sub-section (2) shall have effect as if the words "one year", the words "nine
months" had been substituted. Therefore, the time limit to frame the re-assessment
proceedings in the present case will be after the expiry of nine months from the end of the
financial year in which the notice u/s 148 was served. The revenue in the present case has
furnished an affidavit before the Hon'ble High Court in the Writ Proceedings that the assessee
must be deemed to have been served in Lucknow on 2nd April, 2008. The observations of
their Lordships on this issue in the order dated 13th February, 2009 vide which the assessee's
writ was dismissed are as under:-

"An important question is whether a noticee can insist that service must be effected upon
him/her only at a specified address. It would be recalled that the notice dated 25.3.2008 had
been personally taken to C-1/11, Hamayun Road, New Delhi where the Inspector was told to
 236

dispatch it to property No.3, Survey No.105, Nehru Road, Cantonment, Lucknow, Uttar
Pradesh. There is no averment in the petition to the effect that on 29.3.2008 the petitioner was
not in Delhi or that she would have gained knowledge of the contents of the notice unless it
had been served upon her in Lucknow. In today's day and age reaching even the remotest
parts of the globe is possible within 3 day. Even if the petitioner was not in Delhi on
29.3.2008, she could have been informed almost instantaneously of the service of the notice
even if she was in Lucknow. It is, therefore, a moot question that the petitioner must be
deemed to have been served in New Delhi on 29.3.2008 since those were the premises
allotted to her by the Government of India in her status as a Member of Parliament. We do
not have to give a definitive answer on this issue since it is the position of the Revenue that
that the petitioner must be deemed to have been served in Lucknow on 2.4.2008. According
to the Revenue, the notice dated 25.3.2008 was dispatched to C-1/11, Humayun Road, New
Delhi- 03 by speed post on 29.3.2008. We have perused the envelope and the postal receipt
bears this statement to be correct. The Court cannot but presume that the postman had visited
property No.3, survey No.105, Nehru Road, Cantonment, Lucknow, Uttar Pradesh and was
thereupon redirected to serve the notice at 5, Kalidas Marg, Lucknow, Uttar Pradesh. The
Postman's endorsements translated from Hindi reads thus:-
"Stated that the notice was not received at the official residence of the Chief Minister, 5,
Kalidas Marg and was told to deliver it at the earlier written address, that is, property No.3,
Survey No.105, Nehru Road, Cantonment, Lucknow, Uttar Pradesh."
55. From the above, it is clear that in a case where return is filed and Assessing Officer is not
satisfied with the return so filed and he also proceeded to make the assessment, then, unless
notice u/s 143 (2) is issued, assessment cannot be validly framed. The issue and service of
notice u/s 143 (2) is not a procedural irregularity and the same is not curable and the
requirement to issue notice u/s 143 (2) cannot be dispensed with.

56. In view of the above discussion, the factual position being that notice u/s 143 (2) is not
issued and return filed by the assessee has been tinkered, therefore, the absence of notice u/s
143 (2) will invalidate the assessment proceedings and that has rightly been held by CIT (A)
that the assessment is invalid and void ab initio in the absence of notice u/s 143 (2). The
finding of the Ld. CIT (A) are based on facts and is in accordance with the law explained by
Hon'ble Supreme Court in the case of ACIT vs. Hotel Bluemoon (supra) and jurisdictional
High Court in the case of DCIT vs. Pawan Gupta (supra) and these findings of the CIT (A)
are upheld.

64. With respect to the objection of the assessee that Investigation Wing called the donor
ladies to investigate about the declaration made by them under the scheme as no proceedings
were pending against the assessee and Circular No.754 dated 10th June, 1997 prohibits such
inquiry, Ld. Assessing Officer has observed that such contention of the assessee is not
correct. The department was conducting the inquiries in accordance with the decision of
Hon'ble Supreme Court in the case of Taj Heritage Corridor Project and, thus, the inquiry
made by the Investigation Wing was a proper inquiry.

65. So as it relates to the request of the assessee vide letter dated 24th December, 2009 for
permission to cross examine a number of people like Shri Jaswinder Singh, Village Sarpanch,
three donor ladies, Shri Rakesh Sharma, an employee of Canara Bank and the officers who
have made the inquiry in the year 2004, the Assessing Officer observed that it will be
worthwhile to examine the necessity for granting such opportunity in each case. So as it
relates to Shri Jaswinder Singh and two of the donor ladies namely, Gurucharan Kaur and
 237

Smt. Swaran Kaur, the Assessing Officer referred to the letter filed by the assessee on 11th
December, 2009 in which it was submitted that the assessee wish to produce Shri Jaswinder
Singh, the Sarpanch and also other eminent person from the village who were well aware of
the social status of late Shri Kanshi Ram, founder of the Bahujan Samaj Party and his family
members including the donor ladies and vide letter dated 17th December, 2009, the Assessing
Officer had informed the assessee that permission is granted to produce those persons on 24th
December, 2009 at 11 AM. The Assessing Officer observed that instead of producing those
witnesses on 24th December, 2009, the assessee has filed an application asking the
department to produce them for cross examination and, thus, the Assessing Officer inferred
that the assessee is not really serious about examination of those witnesses and has merely
put in request to desperately create some legal lacuna as a diversionary technique to cover up
her failure to produce witness in support of her case. The assessee has changed her stance of
production of Shri Jaswinder Singh on the pretext that the department has specifically
examined him. The Assessing Officer observed that copy of statement of Shri Jaswinder
Singh who was examined by Investigation Wing on 14th December, 2009 was given to the
assessee on 17th December, 2009 and the assessee is relying on the said statement to argue
her case. The assessee is also relying on the statement given by three donor ladies to contend
that they have confirmed the fact of giving gifts to the assessee and when the assessee herself
is relying upon those statements and has not availed opportunity to produce them, in view of
these facts the request of the assessee for cross examine, when the case is shortly to be time
barred by limitation, is nothing more than a dilatory tactics. In regard to the statement of Shri
Rakesh Sharma, the Assessing Officer observed that no such statement of Shri Rakesh
Sharma is available on record or is in his knowledge and no such statement is being used
against the assessee. It is also observed by the Assessing Officer that the department has
never alleged that any one else, apart from the lady donors, opened the bank accounts relating
to them. Thus, the Assessing Officer observed that no purpose would be served by cross
examining Shri Rakesh Sharma in view of the fact that the case is going to be time barred
shortly, the request for cross examining is denied. So as it relates to the cross examination of
the officers who examined the donor ladies, etc., the Assessing Officer observed that all the
facts collected by those officials have been presented to the assessee for rebuttal and the
assessee has exercised her option to rebut these facts, therefore, there is no need for further
cross examination of the officials. The Assessing Officer observed that principles of natural
justice have been adhered to and the assessee could not have any cause to complain about the
manner in which the department conducts its investigations.

66. Finally, the Assessing Officer observed that the mere fact that the donees have declared
this amount under VDIS, 1997 is not enough to hold that these gifts were explained in the
hands of the assessee. There is sufficient evidence to show that the assessee played a
significant role in opening of the bank accounts and declaration u/s VDIS, 1997. The assessee
is specifically seen to be the beneficiary of such efforts and that is a good evidence to
consider such gifts as unexplained investment u/s 69. The declarations made by donor ladies
is not in accordance with the provisions of VDIS, 1997. The assessee cannot claim benefit of
Circular No.754 which is applicable only to valid declarations and even if it is argued the
declarations are valid, the law laid down by Hon'ble Supreme Court in the case of Rattan Lal
(supra) must prevail in terms of aforementioned decision of Hon'ble Supreme Court in the
case of Rattan Melting & Wire Industries (supra).

67. The Assessing Officer observed that the money is assessable as unexplained income in
the hands of the assessee in the year under consideration and, in this manner, the amount of `
 238

69,96,000/- being gift received by the assessee from three donor ladies has been added to the
income of the assessee as unexplained investment.

68. In the appeal filed before CIT (A), apart from agitating the addition of Rs.69,96,000/-, the
issue of validity of initiation of re-assessment proceedings was also raised. The issue of
validity of reassessment has been decided against the assessee. The assesse is not in further
appeal against the said issue. Therefore, the only question pertains to the issue that whether or
not, in the facts and circumstances of the case, the addition has rightly been deleted by the
CIT (A) with respect to gifts received by the assessee from aforementioned three ladies
aggregating to ` 69,96,000/- . It was submitted before the CIT (A) that the assessee had
received gifts from donors who had made disclosures under VDIS 1997. It was submitted that
VDIS, 1997 granted a very clear immunity to the declarants from inquiries of any kind about
the disclosures made by them. Valid declarations under VDIS, 1997 are possessed by the
donors which are subsisting. Reference was made to Sections 64, 71 and 72 of the Finance
(Amendment) Act, 1997 and it was pleaded that Section 72 clearly mention that no court or
any other authority shall be entitled to require any public servant or the declarant to produce
before it any such declaration or any part thereof or to give any evidence thereto in respect
thereof. Reference was also made to the clarification given by Finance Minister at the India
Merchant Chambers on 31st October, 1997 in which it was stated that a solemn promise is
made by the Parliament that there will be a confidentiality of the declarations made. It was
submitted that the inquiries made by the Investigation Wing, on which the Assessing Officer
has placed reliance, have become null and void due to Section 72 of the scheme. Further
reference was made to questions and answers given in Circular No.754 and 755 dated 10th
June, 1997 and 25th July, 1997, Nos. 9, 11, 14, 15, 44 and 51 and it was submitted that the
Assessing Officer was wrong in stating that the declarations made by the three ladies were
not covered by Circular No.754 dated 10th June, 1997. It was submitted that the gifts were
made by the donors out of the bank accounts owned and operated by them. The amount
deposited in the bank accounts of the donor ladies is covered by the voluntary deposit scheme
and the amount remained deposited till the same was given to the assessee. The assessee was
known to those ladies. Their statements were recorded by the department and, therefore, it
cannot be said that either identity or their capacity could be doubted and they have admitted
to have made the gift and gift is through banking channel and are genuine, therefore, all the
three ingredients of making gifts were proved.

69. It was submitted that the Assessing Officer has relied upon the earlier scheme and
clarification dated 17th February, 1986 which was issued in respect of earlier scheme
whereas in the case of the assessee question No.14 & 51 of the Circular No.754 relating to
the relevant scheme were applicable. Reference was also made to question No.11 and answer
thereto wherein it was stated that declaration issued by the Commissioner shall be final. It
was submitted that the facts that the donor ladies were not having place of residence in Delhi
and they had opened their bank account in Delhi and Mr. Rakesh Sharma, a bank employee
introduced their bank account were not having much relevance to the question of capacity of
the donors and the deposit in the bank accounts of the donors is a concrete proof of credit
worthiness and financial capabilities of the donors. It was submitted that the case law relied
upon by the Assessing Officer was not applicable at all as that was in respect of earlier
schemes.

70. It was submitted that the factum of gift was supported by the affidavit- cum-gift deed
filed by all the lady donors. The ladies had appeared before the Investigation Wing and had
admitted the fact of gifts having been made and various evidences were filed before the
 239

Assessing Officer to prove the financial status of the ladies. It was submitted that the
Assessing Officer did not give opportunity to cross examine. Reference was made to the
decision of Delhi High Court in the case of CIT vs. SMC Share Brokers Ltd. 288 ITR 354 to
contend that in the absence of opportunity to cross examine, the assessment would be null
and void. Ld. CIT (A) has accepted such submission of the assessee and referring to the
decision of Hon'ble Supreme Court in the case of Kishan Chand Chela Ram 125 ITR 713 and
Delhi High Court in the case of CIT vs. S.M. Aggarwal 293 ITR 43 (Del) he has held that
where such opportunity of cross examine is not provided, the assessment is required to be
quashed. So as it relates to financial capacity of the donors, Ld. CIT (A) after having
considered the evidence referred to by the assessee has observed in para 5.2 that after having
considered the submissions of the assessee and statement of Sarpanch of village as well as
secret inquiries made by the departmental officers, all the statement and inquiry indicate that
the donors were from respectable family having their own house, business, agricultural
income, etc. The donor ladies have also declared their income under VDIS, 1997 and held a
valid certificate of declaration of income. The money declared was deposited in the bank
account which remained in the bank account for four years and, therefore, the declaration of
income and the credit of money in the bank account is a proof of credit worthiness which
needs acceptance. Therefore, he allowed this ground of the assessee that the donors were
having credit worthiness and capacity to advance the gift.

71. So as it relates to the contention of the assessee that provisions of Section 69 could not be
applied to the impugned amount, Ld. CIT (A) observed that keeping in view the fact of
subsisting valid declaration and acceptance of the department of the donor laides in respect of
VDIS 1997, it could not be held by the Assessing Officer that the declarations of the donor
ladies were not in accordance with the provisions of VDIS, 1997. The affidavits filed by
donor ladies and various statements made by them during the course of investigation and
assessment proceedings have clarified that these gifts made by them were out of love and
affection and without consideration and the same were accepted by the donee. There is no
evidence on record to prove that the contents of the affidavit or submissions were not true,
therefore, the Assessing Officer was wrong in holding that money received by the assessee
belonged to the assessee herself as the same is not factually correct and legally acceptable.
Ld. CIT (A) has recorded a finding that these gifts had directly come from the respective
bank accounts of the donors by account payee cheques and credited to the account of the
assessee and such fact is not disproved by the Assessing Officer and since the source of
amount credited is clearly established and the amount having been received from bank
accounts of the donor ladies, the source of which were valid declarations made under the
VDIS scheme, 1997, the conclusion of the Assessing Officer that amounts are unexplained
investment of the assessee is unfounded and has no factual or legal basis. The source of `
69,96,000/- has been clearly explained and, thus, he has deleted the addition. The revenue is
aggrieved and has raised the aforementioned grounds of appeal.

72. After narrating the facts, Ld. CIT (DR) argued that the Assessing Officer while making
the addition has relied upon the following decisions:-

i) P. Mohanakala vs. CIT 291 ITR 278 (SC)

ii) RadheyShyamTibrewal vs. CIT 145 ITR 186 (SC)
iii) Pioneer Trading Syndicate vs. CIT 120 ITR 5 (All)
iv) SajanDass& Sons vs. CIT 264 ITR 435 (Del)
v) Sandeep Kumar (HUF) vs. CIT 293 ITR 294.
 240

73. She submitted that Ld. CIT (A) himself has agreed that the voluntary disclosure schemes
of 1976 and 97 are parimateria and if it is so the principles of law laid down by the decisions
of Hon'ble Supreme Court with respect to earlier scheme will automatically apply to the new
scheme. She submitted that the CIT (A) has wrongly stated that the facts of Rattan Lal's case
are different from the facts of the case of the assessee as in that case also certain declarations
were made by other declarants under the scheme of 1965 which was sought to be made the
basis to claim the immunity by the assessee and it was held by Hon'ble Court that immunity
under the scheme is confined to the declarants and it does not extend to any other party
receiving gifts/amounts from the declarants. She submitted that the principles of law laid
down in the said case are clearly applicable to the case of the assessee as, in the present case,
the assessee has received gifts from the declarants of VDIS, 1997 and the assessee has
claimed immunity from investigation and, therefore, the case law in the case of Rattan Lal
(supra) is applicable to the case of the assessee.

74. She further submitted that according to the decision of Hon'ble Supreme Court in the case
of HemlataGargayi vs. CIT 215 ITR 1 and Jamuna Modi 292 ITR 209, when an assessee
claims the benefit of exemption scheme, they are bound to apply strictly with the requirement
of the scheme and further all the conditions precedent, otherwise such benefit may be denied
to them. She submitted that in the instant case the Assessing Officer has outlined a long list of
false declarations and omissions by the three ladies in the declaration made before the
Commissioner and in the subsequent conduct of the declarants and, thus, the Assessing
Officer has rightly concluded that such declarations are not valid declarations u/s 64 of VDIS,
1997 and, thus, the assessee cannot enjoy the benefit of Circular No.754. Reference was
made to the decision of Hon'ble Allahabad High Court in the case of Pioneer Trading
Syndicate vs. CIT 120 ITR 5 (All) to contend that the certificate issued by the Commissioner
does not in any way change the fact of invalid declaration as CIT did not have option, but to
accept the declaration made by the declarant. Referring to the decision of Hon'ble Gauhati
High Court in the case of RadheyShyamTibrewal vs. CIT 125 ITR 393, it was submitted that
there is nothing in the scheme that makes declaration and certificate to be final or conclusive
in respect of proceedings against persons who are not declarants. While declarations made
and certificate granted by the Commissioner were relevant pieces of evidence and they are
neither final nor conclusive and if the revenue finds that the credit represents the income of
the assessee, the same can be assessed as income of the assessee from undisclosed sources.
She pleaded that the amount may be added in the income of the assessee notwithstanding the
fact that the declarations were accepted by the department in the donors' hand and to support
such contention reliance was placed on the decision in the case of Rattan Lal (supra) and she
pleaded that all these decisions have been ignored by the CIT (A). She pleaded that the
decision of CIT (A) that benefit of Circular No.754 is to be given to the assessee is perverse
since the same is against the judicial precedence laid down by the various courts.

75. It was submitted that the Assessing Officer did not question the validity of the certificate
issued by CIT under the scheme and he was also not required to do so as even the presence of
these certificates does not debar the Assessing Officer from proceeding against the assessee.
Thus, she pleaded that Ld. CIT (A) is incorrect in holding that the Assessing Officer has
questioned the validity of these certificates. What the Assessing Officer has done is that he
has denied the benefit of Circular No.754 to the assessee on account of the fact that the
declarations made by the declarants were not in accordance with Section 64 and 68 of VDIS,
1997.
 241

76. It was submitted that while upholding the credit worthiness and financial capacities of the
donor ladies, Ld. CIT (A) has greatly relied upon the statement of Sarpanch who had given
the contrary statements at different points of time. She submitted that the CIT (A) failed to
note that the Sarpanch had given his statement based on mere hearsay and there no single
piece of material evidence placed on record to substantiate his statement that the father of the
three ladies was a man of good means and could afford to make gifts of that magnitude to his
daughters. She submitted that the CIT (A) has ignored the plethora of evidence collected by
the Assessing Officer in this regard. He could not rely simply upon the statement of Sarpanch
and, thus, the order of CIT (A) vide which it has been held that Shri Hari Singh was credit
worthy is perverse.

77. She submitted that the assessee herself asked permission to produce Sarpanch of the
village and, also many other persons who were aware of the social status of late Shri Kanshi
Ram and his family and when the assessee was given such opportunity to produce them on
24th December, 2009, the assessee, instead of producing those persons filed a petition
requesting the department to produce them for cross examination and, therefore, the
Assessing Officer was right in holding that the assessee was not serious about producing
those witnesses and was only putting such request to create some legal lacuna to cover up her
failure to produce witnesses. She submitted that even specifically during the course of
assessment proceedings the assessee submitted that she does not want to cross examine the
witnesses as she considered the entire inquiry as illegal. Thus, it was pleaded by CIT, DR that
the CIT (A) has erred in holding that the assessee was not allowed opportunity to cross
examine the witness and his findings in this regard are perverse because Ld. CIT (A) has
overlooked the conduct of the assessee at all stages of the proceedings.

78. She submitted that Ld. CIT (A) has erred in holding that the donors came from
respectable families and cited certain properties in support of this fact, but Ld. CIT (A) has
failed to observe that most of the properties pertained to the period much later than the
purported gifts and, thus, they cannot constitute the proof of credit worthiness of the donors.
She submitted that it is also not the claim of the donors that they have paid the amounts of
gifts out of their own income from properties. She submitted that there is no evidence on
record to show that Shri Hari Singh was having credit worthiness to give the money to his
daughters.

79. She submitted that Ld. CIT (A) is also incorrect in citing that there is no evidence to
prove that the contents of affidavits and statements are untrue as he has ignored the plethora
of evidence collected by the Assessing Officer which showed that how the assessee had
manipulated the deposits into the bank account. She submitted that the providing of money
by Shri Hari Singh to his daughters of that magnitude was a mathematical mistake. Finally
she submitted that the Assessing Officer has clearly made a different case whereby he has
virtually proved that apparent is not real and referring to the decision of Hon'ble Supreme
Court in the case of SumatiDayal vs CIT 201 ITR 802, it was pleaded that what has been
presented by the assessee is not real and Ld. CIT (A) has chosen to ignore all the surrounding
circumstances and, therefore, the order passed by the CIT (A) is perverse and should be set
aside and that of Assessing Officer be restored.

80. It was submitted by Ld. AR that the three donor ladies were very close to the assessee and
they have given gifts out of their own income which was declared by them in VDIS, 1997 on
which the taxes were paid and declarations were accepted as such by CIT and necessary
certificates were issued and subsisting. He submitted that vide copies of reply submitted
 242

before the Assessing Officer at pages 4, 10 and 16 of the paper book, the assessee had
submitted all the facts and had enclosed various evidences in which the donors had confirmed
the fact of having made gifts by way of affidavit and by way of statements recorded on oath
and these gifts were out of sum declared in VDIS as back as 1997 and the amount was lying
in their respective bank accounts since then.

81. Coming to evidence submitted in respect of each donor, Ld. AR referred to the following
pages of paper book:-

Mrs. Kulwant Kaur

i) Page 136 which is copy of affidavit of Mrs. Kulwant Kaur, stating that the impugned gift
has been made to the assessee.
ii) Paper Book page 148 and 149 being copy of bank passbook of Mrs. Kulwant Kaur
showing the impugned gift made on 4th December, 2001 and submitted that it was paid out
of a sum of ` 28,60,000/- deposited by her in her bank account on 2nd December, 1997 being
income declared in VDIS.
iii) Page 150 is VDIS certificate wherein the declared cash of ` 28,60,000/- has been accepted
by the CIT.
iv) Page 55 and 56 is the copy of the statement given by Smt. Kulwant Kaur recorded on oath
on 31st January, 2004 wherein she has stated that she knows the assessee who is a social
worker and she had given the gift to the assessee and the said gift was given as per wish of
her father and the money was received by her from her father 10-12 years back.
v) Paper book pages 126 to 135 contains the details of nature of the assets owned by her.
vi) Paper book page No.100 to 107, statement of Sarpanch Mr. Jaswinder Singh recorded on
14th December, 2009 in which he has stated that Shri Hari Singh, father of three donor ladies
had good financial position.

Mrs. Swaran Singh

i) Page No.137, affidavit of Smt. Swaran Kaur, stating the gift having been made to the
assessee.

ii) Paper book page Nos.142 to 146 copy of the bank passbook of Mrs. Swaran Kaur showing
the gift made on 3rd December, 2001 and the same was paid out of a sum of ` 28,60,000/-
deposited by her in her bank account on 2nd December, 1997 being income declared in
VDIS.

iii) Page No.151 is VDIS certificate of Smt. Swaran Kaur in which she declared cash of `
28,60,000/- and it is accepted by the CIT.

iv) Paper book page 63 to 70, the statement of Mrs. Swaran Kaur recorded on 30th January,
2004 wherein she has stated that she knows the assessee who is a social worker and she made
the gift to the assessee and similarly she has accepted that this gift was made as per wish of
her father and she got the money from her father about 11-12 years back.

Mrs. Gurcharan Kaur

 243

i) Paper book page 136 is an affidavit by Smt. Gurcharan Kaur stating that the impugned gift
was made to the assessee.

ii) Paper book pages 139 to 141 is the copy of bank passbook of Mrs. Gurcharan Kaur
showing the impugned gift made on 3rd December, 2001 out of ` 28,60,000/- deposited by
her in the bank account on 2nd December, 2001 being income declared under VDIS, 1997.

iii) Page 152 is VDIS certificate issued to Smt. Gurcharan Kaur where the declared cash of `
28,60,000/- has been accepted by the CIT.

iv) Page 46 to 54 is the copy of statement recorded by the department on 30th January, 2004
wherein she has stated that she knows the assessee and the assessee is a social worker and the
gift was given as per wish of her father and the money was received by her from her father
10-12 years back.

v) Pages 121 to 125 contains the details of assets owned by Mrs. Kulwant Kaur.

82. Then, Ld. AR carried us through submissions made before the Assessing Officer and CIT
(A). He referred to pages 22 to 32 which are the submissions made before the Assessing
Officer vide letter dated 24th December, 009 the copy of which is filed at pages 19 to 42 of
the paper book regarding the credit worthiness of the donor and their father. Then, he referred
to the submissions made before the CIT (A) vide letter dated 18th March, 2010 copy of
which is filed at pages 175 to 229 of the paper book.

83. He submitted that a request was made to the Assessing Officer for making available to the
assessee the adverse material and such request was made as per submissions made before the
CIT (A) and reference was made to pages 208 and 209 of the paper book wherein the
assessee has raised the issue that the Assessing Officer erred in passing assessment order of
the assessee without providing opportunity to cross examine the person whose
report/statements have been relied upon and has passed the order without following the
principles of natural justice.

84. Then, Ld. AR referred to the submissions made before the Assessing Officer vide
aforementioned letter dated 24th December, 2009 the copy of which is placed at pages 19 to
42 of the paper book and invited our attention towards the submissions made before the
Assessing Officer regarding validity of VDIS declaration and year of assessability and
reference was made to pages 32 to 42 of the paper book. Ld. AR further placed reliance on
the following decisions to contend that once declaration stood accepted and sums have been
given from the said amount, the same cannot be added as unexplained income:-

"99 TTJ 744 (Jp) (PB 858-877) 78 ITD 280 (Mum) (PB 878-884) (Jamnalal Kanhaiya Lal
distinguished) 201 CTR 54 (All) (PB 885-892 (Jamna Lal Kanhaiya Lal, Rattan Lal, United
Trading all discussed) 282 ITR 236 (All) (PB 893-903) Ratan Lal & United Trading
considered. 116 TTJ 102 (Asr) (PB 812-833) 97 ITD 235 (Cal) (SB) (PB 834-857) CBDT
Circular NO.754 DATED 10.6.1997 question no.14 & its answer (paper-book 156)"

85. He further contended that the decision in the cases of Rattan Lal (supra), Jamna Prasad
Kanhaiyalal (supra) and United Trading and Construction (supra) cannot be applied to the
present case as those decisions were in respect of earlier VDIS schemes and question No.14
and answer thereto of CBDT Circular No. 754 specifically covers the issue in which the
 244

department has clarified that if the amount credited in the books is less or equal to the amount
declared, the credit should be accepted.

86. To contend that CBDT Circulars are binding on tax authorities he relied upon the
following decisions:-

i) UCO Bank vs. CIT 237 ITR 889 (SC)

ii) Union of India vs. Azadi BachaoAndolan 263 ITR 706.

87. It was further contended by Ld. AR that the Assessing Officer has no authority to look
into the validity of declarations issued by CIT under the VDIS, 1997 and in this behalf he has
relied upon the following decisions:-

1. Nitin P. Shah vs. CIT 276 ITR 411 (Guj)

2. DCIT vs. Ranjit Kaur 81 TTJ 269 (Chd)
3. Bhagwat Prasad vs. CIT 263 ITR 119 (All)
4. Uma Corporation vs. ACIT 284 ITR 67 (Bom)
5. CIT vs. Uttam Chand Jain 320 ITR 554 (Bom)

88. It was further submitted that the assessment order in itself is contradictory as the
Assessing Officer while deciding the issue against the assessee is relying upon the questions
and answers given in respect of earlier schemes and ignoring the questions and answers given
in respect of the scheme which is applicable in the case of the assessee.

89. He submitted that the reliance by the Assessing Officer on the decision in the case of CIT
vs. K. Palaniappan 242 ITR 719 (Mad) is not relevant as in that case declaration was not
accepted whereas in the case of the assessee CIT had issued declarations which are
subsisting.

90. He further submitted that the reliance by the Assessing Officer on the decision in the case
of RadheshyamTibrewal vs. CIT 125 ITR 393 as affirmed in 145 ITR 186 is also incorrect as,
in that case, money depositors were not declarants and declarants used the name of the other
persons and the Hon'ble Supreme Court followed earlier decision of Hon'ble Supreme Court
in the case of Jamna Prasad Kanhaiyalal (supra) which was also in the case of Rattan Lal
(supra) and the case of Rattan Lal (supra) was considered by CBDT in Circular No.754 as per
question No.14 and an opinion was given that if the deposit is covered by the declared
amount, the same will be accepted by the Assessing Officer. He submitted that in the case of
Tibrewal (supra) it has been observed that the declarants did not appear for deposition as
against that in the case of the assessee all the three declarants have appeared and they
deposed before the department.

91. Similarly, Ld. AR distinguished the decision in the case of Pioneer Traders Syndicate,
120 ITR 5 (All) which was approved in Jamunala Prasad Kanhaiyalal (supra) which decision
was followed by the Apex Court in the case of Rattan Lal (supra) and the decision in Rattan
Lal (supra) has been explained in the Board's Circular No.754.
 245

92. It was further submitted that the Assessing Officer has again committed an error while
holding that Circular is contrary to the decision of Apex Court in the case of Rattan Lal
(supra) as it was explained by the Board upon the apprehensions of the assessee that the
decision in the case of Rattan Lal will not be applied where the declared amount does not
exceed the deposits made in the hands of other person. He submitted that as against that it has
been held by Hon'ble Supreme Court that a benevolent Circular is binding on the department
and, in this regard, he referred to the decision of Hon'ble Supreme Court in the case of
Navneet C. Jhaveri 56 ITR 198 (SC)

93. Without prejudice to the above arguments, it was submitted by Ld. AR that even if the
case of the Assessing Officer is accepted that the gifts were the money of the assessee, then,
the addition could not be made in the year of the deposits in the bank accounts of the donors
and to support such contention he relied upon the decision of Hon'ble Delhi High Court in the
case of Satyaprakash 140 ITR 880 and 201 CTR 54 (All), CIT vs. Johari Mal Goel.

94. He, however, submitted that the Assessing Officer has misplaced reliance on the decision
of Hon'ble Supreme Court in the case of SumatiDayal (supra) as the Assessing Officer
despite the request of the assessee failed to provide opportunity to cross examine the persons
upon whose statements the Assessing Officer has placed reliance and he submitted that case
law relied upon by the Assessing Officer and CIT (A) in this regard are also relied upon here.

95. Thus, it was submitted by Ld. AR that the CIT (A) has rightly deleted the addition and his
order should be upheld.

96. We have carefully considered the rival submissions in the light of the material placed
before us. The case of Assessing Officer broadly is based upon the following grounds:-

i) The ladies did not make proper declarations under VDIS, 1997, hence, the assessee cannot
claim shelter under Question No.14 of Circular No.754 dated 10th June, 2007. According to
the Assessing Officer, the provisions of VDIS, 1997 were applicable only in respect of
income in the hands of the declarants which was chargeable to tax, but was not declared
earlier. Therefore, the declarations filed by the declarants were questionable. The declarations
filed by the declarants were not in accordance with Section 64 of VDIS, 1997, therefore, the
benefit of Question No.14 to the Circular cannot be granted.
ii) Since earlier voluntary disclosure schemes are parimateria with VDIS, 1997, therefore, the
decisions rendered by Apex Court in the case of ITO vs. Rattan Lal (supra) and CIT vs.
United Trading and Construction Ltd. (supra) are applicable to the assessee's case, therefore,
the benefit given by Question No.14 of the Circular cannot be extended to the assessee as the
decision of Constitution Bench of Apex Court in the case of Rattan Melting & Wire
Industries (supra) shall have an overriding effect over the answer given in respect of Question
No.14.
iii) The donor ladies were not having financial capacity/credit worthiness to make such huge
gifts to the assessee.
iv) The amount being unexplained in the hands of the assessee is assessable as undisclosed
income of the assessee only in the year under consideration as against the claim of the asessee
that if the said amount is considered to be unexplained income of the assessee, then, it should
have been assessed in the year of deposit in the bank account of the donor ladies.
 246

97. So far as it relates to the first objection of the Assessing Officer, it may be mentioned that
the declarations filed by the donor ladies are supported by the certificates issued by the CIT
(Competent Authority) and those certificates are valid and subsisting. No material has been
brought on record to show that those certificates were either ever cancelled or revoked. If the
certificate granted by the Competent Authority are valid and subsisting then, whether it is
permissible to Assessing Officer to say that declarations against which those certificates are
given were not valid declarations as those declarations were not made in accordance with the
scheme. To examine such aspect, one has to consider the judicial precedents available on this
issue.

98. Reference in this regard can be made to the decision in the case of Nitin P. Shah (supra).
In that case, it was the case of the Assessing Officer that declarations made by the assessee
was not in accordance with the Section 68 (1) of VDIS, 1997, therefore, declarant was not
entitled to immunity provided under the scheme. It was also observed by the Assessing
Officer that the declarant did not comply with the provisions of Section 64 (1)

(a) of the scheme. On this contention, it was observed by the Hon'ble Gujarat High Court that
the CIT having issued certificate u/s 68(2) of the scheme, judicial discipline requires that the
authorities entrusted with the administering the law proceed on the basis that the certificate
granted by the CIT would indicate satisfaction of all the requisite conditions as required by
the provisions of the scheme and it is not open to subordinate authority to sit in judgement
over the certificate granted by the CIT. Their Lordships have referred to the decision of
Hon'ble Supreme Court in the case of Gestetner Duplicators (P.) Ltd. v. CIT [1979] 117 ITR
1 and it was held that it was not open to go behind the certificate issued by the CIT. The
relevant observations of their Lordships from the said decisions are reproduced below:-

27. The CIT, having issued certificate under section 68(2) of the Scheme, judicial discipline
requires that the authorities entrusted with administering law proceed on the basis that the
certificate granted by the CIT would indicate satisfaction of all the requisite conditions as
required by the provisions of the scheme and it is not open to subordinate authority to sit in
judgment over the certificate granted by the CIT. The Assessing Officer in the present case
has, while making addition of Rs. 137 lakhs in the fresh assessment made pursuant to order of
set aside, taken upon himself to give go-bye to the certificate issued by the CIT as if the said
certificate had been issued by the CIT without verification or application of mind. The Court
is not prepared to proceed on such an assumption, though it was so contended by the learned
counsel for the Revenue. The fact that the CIT is superior authority insofar as the Assessing
Officer is concerned, is not in dispute and could not be disputed by the learned counsel for
the Revenue. Once that is the position, the following observations made by the Apex Court in
case of Gestetner Duplicators (P.) Ltd. v. CIT [1979] 117 ITR 1 would apply. In a case where
a private company employed salesmen with a fixed monthly salary and also commission at
fixed percentage of the turnover achieved by the salesmen, the assessee-company paid
employer's contribution to a provident fund maintained by the company after computing the
same by considering both as salary. The fund was recognised by the CIT. According to the
Assessing Officer, the commission so paid did not partake the character of salary and, hence,
the contribution made in relation to such commission was proportionately disallowed in the
assessment proceedings. After deciding on the merits of the dispute between the parties and
taking into consideration the terms of the contract, it was observed by the Court that :
". . . It would be conducive to judicial discipline and the maintaining of certainty and
uniformity in administering the law that the taxing authorities should proceed on the basis
 247

that the recognition granted and available for any particular assessment year implies that the
provident fund satisfies all the conditions under rule 4 of Part A of the Fourth Schedule to the
Act and not sit in judgment over it. There is ample power conferred upon the CIT under rule
3 of Part A of the Fourth Schedule to withdraw at any time the recognition already granted if,
in his opinion, the provident fund contravenes any of the conditions required to be satisfied
for its recognition and if during the assessment proceedings for any particular assessment
year the taxing authority finds that the provident fund maintained by an assessee has
contravened any of the conditions of recognition, he may refer the question of withdrawal of
recognition to the CIT, but until the CIT acting under the powers reserved to him, withdraws
such recognition the taxing authority must proceed on the basis that the provident fund has
satisfied all the requisite conditions for its recognition for that year; any other course is bound
to result in chaos and uncertainty which has to be avoided." (p. 15) Therefore, it is not open
to the Assessing Officer to go behind the certificate issued by the CIT and by ignoring same,
assess an income which has already borne tax under VDIS.
99. In the case of CIT vs. Uttam Chand Jain 320 ITR 554 (Bom), the assessee being a dealer
in diamond jewellery, diamond jewellery weighing 65.75 carats was declared under VDIS
1997. The said declaration was accepted by the department and a certificate was issued to the
assessee under VDIS 1997. The revenue doubted the existence of the said diamond jewellery
and their Lordships rejected the said contention of the assessee with the following
observations:-
12. We see no merit in the above contentions. At the outset, we may note that the certificate
issued by the revenue under VDIS, 1997 to the effect that the assessee had diamond jewellery
weighing 65.75 carats continues to be valid and subsisting. In fact, no proceedings have been
initiated so far to cancel the certificate issued to the assessee under VDIS, 1997.
It was further observed:-
16. As the VDIS, 1997 certificate issued by the department is valid and subsisting, it is not
open to the revenue to contend that there was no jewellery which could be sold by the
assessee on 20-1-1999. It is not the case of the revenue that the assessee continues to be in
possession of the said diamond jewellery even after the alleged sale effected on 20-1-1999 or
that the said jewellery has been sold to third parties. In these circumstances, the decision of
the Tribunal in accepting the claim of the assessee that the amount of Rs. 10,35,562
represented the sale proceeds of the diamond jewellery declared under VDIS, 1997 cannot be
faulted.
100. Similar view has been taken by co-ordinate Bench in the case of DCIT vs. Ranjit Kaur
681 TTJ 269 (Chd).

101. If the principles of law laid down in the aforementioned decisions are considered, then,
it has to be held that in a case where declaration is supported by the certificate given by the
Competent Authority (in the present case, the CIT) and the said certificate is valid and
subsisting, then, the Assessing Officer being subordinate authority to the certificate issuing
authority cannot hold that the declarants did not make valid declaration, therefore, the benefit
of VDIS, 1997 is not available to the declarants. In the present case, the Assessing Officer
has ignored the valid and subsisting certificate issued by the CIT on the ground that the
declaration submitted by them were not valid declarations as they did not fulfill the
conditions laid down in the scheme. Such observations of the Assessing Officer are contrary
to the judicial discipline as the CIT, after having satisfied himself about the fulfillment of all
 248

the conditions, has granted the certificate to the declarants which are subsisting as on the
date. Therefore, it is not permissible to the Assessing Officer to go behind the certificate
issued by the CIT and to hold that the declarations filed by the donor ladies were not valid.
We find no infirmity in the findings recorded by CIT (A) that in view of the existence of
valid certificates issued by CIT, the Assessing Officer could not say that the declarations
submitted by the declarant ladies were not in accordance with the scheme.

102. Now, coming to the second objection of the Assessing Officer, there cannot be any
dispute to the proposition that if the decision of Apex Court/High Court is contrary to the
view expressed in the Circular/clarification, then, the decision rendered by the court will have
overriding effect and administering authorities and courts working under their jurisdiction
will be bound to follow the said decision in preference to the Circular/clarification. Such
proposition of law is now supported by the decision of Hon'ble Apex Court in the case of
Rattan Melting & Wire Industries (supra). It is the case of Assessing Officer that earlier
schemes are parimateria to VDIS, 1997, therefore, as per law laid down by Hon'ble Supreme
Court in the case of Rattan Lal (supra), the answer to Question No.14 given in Circular
No.754 should be ignored. The voluntary disclosure schemes are issued by the Government
and public at large is invited to submit declarations. Before the applicability of the schemes
the doubts raised by the public at large are clarified in the form of questions and answers, so
that there should not be any difficulty in the implementation of the scheme. Vide questions
and answers, clarifications are issued to facilitate the department as well as the declarants to
work on the scheme, so that the scheme works smoothly. As it can be seen from the questions
and answers issued under the earlier schemes, it was not the intention of the legislature to
extend the benefit of declared income in the hands of other persons whereas under the VDIS
1997 it has been clearly observed by the CBDT in answer to Question No.14 that benefit will
be given to the other person to the extent of amount declared. VDIS 1997 was brought on the
statute by the Finance Act, 1997 and it was made applicable w.e.f. 1st July, 1997. While
issuing Circular No.754 dated 10th June, 1997 i.e., prior to the date of applicability of the
scheme, the Board had received number of queries from public about the scope of the scheme
and the procedure to be followed and after considering those queries received from the
public, the CBDT had decided to clarify the doubts raised by the public in the form of
question and answer through Annexure annexed to that Circular. While issuing such
clarification, the observations of the Board are as under:-

"The Finance Act, 1997,has introduced a Voluntary Disclosure of Income Scheme, 1997. In
regard to the Scheme, a number of queries have been received from the public about the
scope of the scheme and the procedure to be followed. The Board has considered the same
and decided to clarify the points raised by issue of Circular in the form of questions and
answers as per annexure."

Question No.14 and answer thereto read as under:-

"Question No.14: In the case of ladies and minors making declaration and amounts are later
credited in the books of account of the firm, etc., it needs to be clarified as to what will be the
view of the Department, particularly whether the Assessing Officer can investigate into the
source of the amounts so credited? (refer to Supreme Court decision in Rattan Lal's case
[1984] 145 ITR 183) Answer: The declarant lady or minor should first credit the amount
declared in their own books of account or any other record. Thereafter, the advance can be
made to other persons. Where the mounts credited in the books of the other persons are equal
to or less than the amount declared by the lady or the minor then the Assessing Officer should
 249

accept the credit entries in the books of the firm. If the amount credited is more than the
amount declared the Assessing Officer will be free to enquire into such excess."

103. There was an apprehension in the mind of the public regarding the applicability of
decision of Hon'ble Supreme Court in the case of ITO vs. Rattan Lal (supra) and, therefore,
doubts were raised as represented in Question No.14 and a question was raised that in the
case of ladies and minors who are making declarations and amounts are later on credited in
the books of account of the firms, etc., a clarification is needed as to what will be the view of
the department, particularly whether the Assessing Officer can investigate the source of the
amount so credited and reference was specifically made to the decision in the case of Rattan
Lal (supra). It was clarified by the CBDT that the declarant ladies or minors should first
credit the amount declared in their books of accounts or any other record. Thereafter, the
advance can be made to other persons. Thus, if the amounts are declared by the ladies and
minors and they are first credited in any of the record maintained by them, then, the credit
can be given to the other person. And, in a case where the amount credited in the books of
other person is equal to or less than the amounts declared by the lady or the minor, then, the
Assessing Officer should accept the credit entries in the books of other person. The word
used by the CBDT is "should." Therefore, an assurance was given by the CBDT to the public
at large that to the extent the amount of credit in the hands of other person does not exceed
the declared amount in the hands of ladies and minors the Assessing Officer should accept
the credit. Such was not the position under the earlier schemes. The decision of Hon'ble
Supreme Court in the case of ITO vs. Rattan Lal (supra) was rendered in the context of 1965
Scheme and the Assessing Officer has also admitted such fact. No direct decision has been
supplied by the department in respect of VDIS 1997 where such position is not accepted by
the Court. Therefore, it cannot be said that earlier schemes were in parimateria with the VDIS
1997.

104. The decision of Hon'ble Supreme Court rendered in the case of ITO vs. Rattan
Lal (supra) has to be read as a whole and the ratio laid down therein cannot be divorced from
the context in which said decision was rendered. This proposition of law has been explained
by Hon'ble Supreme Court in the case of CIT vs. Sun Engineering Works Pvt. Ltd. 198 ITR
297. In that case, the respondent company had submitted returns of income for assessment
year 1960-61 and 1962-63 showing losses. The returns being filed belatedly, the losses were
not determined by the Assessing Officer. Appellate Asstt. Commissioner held that though the
losses ought to have been determined, but no relief could be granted to the assessee as
assessee had filed belated returns. Later on, the assessee filed disclosure petition in respect of
certain hundi loans and a settlement was arrived at between the assessee and the department
which resulted in an assessable income of ` 29,000/- and ` 90,000/- for assessment years
1960-61 and 1961-62 respectively. The Assessing Officer reopened the assessment for those
years u/s 147 (a) of IT Act, 1961. It was claimed by the assessee that losses of those years
should be determined in the re-assessment proceedings. ITAT held that the original
proceedings relating to losses had become final and since the item of loss were unconnected
with the income escaping assessment to be assessed u/s 147, it was not permissible for the
assessee to seek a review of the original order. The assessee placed reliance on the decision
of Hon'ble Supreme Court in the case of Jaganmohan Rao vs. CIT 75 ITR 373 and it was
claimed that as per that decision the previous under assessment is set aside and the whole
assessment proceedings to start afresh. Their Lordships of Hon'ble Supreme Court held that
the decision in the case of Jaganmohan Rao vs. CIT (supra) cannot be read without the
context. The principle laid down in that decision was only to the extent that once an
assessment is validly reopened by issuance of notice u/s 22 (2) of 1922 Act, the previous
 250

under assessment is set aside and the ITO has the jurisdiction and duty to levy tax on the
entire income that had escaped assessment during the previous year. It was observed that
what was set aside was only the previous under assessment and not the original assessment
proceedings. Therefore, the emphasis was on the set aside of the escaped assessment and not
the assessment at large. Their Lordships rejected the contention of the assessee as the
interpretation sought to be taken by the assessee was totally out of context and the
observations are reproduced below: -

"Of course, in the reassessment proceedings it is open to an assessee to show that the income
alleged to have escaped assessment has in truth and in fact not escaped assessment but that
the same had been shown under some inappropriate head in the original return, but to read the
judgment in V. JaganmohanRoa's case (supra) as if laying down that reassessment wipes out
the original assessment and that reassessment is not only confined to 'escaped assessment' or
'under- assessment' but to the entire assessment for the year and start the assessment
proceedings de novo giving right to an assessee to reagitate matters which he had lost during
the original assessment proceeding, which had acquired finality, is not only erroneous but
also against the phraseology of section 147 and the object of reassessment proceedings. Such
an interpretation would be reading that judgment totally out of context in which the questions
arose for decision in that case. It is neither desirable nor permissible to pick out a word or a
sentence from the judgment of this Court, divorced from the context of the question under
consideration and treat it to be the complete 'law' declared by this Court. The judgment must
be read as a whole and the observations from the judgment have to be considered in the light
of the questions which were before this Court. A decision of this Court takes its colour from
the questions involved in the case in which it is rendered and while applying the decision to a
latter case, the Courts must carefully try to ascertain the true principle laid down by the
decision of this Court and not to pick out words or sentences from the judgment, divorced
from the context of the questions under consideration by this Court, to support their
reasonings. In H.H. Maharajadhiraja Madhav Rao Jiwaji Rao Scindia Bahadur v. Union of
India [1971] 3 SCR 9 this Court cautioned:
"It is not proper to regard a word, a clause or a sentence occurring in a judgment of the
Supreme Court, divorced from its context, as containing a full exposition of the law on a
question when the question did not even fall to be answered in that judgment."
38. Although, section 147 is part of a taxing statute, it imposes no charge on the subject but
deals merely with the machinery of assessment and in interpreting a provision of that kind,
the rule is that construction should be preferred which makes the machinery workable. Since
the proceedings under section 147 are for the benefit of the revenue and not an assessee and
are aimed at garnering the 'escaped income' of an assessee, the same cannot be allowed to be
converted as 'revisional' or 'review' proceedings at the instance of the assessee, thereby
making the machinery unworkable.

105. In view of the above proposition of law explained by Hon'ble Supreme Court, it cannot
be said that the decision of Apex Court in the case of ITO vs. Rattan Lal (supra) is applicable
to VDIS 1997 irrespective of the fact that the said decision, according to the opinion of the
Board was not applicable to VDIS 1997. It has already been mentioned that all the decisions
relied upon by the revenue pertains to the earlier schemes and no decision has been referred
by the revenue in which the proposition of law laid down in the case of ITO vs. Rattan
Lal (supra) has been applied to VDIS, 1997 by considering the question No.14 and answer
thereto. The Assessing Officer would have been right if the decision in the case of ITO vs.
Rattan Lal (supra) is rendered under VDIS Scheme, 1997 then, the said decision will prevail
 251

over the view expressed by the CBDT. In this view of the situation, we find no infirmity in
the order of the CIT (A) vide which it has been held that the benefit given by answer to
question No.14 is applicable to the case of the assessee as the amount received by the
assessee did not exceed the amount declared by donor ladies under VDIS 1997.

106. So far as it relates to the third objection of the Assessing Officer regarding the financial
capacities and credit worthiness of the donor ladies to give the gifts, it may be observed that
to validly explain an amount of credit or gift the three requirements are to be fulfilled,
namely, (i) identity of the creditor/donor, (ii) credit worthiness and (iii) the genuineness of
the transaction. So as it relates to identity of the declarants/creditor is concerned, there is no
dispute that all of them had appeared before the Investigation Wing and their statements were
recoded. The Assessing Officer is also not disputing about the identity of these donor ladies
and reference in this regard can be made to the observation of the Assessing Officer at page
14 of the impugned assessment order where he has observed that in the instant case capacity
and credit worthiness of these three donor ladies have not been proved. The financial capacity
of the donor ladies has to be seen vis-a-vis the amount given by them to the assessee. It is a
fact that declared amount was supported by the certificate and was lying in the bank account
of the donor ladies since 1997. The amount deposited in the bank accounts relating to donor
ladies did not change its shape and the money remained in the bank account of the respective
declarants until it was given as gift to the assessee by way of account payee cheques. There is
no material on record to show that the bank accounts owned by those declarant ladies could
also be operated by any person other than the declarants. Though the Assessing Officer at
page 28 has mentioned that the assessee has played a significant role in the opening of the
bank accounts and not submission of declarations under VDIS 1997, but there appears to be
no material on record to support such observations. The amount given by the donor ladies to
the assessee are supported by declarations made by them on which the tax was duly paid by
them and a certificate was issued by the CIT. To that extent, the financial capacity and credit
worthiness of donor ladies could not be denied and the other factors on which the Assessing
Officer is placing reliance for disproving financial capacity of those ladies and their families
will become irrelevant. It is already pointed out that such financial capacity and credit
worthiness is to be examined only in the context of amount advanced by them to the assessee.
Therefore, we find no infirmity in the order of the CIT (A) vide which he has held that the
donor ladies were having the financial capacity and credit worthiness to make gifts to the
assessee.

107. So as it relates to the genuineness of the transaction, it is already observed that money in
the bank of the donor ladies was lying since 1997 and it did not change shape till it was given
to the assessee. The amount of gift was made vide account payee cheques. The donor ladies
have been stated to have admitted the fact of gift. The relevant evidences were produced on
record to support such gifts. There is no material on record to controvert such evidence. In
this view of the situation, we are of the opinion that the CIT (A) has rightly held that the gifts
made by those donor ladies to the assessee were genuine.

108. In view of above discussion, we are of the opinion that there is no infirmity in the order
of Ld. CIT (A) vide which the impugned addition is deleted. We decline to interfere and the
appeal is dismissed.

109. In the result, both the appeals filed by the Department are dismissed.

(ii) Tata International Ltd. vs. DCIT (2012) 52 SOT 465

 252

S. 147 : Reassessment – Non supply of recorded reasons – Order bad in law – Non-supply of
recorded reasons before passing reassessment order renders the reopening void – Subsequent
supply does not validate reassessment order [S. 143(3), 148] After completing the section
143(3) assessment, the Assessing Officer received information from the Volcker Committee
report that the assessee had paid “illegal” commission for supply of goods to Iraq under the
“Oil for Food Programme” of the UN. The Assessing Officer issued a section 148 notice to
disallow the commission and supplied the assessee with only the “gist” of the recorded
reasons.
The complete recorded reasons were furnished only after the passing of the reassessment
order. In the reassessment order, the Assessing Officer disallowed the commission. The
CIT(A) upheld the reassessment. On appeal by the assessee to the Tribunal, Held allowing
the appeal:
As per GKN Driveshafts (India) Ltd. v. ITO (2003) 259 ITR 19 (SC) and the rules of natural
justice, the Assessing Officer was bound to furnish reasons within a reasonable time so that
the assessee could file objections against the same. The adherence to this procedure is a
necessity because at the preliminary stage itself, the Assessing Officer may be satisfied with
the explanation of the assessee. A
reassessment completed without furnishing the reasons actually recorded by the Assessing
Officer for reopening of assessment is not sustainable in law. The subsequent supply of the
reasons would not make good of the illegality suffered at the stage of reopening of the
assessment. On facts, though the
assessee asked for the recorded reasons, the same was supplied to him only after the passing
of the reassessment order. This failure on the part of the Assessing Officer renders the
reassessment order invalid [CIT v. Fomento Resorts &Hotesl Ltd. ITA No. 71 of 2006 dt. 27-
11-2006 and CIT v. Videsh Sanchar Nigam Ltd. (2012) 340 ITR 66 (Bom.) (SLP dismissed)

IX. Powers & Functions of Income Tax Authorities:

In Pooran Mal v. The Director of Inspection (Investigation), New Delhi and Or 1974
93 ITR 505 SC - Bench: Ray, A.N. (Cj), Palekar, D.G., Chandrachud, Y.V.,
Alagiriswami, A., Bhagwati, P.N.

Facts
In the proceedings before the Supreme Court two of them being writ petitions under
Art. 32 of the Constitution and two others being appeals from the orders of the Delhi High
Court in writ petitions under Art. 226-relief was claimed in respect of the search of
certain premises and seizure of account books, documents, cash, jewelry and other
valuables by Income-tax authorities purporting to act u/s 132 of the Income Tax
Act, 1961. The petitioners/ appellants challenged the validity of Sec. 132(1)
and (5) of Rule 112(A) on the ground that they violate Art. 14, Article
19(1)(f) and (g) and 31 of the Constitution. It was also contended that a writ
of prohibition to restrain the authorities from using the 'information gathered from the
 253

documents seized should be issued. In the writ petitions, the actual search and seizure were
challenged on the ground that they were carried out in contravention of the provisions
of Sec. 132 and Rule 112-A.

Constitutionality of Search

Dealing first with the challenge under article 19(1)(f) and (g) ,of the Constitution it is to be
noted that the impugned provisions are evidently directed against persons who are believed
on good grounds to have illegally evaded the payment of tax on their income and property.:
Therefore, drastic measures to get at such income and property with a view to recover the
government dues would stand justified in themselves. When one has to consider the
reasonableness of the restrictions or curbs placed on the freedoms mentioned in article
19(f) and (g), one cannot possibly ignore how such evasions eat into the vitals of,the
economic life of the community. It is a well-known fact of our economic life that huge sums
of unaccounted money are in circulation endangering its very fabric. In a country which has
adopted high rates, of taxation a major portion of the unaccounted money should normally fill
the Government coffers. Instead of doing so it distorts the economy. Therefore, in the interest
of the community it is only right that the fiscal authorities should have sufficient Powers to
prevent tax evasion.

Search and seizure are not a new weapon in the armory of those whose duty it is to maintain
social security in its broadest sense. The Process is widely recognised in all civilized
countries Our own 'Criminal Law accepted its necessity and usefulness in sections
96 to 103 and section 165 of the Criminal Procedure, Code. In M. P. Sharma v. Satish
Chandra(.) the challenge to the power of issuing a search warrant under section 96 (1) as
violative of Article 19 (1) (f) was repelled on the ground that a power of search and seizure is
in (1) [1954] S.C.R. 1077.

As a broad proposition it is now possible to state that if the safeguards are generally on the
lines adopted by the , Criminal Procedure Code they would be regarded as adequate and
render the temporary restrictions imposed by the measure reasonable. In the case just cited
there was a proviso to sub-section (2) of section (1) (19681 (1) S.C.R. 148 which prescribed
that all searches under the subsection shall, so far as may be, made in accordance with the
provisions of the Code of Criminal Procedure. After pointing out that section 165 of the
Criminal Procedure Code would apply mutatis mutandis to searches made under sub- section
(2), this Court observed : "We are, therefore, of opinion that safeguards provided in S.
165 also apply to searches made under sub-s. (2). These safeguards are-(i) the empowered
officer must have reasonable grounds for believing that anything necessary for the purpose of
recovery of tax may be found in any place within his jurisdiction (ii) he must be of the
opinion that such thing cannot be otherwise got without undue delay, (iii) he must record in
writing the grounds of his belief, and (iv) he must specify in such writing so far as possible
the thing for which search is to be made,. After he has done these things, he can make the
search. These safeguards, which in our opinion apply to searches under sub-s. (2) also clearly
show that the power to search under sub-s. (2) is not arbitrary. In view of these safeguards
and other safeguards provided in Chapter VII of the Code of Criminal Procedure, which also
apply so far as may be to searches made under sub-s. (2), we can see no reason to hold that
the restriction, if any, on the right to hold property and to carry on trade, by the search
provided in sub-s. (2) is not a reasonable restriction keeping in view the object of the search,
namely, prevention of evasion of tax."
 254

A minor point was urged in support of the above contention that section 132 contains
provisions which are likely to affect even innocent persons. For example, it was submitted, an
innocent person who is merely in custody of cash, bullion or other valuables etc. not knowing
that it was concealed income is likely to be harassed by a raid for the purposes of search and
seizure. That cannot be helped. Since the object of the search is to get at concealed incomes,
any person, who is in custody without enquiring about its true nature, exposes himself to
search. Sub- section (4) of section 132 shows the way how such an innocent person can make
the impact of the (search on him bearable. All that he has to do is to tell the facts to the
searching officer explaining on whose behalf he held the custody of the valuables. It will be
then for the Income- tax Officer to ascertain the person concerned under sub- section (5).
Assessees whose assets could be seized for the recovery of their tax liabilities do not stand in
a different class, as such, but stand in a different situation from those others against whom the
search and seizure process, though available, is futile. The finding of undis- closed income in
the form of cash, jewelry and the like makes the provision of sub-section (5) imperative. The
taxing authorities cannot keep the valuables with indefinitely without,trying to see how much
of what is now seized will go to the Government by way of tax. Therefore, in fairness to the
assessee, sub-section (5) has been deliberately introduced. In the nature of things such an
enquiry is impossible in the case of tax evaders from whom nothing is or could be seized on a
search.
Admissibility of Evidence found in Search:
Kania, C. J. in A. K.Gopalan v. The State of Madras([1950] S.C.R. 88 at p. 120). "There is
considerable authority for the statement that the Courts are not at liberty to declare an Act
void because in their opinion it is opposed to a spirit supposed to pervade the Constitution but
not expressed in words. Where the fundamental law has not limited, either in terms or by
necessary implication, the general powers conferred upon the Legislature we cannot declare a
limitation under the notion of having discovered something in the spirit of the Constitution
which is not even mentioned in the instrument. It is difficult upon any general principles to
limit the omnipotence of the sovereign legislative power by judicial.interposition, except so
far as the express words of a written Constitution give that authority."
In Kuruma v. The Queen(2) where the Privy Council had to consider the English Law of
Evidence in its application to Eastern Africa, their Lordships propounded the rule thus : "The
test to be applied, both in civil and in criminal cases, in considering whether evidence is
admissible is whether it is relevant to the matters in issue. If it is, it is admissible and the
court is not concerned with how it was obtained." Some American cases were also cited
before the Privy Council. Their Lordships observed at p. 204 thus "Certain decisions of the
Supreme Court of the United States of America were also cited in argument. Their Lordships
do not think it necessary to examine them in detail. Suffice it to say that there appears to be
considerable difference of opinion among the judges both in the State and Federal courts as to
whether or not the rejection of evidence obtained by illegal means depends on certain articles
in the American Constitution. At any rate, in Olmstead v. United State (1828) 277 U.S. 438,
the majority of the Supreme Court were clearly of opinion that the common law did not reject
relevant evidence on that ground." In Kuruma's case, Kuruma was searched by two Police
Officers who were not authorised under the law to carry out a search and, in the search, some
ammunition was found in the unlawful possession of Kuruma. The question was whether the
evidence with regard to the finding of the ammunition on the person of Kuruma could be shut
out on the ground that the evidence had been obtained by an unlawful search. It was held it
 255

could not be so shut out because the finding of ammunition was a relevant piece of evidence
on a charge for unlawful possession.
Judgment:

On the whole, therefore, we are not inclined to hold that the search and seizure in this Writ
Petition was vitiated by any illegality.

Writ Petition No. 96 of 1972 The position in this Writ Petition is not different. The petitioner
Ganeriwala is a businessman. His residence is 1, Raj Narain Road, Civil Lines, Delhi and he
runs a family business in Automobile parts in the name of Ganeriwala Trading Company.
The business is at no. 1 Krishna Motor Market, Kashimiri Gate, Delhi. The family seems to
be a partner in the firm of M/s Bisheshwar Lal Bijr Natin Barielly, and is. supposed to have
income from ancestral agricultural lands in Haryana State. It is alleged by the, petitioner that
his assessment of income had been completed upto the year 1970-71 and of Wealth Tax upto
1969-1970. The Return for 1970-71 was also filed. Even so, it is alleged, on 8-101971 his
residential house and also the business premises were searched and documents and books of
account were seized. The search was started at 8.00 A.M. and continued till the evening and,
thereafter, the business premises were searched. The petitioner stated that though the raiding
party made a very detailed search, they did. not come across any concealed incomemash of
bullion, ornaments or jewelry. General allegations regarding the search being oppressive and
excessive are made. But there is no substance in them. Objection was taken to the search on
the ground that the authorities had deliberately selected Panchas who were inimical to the
petitioner. This is denied. It is stated in the affidavit on behalf of the Department that one of
the pancha witnesses namely Lt. Col. Raj Behari Lal was actually sitting in the house of the
petitioner even before the search party entered the premises. It is also stated that both the
panchas are responsible persons of the locality and the immediate neighbors of the petitioner-
one of them being a responsible officer in the Army. The petitioner says that he had told the
authorities that he.had been on inimical terms with these panchas. But that is denied. There is,
therefore, no reason to think that respectable panchas were not taken for the search. Another
objection was made that two cash books relating to the years 1970-71 and 1971-72 were
removed by the Income-tax authorities but they were not duly entered in the inventory. This
allegation also is denied, In para 21 of the counter-affidavit the Assistant Director of
Inspection has stated that during the course of the petitioners examination and the recording
of his statement on October 8, 1971 the petitioner had stated that his Roker-Bahis for the
accounting year 1970-71 and 1971-72 did not contain any entries regarding the expenditure
on the construction of the godown, and as such those Roker-Bahis were not seized from the
custody of the petitioner. The other reason was that the petitioner had requested that they may
not be seized as otherwise the petitioner would face difficulties in carrying on his business. It
must be remembered that the search and seizure had been ordered because the petitioner had
recently constructed a huge godown near his residential premises with the floor area of
approximately 6700 sq.. ft. on which a large investment was estimated to have been made
from income which had not been disclosed in the books of account produced or returns filed
by the petitioner. Since the petitioner himself told the authorities that the Roker-Bahis for the
two years did not contain any entries regarding the expenditure on the construction, the
authorities inspected the Roker-Bahis for the year 1971-72 and finding that it did not contain
,any entries for the past 30 days it was considered by the authorities not proper to take
Possession of the same. We are inclined to think that this objection by the petitioner is an
afterthought with a view to malign the departmental authorities. It is not denied that the
petitioner had been given a copy of the inventory of the documents seized from his custody
 256

on that very day. He, did not raise the objection regarding the account books till November 5,
1971 i.e. nearly after one month. The petitioner is a businessman. He could not have been
unaware that his Roker-Bahis for the current year and the previous year were missing for
such a long time.

It was next alleged that a very large number of documents were seized which were really
irrelevant. The authorised officer has to seize books of account and other documents which
will be useful for and relevant to any proceeding under the Income-tax Act. When in the
course of a search voluminous documents and books of account are to be examined with a
view to judge whether they would be relevant a certain amount of latitude must be permitted
to the authori- ties. It is true that when particularly documents are asked to be seized
unnecessary examination of other documents may conceivably make the search-excessive.
But when the documents, pieces of paper, exercise books, account books, small memos etc.
have all to be examined with a view to see how far they are relevant for the proceeding under
the Act, an error of judgment is not unlikely. At the most this would be an irregularity not an
illegality. Nor can it be a valid objection to the search that it continued for about 16 hours. By
their very nature the search and seizure as shown above, would consume a lot of time.

In this petition also it was alleged that the Director of Inspection could possibly have no
reason to believe the existence of circumstances required by sub-clauses (b) & (c) of sub-
section (1) 'of' section 132 because the petitioner's assessment for the year 1970-71 had been
already completed and so also the Wealth Tax assessment for the year 1969-70. But this does
not mean that on the information, in the possession of the Director of Inspection he cannot
entertain the necessary belief. The grounds for the belief recorded by the Director of
Inspectionbefore the authorisation were shown to us and we do not the that on the material
the authority could not have entertained the belief. A big godown has been newly constructed
by the petitioner but his books of account did not reflect the expenditure on account of this
construction. It is alleged on behalf of the Department that, on search, certain documents in
the nature of maps etc. were seized which showed that the petitioner had constructed the
building in the month preceding the date of search and the money with which the said
building was constructed was unaccounted money. There is, therefore, no substance in the
contention that the incometax authorities could not have possibly entertained the required
belief. The search and seizure, therefore, impugned in this Writ Petition cannot be regarded
as illegal.

In the result the two Writ Petitions and the two appeals are dismissed with costs.

S.B.W. Petitions and appeals dismissed.

(ii) M. Narayanan & Bros. v. Asstt. CIT [2011] 201 - CHITRA VENKATARAMAN,J.

1. Whether on the facts and in the circumstances of the case, the Tribunal was right in
holding that the addition made by the assessing officer is justified when the additional income
of Rs.4 lakhs offered in the second statement on 11.5.1993 was a clear mistake?

2. Whether on the facts and in the circumstances of the case, the Tribunal was right in setting
aside the order of the Commissioner of Income-tax (Appeals) and upholding the order of the
assessing officer in respect of addition of Rs.4 lakhs under "other sources"?"
 257

2. The assessee herein had his income from pawn broking business as well as from
commission earned on dealing with coconut seedling. The Department conducted search in
the assessee's premises on 10.5.1993 and 11.5.1993, where cash of Rs.60,000/- and gold
jewellery of 1,746 grams taken on pledge in pawn broking business were seized. Apart from
that, Kisan Vikas Patra for Rs.45,000/-, Fixed Deposits of Rs.1,30,252/-, pro-notes for
Rs.1,22,000/- and finance deposits of Rs.5,000/- were also found and seized. Two statements
were recorded from the assessee on 10.5.1993 and 11.5.1993. On the first of the statements
made, the assessee admitted that apart from earning income from pawn broking business for
the past 10 years, the assessee was in the business of purchasing and selling coconuts for the
past 25 years. The assessee admitted that he was not maintaining proper books of accounts
except some jottings in a small note book. The assessee further admitted that he had taken
loan from outsiders to the tune of Rs.2,75,000/-. He also showed the details of loan taken
from the family to the tune of Rs.4,75,000/-. The assessee offered a sum of Rs.3,00,000/- as
unaccounted income on the first day of search. As regards the jewellery found, it was stated
that he had made advances to the tune of Rs.4,55,900/- on the security of the jewellery
pawned with him. On 11.5.1993, the second day of the search, the assessee admitted that the
cash of Rs.1,14,000/- found at the time of raid represented money in rotation in his coconut
and pawn broking business. He also offered a sum of Rs.4,00,000/-, over and above what was
offered in the previous day.

3. In the course of the assessment proceedings, the assessee, however, pointed out that the
original admission on 10.5.1993 the income of Rs.3.00 lakhs as unaccounted income alone
was correct and the subsequent statement made on the next day, i.e., on 11.5.1993, offering a
further sum of Rs.4.00 lakhs was not correct. Thus the assessee retracted the statement made
on 11.5.1993 offering an additional income of Rs.4.00 lakhs. The Assessing Officer,
however, rejected the plea and made assessment on the basis of the confession statements
given by the assessee.

4. On appeal before the Commissioner of Income Tax (Appeals), the assessee contended that
the additional income of Rs.4.00 lakhs offered on 11.5.1993 on the second statement was a
clear mistake and that there were no materials which would warrant any interference that the
assessee had such undisclosed income. For this, the assessee placed reliance on the income of
the family members, from whom he had obtained loan. The assessee, further pointed out that
the sum of Rs.4.00 lakhs was to be taken as income from money lending business and that the
transactions related to various years starting from 1989-90 to 1992-93. Hence, the same could
not be considered as income in the year 1994-95.

5. The Commissioner of Income Tax (Appeals) considered the said fact and pointed out that
the family members, from whom the assessee had taken loan, had filed their returns from
1989-90 onwards offering the loan taken by the assessee as income in their returns. Their
statements were accepted and based on the statements, the assessments were completed
under Section 143(3) of the Income Tax Act. They were also subject matter of appeal before
the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals)
further pointed out that in respect of loans obtained from Sabitha Devi, there were
documentary evidence in the form of Fixed Deposits in her name in Syndicate Bank. Quite
apart, it was also pointed out that the credits in the names of Lakshmi Ammal and Usha Rani
alone were not supported by satisfactory explanation. However, since the assessments were
completed at their respective hands, the question of again adding it in the hands of the
assessee did not arise. On the alternative plea taken that the said amount offered by the
assessee would relate to the pawn broking business, the Commissioner of Income Tax
 258

(Appeals) pointed out from the details of list of jewellery and the amount of loan advanced on
the pledge of such jewellery, that the transactions related to various years starting from 1988-
89 to 1992-93. Thus the Commissioner of Income Tax (Appeals) agreed with the assessee's
case that the confession made on 11.5.1993 offering a sum of Rs.4.00 lakhs was not
supported by any material; that the assessee was justified in withdrawing the said offer.
Aggrieved by the same, the Revenue went on appeal before the Income Tax Appellate
Tribunal.

6. The Tribunal, in a very cryptic order, allowed the appeal filed by the Revenue, taking the
view that the statements were made by the assessee freely and voluntarily and there was no
compulsion, nor was a complaint by the assessee alleging coercion from the Department. In
the circumstances, when the assessee was not maintaining proper accounts, the statements
given form the basis for estimating the income. Aggrieved by the same, the assessee has
preferred the present appeal.

7. Learned counsel appearing for the assessee placed reliance on the decision reported in
(1973) 91 ITR 18 (Pullangode Rubber Produce Co. Ltd. V. State of Kerala and another) in
support of his contention that where the assessee comes forward with a proper explanation as
regards the statement made originally, an assessment passed just on the statement made by
the assessee would not be sustained, since the statement could not be treated as a conclusive
one. Thus learned counsel submitted that even though the admission may be taken in as an
important piece of evidence, yet, when the assessee had offered a valid explanation and the
same was accepted by the Commissioner of Income Tax (Appeals), the Tribunal had
committed a serious error in ignoring these principles but sustained the assessment just on the
basis of the statement of the assessee. Learned counsel further pointed out to the circular
issued by the Central Board of Direct Taxes dated 10th March, 2003, as regards the relevancy
of the confession statement recorded in the course of search, which was considered by this
Court in the decision of this Court reported in (2008) 300 ITR 157(Mad) (Commissioner of
Income Tax V. S.Kahder Khan Son). This Court rejected the appeal preferred by the Revenue
holding that the materials collected in the course of search and survey under Section 133A of
the Income Tax Act did not have any evidentiary value, that the assessment could not rest
solely on the basis of the statement given by one of the partners of the assessee firm. In the
light of the above-said decisions, particularly the circular of the Central Board of Direct
Taxes in the circular No.F. No. 286/2/2003-IT (Inv.) dated 10th March, 2003, learned counsel
appearing for the assessee pleaded that the order of the Tribunal merits to be set aside and the
detailed findings by the Commissioner of Income Tax (Appeals) merits to be accepted.

8. Per contra, learned standing counsel appearing for the Revenue placed reliance on the
decisions reported in (2010) 328 ITR 400 (Bachittar Singh Vs. Commissioner of Income Tax
and Another) and (2006) 287 ITR 209 (P.R.Metrani V. Commissioner of Income-Tax) only to
contend that when the assessee had volunteered to come before the Officer to make a
statement admitting an income of Rs.4.00 lakhs, it stands to reason that the same would be
binding on the assessee. The retraction came long after the date of statement given by the
assessee and only in the course of the assessment proceedings, the assessee chose to contend
otherwise. In the circumstances, no credence could be given to the explanation given by the
assessee.

9. Heard the learned counsel appearing for the assessee and the learned standing counsel
appearing for the Revenue.
 259

10. It is seen from the Circular dated 10th March, 2003, which has been extracted in the
decision reported in (2008) 300 ITR 157 (Mad) (Commissioner of Income Tax V. S.Kahder
Khan Son) that the Board emphasized the need to have a focus on the collection of evidence,
search and seizure and survey operations, which leads to an information as regards the
undisclosed income. The Board viewed that confessions recorded during the course of search
and seizure and survey operations did not serve any useful purpose. The Board also insisted
that while recording statements during search and seizure and survey operations, no attempt
should be made to obtain confession statement as to the undisclosed income. It was also
stated that any action on the contrary, shall be viewed seriously and the said circular has to be
applied to all pending assessments. Thus the Board insisted the Assessing Officer to rely
upon the evidences/materials gathered during search operation and that the assessment could
not rest simply on the confession statements made.

11. Thus pointing out to the above Circular, this Court, in the decision reported in (2008) 300
ITR 157 (Mad) (Commissioner of Income Tax V. S.Kahder Khan Son) laid the following
principles, which may usefully be extracted herein too:

"(i) An admission is extremely an important piece of evidence but it cannot be said that it is
conclusive and it is open to the person who made the admission to show that it is incorrect
and that the assessee should be given a proper opportunity to show that the books of accounts
do not correctly disclose the correct state of facts, vide decision of the Apex Court
in Pullangode Rubber Produce Co. Ltd. v. State of Kerala[1973]91ITR18(SC) ;

(ii) In contradistinction to the power under Section 133A, Section 132(4) of the Income Tax
Act enables the authorised officer to examine a person on oath and any statement made by
such person during such examination can also be used in evidence under the Income Tax Act.
On the other hand, whatever statement is recorded under Section 133A of the Income Tax
Act it is not given any evidentiary value obviously for the reason that the officer is not
authorised to administer oath and to take any sworn statement which alone has evidentiary
value as contemplated under law, vide Paul Mathews and Sons v. Commissioner of Income
Tax [2003]263ITR101(Ker) ;

(iii) The expression "such other materials or information as are available with the Assessing
Officer" contained in Section 158BB of the Income Tax Act, 1961, would include the
materials gathered during the survey operation under Section 133A, vide Commissioner of
Income Tax v. G.K. Senniappan [2006]284ITR220(Mad) ];

(iv) The material or infomration found in the course of survey proceeding could not be a basis
for making any addition in the block assessment, vide decision of this Court in T.C. (A) No.
2620 of 2006 between Commissioner of Income Tax v. S. Ajit Kumar;

(v) Finally, the word "may" used in Section 133A(3)(iii) of the Act, viz., "record the
statement of any person which may be useful for, or relevant to, any proceeding under this
Act, as already extracted above, makes it clear that the materials collected and the statement
recorded during the survey under Section 133A are not conclusive piece of evidence by
itself."

12. In the decision reported in (2006) 287 ITR 209 (P.R.Metrani V. Commissioner of Income-
Tax), dealing with the scope of Section 132(4A), the Supreme Court considered the
conclusive character of the statement made in a search operation. The Apex Court held
 260

that Section 132 is a complete code by itself. Under Section 132(4), in the case of search, the
authorised officer can examine any person who is found to be in possession or control of any
books of accounts, documents, money, jewellery or other valuable article and any statement
made by such person during the examination may thereafter be used in evidence in any
proceedings. Sub section (4A) enables an Assessing Officer to raise a rebuttable presumption
that such books of accounts, money, jewellery, etc., belonged to such person that the contents
of books of accounts and the documents are true and the signature found therein are in the
handwriting of the particular person. The Supreme Court held that the presumption is
rebuttable and is available only in regard to the proceedings for search and seizure and for the
purpose of Section 132(5) and 132B. However, the presumption under sub-section (4A)
to Section 132 of the Income Tax Act would not be available for the purpose of framing a
regular assessment. However, retention of books etc., can be used as a piece of evidence for
the purposes of framing of the regular assessment. Thus going by the above-said decision,
while the statement rendered at the time of search under Section 132(4) may be used in
evidence in any proceeding, yet, that by itself, does not become the sole material to rest the
assessment more so when the assessee seeks to withdraw the same by producing material
evidence in support of such retraction.

13. Thus going by the said decision of the Supreme Court, as well as the law declared in the
decision reported in (1973) 91 ITR 18 (Pullangode Rubber Produce Co. Ltd. V. State of
Kerala and another) that it is always open to a person, who made the admission, to show that
the statement to offer income is incorrect and had material to substantiate so, we hold that the
Tribunal is not justified in placing undue emphasis on the confession statements made by the
assessee.

14. As rightly pointed out by the learned counsel appearing for the assessee, when the
assessee had explained the statement made on the second day of the search with materials,
that the amounts offered were the loans taken from the relatives who were already assessed
on the said amount; apart from this, even otherwise, the transactions relating to pawn
broking, related to years prior to the date of assessment and had no relevance to the year
under consideration, rightly the Commissioner of Income Tax (Appeals) accepted the case of
assessee to cancel the assessment on Rs.4.00 lakhs. Thus when the assessee had explained his
statement as not correct in the context of the materials produced, as held by the Apex Court in
the decision reported in (1973) 91 ITR 18 (Pullangode Rubber Produce Co. Ltd. V. State of
Kerala and another), we do not think that the Tribunal would be justified in its conclusion
that the statement made would clothe the assessment with legality. Quite apart from that, the
case of the assessee also stands supported by the Circular dated 10th March, 2003 of the
Central Board of Direct Taxes, which has given categorical directions to the officers, who are
entrusted with the job of assessment that undue emphasis should not be placed on the
statements recorded. In fact, it had given a mandate not to obtain confession as to the
undisclosed income. Thus applying the Circular dated 10th March, 2003 to the facts of the
case, which is binding on the Revenue, we have no hesitation in setting aside the order of the
Tribunal. As already pointed out that except for the statements referred to by the Tribunal, it
had not adverted its attention to the materials produced by the assessee before the
Commissioner of Income Tax (Appeals) explaining the claim that the said amount could not
be included in the hands of the assessee.

15. In the circumstances, the order of the Tribunal stands set aside and the Tax Case
(Appeals) stands allowed. No costs.
 261

20. Penalties and Prosecutions:

Union of India vs Dharmendra Textile [2008] 166 TAXMAN 65 (SC ) - S Kapadia, B
S Reddy

3. In this batch of civil appeals, the question which arises for determination is whether
Section 11AC of the Centra). Excise Act, inserted by Finance Act, 1996 with the intention of
imposing mandatory penalty on persons who evade payment of tax, should be read to contain
mens rea as an essential requirement.

4. According to the department, the said section should be read as penalty for statutory
offences; that the executing authority had no discretion in the matter of penalty and that the
adjudicating authority in such cases was duty bound to impose penalty equal to the duty so
determined. On the other hand, it is the case of the assessee that mens rea was an essential
requirement of the said section particularly when the section refers to intention in the matter
of evading payment of duty. The assessee has also invited our attention, in this connection, to
the provisions of Section 271(l)(c) of the Income Tax Act which according to the assessee is
identically worded to Section 11AC of the Central Excise Act. The assessee has also placed
reliance on a recent judgment of the Division Bench of this Court in the case of Dilip N.
Shroff v. Jt. CIT 2007 (8) SCALE 304, decided on 18th May, 2007.

5. At this stage, we may mention that in the present cases, we are also concerned with
interpretation of Section 3A of the Central Excise Act and Rule 96ZQ(5) of the Central
Excise Rules which refers to failure on the part of an independent processor to pay duty by
specified date. In this connection, it is the case of the department that Clause (5) of Rule
96ZQ specifically refers to payment of penalty equal to amount of duty outstanding from the
assessee. It is the case of the department that penalty under the said rule is also for statutory
offences; that it is not a case of imposition of penalty and that it is not a case where the
adjudicating authority has any discretion in the matter of imposition of penalty. In this
connection, reliance is placed by the department on the judgment of the Division Bench of
this Court in the case of Chairman, SEBI v. Shriram Mutual Fund and Anr. . On the other
hand, it is the case of the assessee that even Rule 96ZQ(5) should be read down so as to
include the requirement of mens rea into Clause (5) of Rule 96ZQ particularly when the said
clause begins with the expression "if any independent processor fails to pay the amount of
duty". In this connection, the assessee once again placed reliance on the judgment of the
Division Bench of this Court in the case of Dilip N. Shroff v. Jt. CIT (supra).

6. We quote hereinbelow the provisions of Rule 96ZQ(5):

96ZQ. Procedure to be Mowed by the independent processor textile fabrics,

(l) to (4) (5) If an independent processor fails to pay the amount of duty or any partthereof by
the date specified in sub-r. (3), he shall be liable to.

(i) pay the outstanding amount of duty along with the interest at the rate of thirty-six per cent
per annum calculated for the outstanding period on the outstanding amount; and

(ii) a penalty equal to an amount of duty outstanding from him or rupees five thousand,
whichever is greater.

We also quote hereinbelow the provisions of Section 11AC of the Central Excise Act:
 262

Section 11 AC. Penalty for short-levy or non-levy of duty in certain cases.Where any duty of
excise has not been levied or paid or has been short-levied or short-paid or erroneously
refunded by reasons of fraud, collusion or any wilful misstatement or suppression of facts, or
contravention of any of the provisions of this Act or of the rules made thereunder with intent
to evade payment of duty, the person who is liable to pay duty as determined under Sub-
section (2) of Section 11A, shall also be liable to pay a penalty equal to the duty so
determined:

Provided that where the duty determined to be payable is reduced or increased by the
Commissioner (Appeals), the Appellate Tribunal or, as the case may be, the Court, then, for
the purposes of this section, the duty as reduced or increased, as the case may be, shall be
taken into account.

We also quote hereinbelow Section 271(l)(c) of the Income Tax Act:

271. Failure to furnish returns, comply with notices, concealment of income, etc.(1) If the
assessing officer or the Commissioner (Appeals) or the CIT in the course of any proceedings
under this Act, is satisfied that any person

(a) and (b) (c) has concealed the particulars of his income or furnished inaccurate particulars
of such income, he may direct that such person shall pay by way of penalty, (i) and (ii)

(iii) in the cases referred to in Clause (c) or Clause (d), in addition to tax, if any, payable by
him, a sum which shall not be less than, but which shall not exceed three times, the amount of
tax sought to be evaded by reason of the concealment of particulars of his income or fringe
benefits the furnishing of inaccurate particulars of such income or fringe benefits:

Explanation 1.Where in respect of any facts material to the computation of the total income
of any person under this Act, (A) Such person fails to offer an explanation or offers an
explanation which is found by the assessing officer or the Commissioner (Appeals) or the
CIT to be false, or (B) such person offers an explanation which he is not able to substantiate
and fails to prove that such explanation is bona fide and that all the facts relating to the same
and material to the computation of his total income have been disclosed by him, then, the
amount added or disallowed in computing the total income of such person as a result thereof
shall, for the purposes of Clause (c) of this sub-section, be deemed to represent the income in
respect of which particulars have been concealed.

Explanation 2,Where the source of any receipt, deposit, outgoing or investment in any
assessment year is claimed by any person to be an amount which had been added in
computing the income or deducted in computing the loss in the assessment of such person for
any earlier assessment year or years but in respect of which no penalty under Clause (iii) of
this sub-section had been levied, that part of the amount so added or deducted in such earlier
assessment year immediately preceding the year in which the receipt, deposit, outgoing or
investment appears (such earlier assessment year hereafter in this Explanation referred to as
the first preceding year) which is sufficient to cover the amount represented by such receipt,
deposit or outgoing or value of such investment (such amount or value hereafter in this
Explanation referred to as the utilised amount) shall be treated as the income of the assessee,
particulars of which had been concealed or inaccurate particulars of which had been
furnished for the first preceding year; and where the amount so added or deducted in the first
preceding year is not sufficient to cover the utilised amount, that part of the amount so added
 263

or deducted in the year immediately preceding the first preceding year which is sufficient to
cover such part of the utilised amount as is not so covered shall be treated to be the income of
the assessee, particulars of which had been concealed or inaccurate particulars of which had
been furnished for the year immediately preceding the first preceding year and so on, until the
entire utilised amount is covered by the amounts so added or deducted in such earlier
assessment years.

Explanation 3. Where any person fails, without reasonable cause, to furnish within the period
specified in Sub-section (1) of Section 153 a return of his income which he is required to
furnish under Section 139 in respect of any assessment year commencing on or after the 1-4-
1989, and until the expiry of the period aforesaid, no notice has been issued to him under
Clause (i) of Sub-section (1) of Section 142 or Section 148 and the assessing officer or the
Commissioner (Appeals) is satisfied that in respect of such assessment year such person has
taxable income, then, such person shall, for the purposes of Clause (c) of this sub-section, be
deemed to have concealed the particulars of his income in respect of such assessment year,
notwithstanding that such person furnishes a return of his income at any time after the expiry
of the period aforesaid in pursuance of a notice under Section 148.

Explanation 4 For the purposes of Clause (iii) of this sub-section, the expression 'the amount
of tax sought to be evaded',

(a) in any case where the amount of income in respect of which particulars have been
concealed or inaccurate particulars have been furnished has the effect of reducing the loss
declared in the return or converting that loss into income, means the tax that would have been
chargeable on the income in respect of which particulars have been concealed or inaccurate
particulars have been furnished had such income been the total income;

(b) in any case to which Expln. 3 applies, means the tax on the total income assessed;

(c) in any other case, means the difference between the tax on the total income assessed and
the tax that would have been chargeable had such total income been reduced by the amount
of income in respect of which particulars have been concealed or inaccurate particulars have
been furnished.

Explanation 5.Where in the course of a search under Section 132, the assessee is found to be
the owner of any money, bullion, jewellery or other valuable article or thing (hereafter in this
Explanation referred to as assets) and the assessee claims that such assets have been acquired
by him by utilising (wholly or in part) his income,

(a) for any previous year which has ended before the date of the search, but the return of
income for such year has not been furnished before the said date or, where such return has
been furnished before the said date, such income has not been declared therein; or

(b) for any previous year which is to end on or after the date of the search, then,
notwithstanding that such income is declared by him in any return of income furnished on or
after the date of the search, he shall, for the purposes of imposition of a penalty under Clause
(c) of Sub-section (1) of this section, be deemed to have concealed the particulars of his
income or furnished inaccurate particulars of such income, unless, (1) such income is, or the
transactions resulting in such income are recorded,
 264

(i) in a case falling Under Clause (a), before the date of the search; and

(ii) in a case falling under Clause (b), on or before such date, in the books of account, if any,
maintained by him for any source of income or such income is otherwise disclosed to the
Chief CIT or CIT before the said date; or (2) he, in the course of the search, makes a
statement under Sub-section (4) of Section 132 that any money, bullion, jewellery or other
valuable article or thing found in hispossession or under his control, has been acquired out of
his income which hasnot been disclosed so far in his return of income to be furnished before
theexpiry of time specified in Sub-section (1) of Section 139, and also specifies in
thestatement the manner in which such income has been derived and pays thetax, together
with interest, if any, in respect of such income.

Explanation 6.Where any adjustment is made in the income or loss declared in the return
under the proviso to Clause (a) of Sub-section (1) of Section 143 and additional tax charged
under that section, the provisions of this sub-section shall not apply in relation to the
adjustment so made, Explanation 7.Where in the case of an assessee who has entered into an
international transaction defined in Section 92B, any amount is added or disallowed in
computing the total income under Sub-section (4) of Section 92C, then, the amount so added
or disallowed shall, for the purposes of Clause (c) of this sub-section, be deemed to represent
the income in respect of which particulars have been concealed or inaccurate particulars have
been furnished, unless the assessee proves to the satisfaction of the assessing officer or the
Commissioner (Appeals) or the CIT that the price charged or paid in such transaction was
computed in accordance with the provisions contained in Section 92C and in the manner
prescribed under the it section, in good faith and with due diligence.

7. In our view, the basic scheme for imposition of penalty under Section 271(l)(c) of the
Income Tax Act, Section 11AC of the Central Excise Act and Rule 96ZQ(5) of the Central
Excise Rules is common. We have gone through the judgment of the Division Bench dated
18-5-2007 in the case of Dilip N. Shroff v. Jt. CIT (supra).

8. We are of the view that there is a conflict of opinions between the judgments of the
Division Bench of this Court in the case of Dilip N. Shroff v. Jt. CIT (supra) on one hand and
on the other hand we have another judgment of this Court in the case of Chairman, SEBI v.
Shriram Mutual Fund and Anr. (supra). Secondly, it may be pointed out that the object behind
enactment of Section 271(l)(c) read with the Explanations quoted above indicates that the
said section has been enacted to provide for a remedy for loss of revenue. The penalty under
the said section is a civl liability. Wilful concealment is not an essential ingredient for
attracting the civil liability as is the case in the matter of prosecution under Section 276C of
the Act. While considering an appeal against an order made under Section 271(l)(c) what is
required to be examined is the record which the officer imposing the penalty had before him
and if that record can sustain the finding there had been concealment, that would be sufficient
to sustain the penalty. Keeping in mind these two circumstances, we are of the view that the
judgment of the Division Bench in the case Dilip N. Shroff v. Jt. CIT (supra) needs
consideration. The Explanations added to Section 271(l)(c) in that entirety also indicate the
element of strict Liability on the assessee for concealment or for giving inaccurate particulars
while filing returns. The judgment in Dilip N. Shroff's case (supra) has also not considered
the provisions of Section 276C of the Income Tax Act. Therefore, in our view, the; judgment
in the case of Dilip N. Shroff v. Jt. CIT (supra) needs consideration by the larger Bench of
this Court particularly when it has ramifications not only regarding provisions of the Income
 265

Tax Act but also with regard to the provisions of Sections 3A and 11 AC of the Central
Excise Act and Rule 96ZQ(5) of the Central Excise Rules.

9. For the aforestated reasons, we direct the Registry to place our order in this batch of civil
appeals before the Hon'ble the Chief Justice of India for appropriate directions.

10. Before concluding, we may mention that in the present cases, the assessee had challenged
the vires of Rule 96ZQ(5). By the impugned judgment, the Gujarat High court has read down
the said rule incorporating the mens rea requirement. It is made clear that if the larger Bench
takes a view to say that the penalty under the said clause is mandatory, then it would still be
open to the assessee to challenge the vires of the said Rule 96ZQ(5) and, therefore, in that
event, the matter has to be kept before the Division Bench for passing appropriate orders.

(ii) JCIT, Surat vs Saheli Leasing & Industries Ltd [2010] 191 TAXMAN 165 (SC) - Deepak
Verma, B.S. Chauhan

2. The facts of both the appeals being identical, the facts of civil appeal arising out of
S.L.P.(C) No.5241 of 2007 are being referred to in this judgment.

3. On a first flush, after bare perusal of the impugned order passed in Revenue Tax Appeal
No. 1904 of 2005, decided on 8.8.2006 by Division Bench of the High Court of Gujarat at
Ahmedabad, we thought of remanding the matter for a fresh decision on merits, in
accordance with law but, on a deeper and studied scrutiny, we thought it apt instead of
directing to remit, it would be just and proper to consider the matter on merits ourselves and
to set at rest the legal controversy involved in the appeal. It is further so that Division Bench
in the impugned order has decided the question of law as projected before it in the appeal
preferred under Section 260 (A) of the Income Tax Act, 1961, (hereinafter referred to as 'the
Act') in a most casual manner. The order is not only cryptic but does not even remotely deal
with the arguments which were sought to be projected by the Revenue before it.

4. This Court, time and again, reminded the courts performing judicial functions, the manner
in which judgments/orders are to be written but, it is, indeed, unfortunate that those
guidelines issued from time to time are not being adhered to.

5. No doubt, it is true that brevity is an art but brevity without clarity likely to enter into the
realm of absurdity, which is impermissible. This is what has been reflected in the impugned
order which we would reproduce hereinafter.

6. We, therefore, before proceeding to decide the matter on merits, once again would like to
reiterate few guidelines for the Courts, while writing orders and judgments to follow the
same.

7. These guidelines are only illustrative in nature, not exhaustive and can further be
elaborated looking to the need and requirement of a given case:-

a) It should always be kept in mind that nothing should be written in the judgment/order,
which may not be germane to the facts of the case; It should have a co-relation with the
applicable law and facts. The ratio decidendi should be clearly spelt out from the judgment /
order.
 266

b) After preparing the draft, it is necessary to go through the same to find out, if anything,
essential to be mentioned, has escaped discussion.

c) The ultimate finished judgment/order should have sustained chronology, regard being had
to the concept that it has readable, continued interest and one does not feel like parting or
leaving it in the midway. To elaborate, it should have flow and perfect sequence of events,
which would continue to generate interest in the reader.

d) Appropriate care should be taken not to load it with all legal knowledge on the subject as
citation of too many judgments creates more confusion rather than clarity. The foremost
requirement is that leading judgments should be mentioned and the evolution that has taken
place ever since the same were pronounced and thereafter, latest judgment, in which all
previous judgments have been considered, should be mentioned. While writing judgment,
psychology of the reader has also to be borne in mind, for the perception on that score is
imperative.

e) Language should not be rhetoric and should not reflect a contrived effort on the part of the
author.

f) After arguments are concluded, an endeavour should be made to pronounce the judgment
at the earliest and in any case not beyond a period of three months. Keeping it pending for
long time, sends a wrong signal to the litigants and the society.

g) It should be avoided to give instances,which are likely to cause public agitation or to a

particular society. Nothing should be reflected in the same which may hurt the feelings or
emotions of any individual or society.

8. Aforesaid are some of the guidelines which are required to be kept in mind while writing
judgments. In fact, we are only reiterating what has already been said in several judgments of
this Court.

9. Aforesaid background has been given after going through the impugned judgment of
Division Bench of the High Court. Following substantial question of law, as contemplated
under Section 260 A of the Act, was formulated to be answered by it : "Whether, on the facts
and in the circumstances of the case, and in law, the Income Tax Appellate Tribunal is right
in coming to the conclusion that where assessed income is loss, penalty cannot be levied
under section 271 (1) (c) of the Income Tax Act in spite of the fact that Explanation 4 (a) was
added in the Income Tax Act with effect from 1.4.1976 and subsequently, further clause (a)
was replaced by another clause

(a) which is in clarificatory nature, with effect from 1.4.2003?"

10. However, the Division Bench in its wisdom thought it fit to dispose of the appeal as
under:-

"Admitted facts are that the appellant has filed return showing loss and the income is also
assessed as "NIL income". When the return was shown as loss as well as assessment of
income is also NIL, no penalty under Section 271 (1) (c) of the Income Tax Act is attracted.
No case is made out for admission of the appeal. The appeal stands dismissed at admission
stage.
 267

11. Considering the important question of law and its wide repercussions, it was least
expected from the Division Bench of the High Court to have dealt with the issue more
seriously, keeping in mind the question of law that was being answered by it.

12. Feeling aggrieved, this appeal has been preferred by Revenue before us.

Factual matrix is as under:-

13. On return being filed by the Respondent/Assessee, an order under Section 143 (3) of the
Act was passed on 27.2.1998, showing total income of Rs. NIL for assessment year 1995-
1996.

14. During the course of assessment proceedings, it was noticed that Assessee had claimed
depreciation, which was viewed to be incorrect. Thus, an amount of Rs. 24,22,531/- was
disallowed out of depreciation. Penalty proceedings under Section 271 (1) (c) of the Act were
initiated. In response to the show cause notice issued by the Revenue, Assessee filed its reply
denying the allegations and contending that no penalty can be imposed on it, when returned
income was NIL.

15. Penalty was sought to be imposed in respect of an item having an effect in reducing the
loss. No appeal was filed against the item, added to the income on account of which the loss
was reduced. Admittedly, Assessee, a leasing company had claimed depreciation on plant and
machinery @ 100% on various items. The statement of depreciation filed along with the
computation of income showed the claim at Rs.1,05,08,824/-. On enquiries being made it was
revealed that 100% depreciation was claimed along with Lease Agreements entered into with
different parties. Even though, terms and conditions of the Lease Agreements entered into
with different parties were the same, except the names of the parties had been changed. Even
after dis-allowance of the said depreciation, the taxable income of the Assessee was NIL and
hence, there was no tax liability. According to Assessee, in such a case no penalty
under Section 271 (1) (c) could have been levied.

16. Deputy Commissioner of Income tax, Special Range-2, Surat, on the basis of the
discussion in the order held that Assessee was liable to pay penalty, with reference to such
additions to income to be treated as its total income, with reference to explanation 4 (a)
to Section 271 (1) (c) of the Act. Accordingly, the penalty was levied on concealed income of
Rs. 24,22,531/- at minimum rate of 100% of tax sought to be evaded. Thus, a penalty of Rs.
11,14,364/- was imposed on the Assessee.

17. Feeling aggrieved thereof, Assessee preferred an appeal before the Commissioner of
Income Tax (Appeals-II). Considering various judgments of the Tribunal and the High
Courts, the appeal of the Assessee came to be dismissed and penalty levied on it stood
confirmed.

18. Assessee preferred further appeal before the Income-Tax Appellate Tribunal,
Ahmedabad. Tribunal, on the strength of an earlier order passed by Special Bench of
Ahmedabad Tribunal in the case of Apsara Processors (P) Ltd. and Ors. in ITA No.
284/Ahd./2004 dated 17.12.2004 came to the conclusion that no penalty can be levied, if the
returned income and the assessed income is loss. Accordingly, the orders passed by the
Assessing Officer as well as Commissioner (Appeals) were set aside and quashed and the
penalty imposed on the Assessee was deleted. It was this order of the Tribunal which was
 268

carried further by filing Appeal under Section 260A of the Act in the High Court, which met
the fate of dismissal by the Division Bench.

19. Shri V. Shekhar, learned senior counsel appearing for the appellant at the outset
contended that the point projected in this appeal stands answered in favour of the Revenue by
a judgment of Bench of three learned Judges of this Court reported in (2008) 304 ITR 308
(SC) titled CIT Vs. Gold Coin Health (P) Ltd.

20. In Gold Coin (supra) an earlier judgment of this Court, reported in (2007) 289 ITR 83 SC
titled Virtual Soft Systems Ltd. Vs. CIT, pronounced by two learned Judges has been over-
ruled.

21. It is pertinent to point out here that in Gold Coin (supra), what was being challenged by
the Revenue, was the order passed by same Bench of the High Court of Gujarat at
Ahmedabad, which finds place at page 309, wherein before proceeding to decide the matter,
the three learned judges of this Court thought it fit to reproduce the same. The question of law
as projected in Gold Coin (supra) before the High Court and the question of law as projected
in this appeal is identical but what is being deciphered by us is the manner in which the
impugned judgment has been written and pronounced. After all, at the High Court level,
when a matter is considered on merits by a Division Bench, not only (contd.) factual but
even legal aspect of the matters is required to be considered at some length.

22. The matter of Gold Coin (supra) was placed before three learned judges of this Court, as
correctness and propriety of the order passed by two learned judges of this Court in Virtual
Soft Systems (supra) was doubted. Thus, to clear the doubts, on the correct exposition of law,
a three Judge Bench was constituted which decided the matter in Gold Coin (supra).

23. It is to be seen that purpose behind Section 271 (1)(c) of the Act is to penalise the
Assessee for -

a)concealing particulars of income and / or

b)furnishing inadequate particulars of such income.

24. Whether income returned was a profit or loss, was really of no consequence. Therefore,
even if no tax was payable, the penalty was still leviable. It is in that context, to be noted that
even prior to the amendment it could not be read to mean that if no tax was payable by the
Assessee, due to filing of return, disclosing loss, the Assessee was not liable to pay penalty
even if the Assessee had concealed and/or furnished inadequate particulars.

25. Some of the High Courts had taken a contrary view, thus, Parliament in its wisdom
thought it fit to clarify the position by changing the expression "any" by "if any".

Thus, this was not a substantive amendment which created imposition of penalty for the first
time. The amendment by the Finance Act of the relevant year as specifically noted in the
notes on clauses shows that proposed amendment was clarificatory in nature and would apply
to all assessments even prior to the assessment year 2003-2004.

26. Thus, in Gold Coin (supra), after combined reading of the recommendations of Wanchoo
Committee, and Circular No. 204 dated 24.7.1976, it was clarified that points had been made
 269

clear with regard to Explanation 4 (a) to Section 271 (1) (c) (iii) to intend to levy penalty not
only in a case where after addition of concealed income, a loss returned, after assessment
becomes positive income, but also in a case where addition of concealed income reduces the
returned loss and finally the assessed income is also a loss or minus figure. Therefore, even
during the period between 1.4.1976 and 1.4.2003, the position was that penalty was still
leviable in a case where addition of concealed income reduces the returned loss.

27. In the aforesaid case, the expression "income" in the statute appearing in Section 2 (24) of
the Act has been clarified to mean that it is an inclusive definition and includes losses, that is,
negative profit. This has been held so on the strength of earlier judgments of this Court in CIT
Vs. Harprasad and Co. P. Ltd (1975) 99 ITR 118 and followed in Reliance Jute and
Industries Ltd. Vs. CIT (1979) 120 ITR 921. After elaborate and detailed discussion, this
Court held with reference to the charging provisions of statute that the expression "income"
should be understood to include losses. The expression "profits and gains" refers to positive
income whereas "losses" represent negative profit or in other words minus income.

28. Considering this aspect of the matter in greater details, Gold Coin (supra) over-ruled the
view expressed by two learned judges in Virtual Soft Systems (supra).

29. Relevant paras 11 and 12 of Gold Coin (supra) dealing with income and losses are
reproduced herein below:-

"11. When the word "income" is read to include losses as held in Harprasad's case it becomes
crystal clear that even in a case where on account of addition of concealed income the
returned loss stands reduced and even if th final assessed income is a loss, still penalty was
leviable thereon even during the period April 1, 1976 to April1, 2003. Even in the Circular
dated July 24, 1976, referred to above, the position was clarified by the Central Board of
direct Taxes (in short "the CBDT"). It is stated that in a case where on setting off the
concealed income against any loss incurred by the Assessee under any other head of income
or brought forward from earlier years, the total income is reduced to a figure lower than the
concealed income or even to a minus figure the penalty would be imposable because in such
a case 'the tax sought to be evaded" will be tax chargeable on concealed income as if it is
"total income".

12. Law is well-settled that the applicable provision would be the law as it existed on the date
of the filing of the return. It is of relevance to note that when any loss is returned in any
return it need not necessarily be the loss of the concerned previous year. It may also include
carried forward loss which is required to be set up against future income under Section 72 of
the Act. Therefore, the applicable law on the date of filing of the return cannot be confined
only to the losses of the previous accounting years."

30. The necessary consequence thereof would be that even if Assessee has disclosed NIL
income and on verification of the record, it is found that certain income has been concealed
or has wrongly been shown, in that case, penalty can still be levied. The aforesaid position is
no more res integra and according to us, it stands answered in favour of the Revenue and
against the Assessee.

31. The learned senior counsel appearing for the respondent Assessee, Mr. D.N Sawhney,
contended that the observations made in Gold Coin (supra) can at best be treated as obiter but
not as binding precedent. According to him, the earlier judgment of the Coordinate Bench in
 270

CIT Vs. Elphinstone Spinning and Weaving Mills Co. Ltd. XL ITR 142, would still hold the
field and applies fully to the facts of the said case.

32. Much emphasis has been laid on the following observations in Elphinstone (supra)
reproduced hereinbelow :

"There is no doubt that if the words of a taxing statute fail, then so much the tax. The courts
cannot, except rarely and in clear cases, help the draftsmen by a favourable construction.
Here, the difficulty is not one of inaccurate language only. It is really this that a very large
number of taxpayers are within the words but some of them are not. Whether the enactment
might fail in the former case on some other ground (as has happened in another case decided
today) is not a matter we are dealing with at the moment. It is sufficient to say there that the
words do not take in the modifications which the learned counsel for the appellant suggests.
The word "additional" in the expression "additional income-tax" must refer to a state of
affairs in which there has been a tax before. The words "charge on the total income" are not
appropriate to describe a case in which there is no income or there is loss. The same is the
case with the expression "profits liable to tax" The last expression "dividends payable out of
such profits" can only apply when there are profits and not when there are no profits.

It is clear that the Legislature had in mind the case of persons paying dividends beyond a
reasonable portion of their income. A rebate was intended to be given to those who kept
within the limit and an enhanced rate was to be imposed on those who exceeded it. The law
was calculated to reach those persons who did the latter even if they resorted to the device of
keeping profits back in one year to earn rebate to pay out the same profits in the next. For this
purpose, the profits of the earlier years were deemed to be profits of the succeeding years. So
far so good. But the Legislature failed to fit in the law in the scheme of the Indian Income-tax
Act under which and to effectuate which the Finance Act is passed. The Legislature used
language appropriate to income, and applied the rate to the "total income". Obviously,
therefore, the law must fail in those cases where there is no total income at all, and the courts
cannot be invited to supply the omission made by the Legislature."

33. In a first glance, after considering arguments of both sides, we thought that matter
required to be referred to a larger Bench for considering the issue involved in this appeal but
on deeper scanning of the judgments in Gold Coin (supra) and Elphinstone (supra), we came
to the conclusion that the ratio decidendi of Gold Coin (supra) fully covers the issue and the
case of Elphinstone (supra) has no application to the facts of the said case.

34. Both cases are distinguishable on the following broad grounds, namely:

(i) Gold Coin Health (supra) arose under the Income Tax Act, 1961, whereas
Elphinstone(supra) arose under the repealed Income Tax Act of 1922.
(Though this is only a distinguishing feature noticed in 2 decisions which is not of much
significance).

(ii) The question that fell for consideration in Gold Coin (supra) was what would be the true
interpretation of Section 271 (1) (c) in the context of amendments made therein whereas, the
question in Elphinstone (supra) was in relation to chargeability Cof "additional tax" on
"dividend income" earned by Assessee under paragraph - B of First Schedule to the Income
Tax Act, 1922.
 271

(iii) Elphinstone (supra) interpreted five words occurring in para-B of First Schedule namely;
"additional", "additional Income Tax", "charge on the total income", "profits liable to tax"
and lastly, "dividends payable out of such profits", whereas, in Gold Coin's case, the question
arose whether word "income" includes loss for the purpose of imposition of penalty u/s 271
(1) (c) and if Assessee incurs loss in any particular year then whether penalty u/s 271 (1) (c)
can still be imposed on him. This has been categorically answered in Gold Coin (supra) in
favour of Revenue and against the Assessee.

(iv) The object of imposing penalty is different than that of determining Assessee's liability to
pay tax or additional tax under any charging section. The interpretation applied to penalty
provision thus, cannot be applied while interpreting any charging section for payment of
income tax or additional tax. In other words, both provisions i.e. penalty and charging have
different objects and consequences. They operate in different fields qua Assessee.

(v) The liability to pay additional tax under First Schedule on the income earned out of
dividend implies that Assessee is first required to pay "tax" and then additional tax on the
specified income. It was basically this issue which was examined in Elphinstone (supra)
wherein Their Lordships considered the object for enacting first para of schedule. This object
has nothing to do with penalty provisions.

(vi) A particular word occurring in one Section of the Act, having a particular object cannot
carry the same meaning when used in different Section of the same Act, which is enacted for
different object. In other words, one word occurring in different Sections of the Act can have
different meaning, if the object of the two Sections are different and when both operate in
different fields.

(vii) Question of law involved in this appeal is directly covered by the decision of Gold Coin
(supra) and is to be answered accordingly.

(viii) Elphinstone (supra), therefore, has no bearing over the view taken in Gold Coin (supra)
case and even if it had been taken note of, the decision taken therein would have been the
same due to aforementioned distinguishing feature.

(ix) The issue involved in Gold Coin (supra) being entirely different than the one involved in
Elphinstone (supra), the view taken by this Court in both the decisions are correct operating
in the respective fields, requiring no reconsideration of the matter.

(x) In order to enable the Court to refer any case to a larger Bench for reconsideration, it is
necessary to point out that particular provision of law having a bearing over the issue
involved was not taken note of or there is an error apparent on its face or that a particular
earlier decision was not noticed, which has a direct bearing or has taken a contrary view.
Such does not appear to be a case herein. Thus, it does not need to be referred to a larger
Bench as in our considered opinion; it is squarely covered by the judgment of this Court in
Gold Coin (supra).

35. In the light of the aforesaid discussion, we have no doubt in our mind that the ratio of
Elphinstone (supra) has no application to the facts of the case and the question of law
projected stands squarely answered in favour of the Revenue and against the Assessee in
Gold Coin (supra) as a result thereof, appeal by Revenue stands hereby allowed. Impugned
order passed by Income Tax Appellate Tribunal and confirmed by Division Bench are hereby
 272

set aside and quashed. The Revenue, therefore, would be at liberty to proceed further against
the Assessee on merits in accordance with law.

36. Appeals stand allowed as mentioned hereinabove but with no order as to costs.

(iii)CIT vs Reliance Petro products Pvt Ltd [2010] 322 ITR 158 - V.S. Sirpurkar,
Mukundakam Sharma

2. The only question in this appeal which has been filed by the Commissioner of Income Tax-
III is as to whether the respondent-assessee is liable to pay the penalty amounting to
Rs.11,37,949/- under Section 271(1)(c) of the Income Tax Act (hereinafter referred to as "the
Act") ordered by the Assessing Authority. The Commissioner of Income Tax (Appeals),
however, deleted the said penalty. The order of the Commissioner (Appeals) was appealed
against before the Income Tax Appellate Tribunal (hereinafter referred to "the Tribunal")
which confirmed the order of the Commissioner (Appeals) and dismissed the appeal filed by
the Revenue. However, the Revenue challenged the said order before the High Court which
confirmed the orders passed by the Commissioner (Appeals) and the Tribunal while
dismissing the Tax Appeal filed by the Revenue.

3. Few facts would be relevant.

4. The assessee is a company and the relevant Assessment Year is 2001-02. The Return was
filed on 31.1.2001 declaring loss of Rs.26,54,554/-. This assessment was finalized
under Section 143(3) of the Act on 25.11.2003 whereby the total income was determined at
Rs.2,22,688/-. In this assessment the addition in respect of interest expenditure was made.
Simultaneously penalty proceedings under Section 271(1)(c) of the Act were also initiated on
account of concealment of income/furnishing of inaccurate particulars of income. The said
expenditure was claimed by the assessee on the basis of expenditure made for paying the
interest on the loans incurred by it by which amount the assessee purchased some IPL shares
by way of its business policies. However, admittedly, the assessee did not earn any income by
way of dividend from those shares. The company in its Return claimed disallowance of the
amount of expenditure for Rs.28,77,242/- under Section 14A of the Act.

5. By way of response to the Show Cause Notice regarding the penalty in its reply dated
22.3.2006, the assessee claimed that all the details given in the Return were correct, there was
no concealment of income, nor were any inaccurate particulars of such income furnished. It
was pointed out that the disallowance made by the Assessing Authority in the Assessment
Order under Section 143(3) of the Act were solely on account of different views taken on the
same set of facts and, therefore, they could, at the most, be termed as difference of opinion
but nothing to do with the concealment of income or furnishing of inaccurate particulars of
such income. It was claimed that mere disallowance of the claim in the assessment
proceedings could not be the sole basis for levying penalty under Section 271(1)(c) of the
Act. It was submitted specifically that it was an investment company and in its own case for
Assessment Year 2000-01 the Commissioner (Appeals) had deleted the disallowance of
interest made by the Assessment Officer and the Tribunal has also confirmed the stand of the
Commissioner (Appeals) for that year and, therefore, it was on the basis of this that the
expenditure was claimed. It was further submitted that making a claim which is rejected
would not make the assessee company liable under Section 271(1)(c) of the Act. It was again
reiterated that there was absolutely no concealment, nor were any inaccurate particular ever
submitted by the assessee-company.
 273

6. Shri Bhattacharya, Learned ASG submits that Commissioner (Appeals), the Tribunal as
well as the High Court have ignored the positive language of Section 271(1)(c) of the Act. He
pointed out that the claim of the interest expenditure was totally without legal basis and was
made with the malafide intentions. It was further pointed out that the claim made for the
interest expenditure was not accepted by the Assessing Authority nor by the Commissioner
(Appeals) and, therefore, it was obvious that the claim for the interest expenditure did not
have any basis. He further pointed out that the contention about the earlier claims being
finalized was also not correct as the appeal was pending before the High Court against the
order of the Tribunal for the year 2000-01. According to the Learned ASG, even otherwise,
the expenditure on interest could not have been claimed in law, as under Section 36(1)(iii),
only the amount of interest paid in respect of capital borrowed for the purposes of the
business or profession could have been claimed and it was clear that the interest in the present
case was not in respect of the capital borrowed. Our attention was also invited to Section
14A of the Act, which provides that no deduction could be allowed in respect of the
expenditure incurred by the assessee in relation to income which does not form part of the
total income under this Act. The Learned ASG also invited our attention to provision
of Section 10(33) to show that the income arising from the transfer of a capital asset could
not be reckoned as an income which can form the part of the total income. In short, the
contention was that the assessee in this case had made a claim which was totally unacceptable
in law and thereby had invited the provisions of Section 271(1)(c) of the Act and had,
therefore, exposed itself to the penalty under that provision.

7. As against this, Learned Counsel appearing on behalf of the respondent pointed out that the
language of Section 271(1)(c) had to be strictly construed, this being a taxing statute and
more particularly the one providing for penalty. It was pointed out that unless the wording
directly covered the assessee and the fact situation herein, there could not be any penalty
under the Act. It was pointed out that there was no concealment or any inaccurate particulars
regarding the income were submitted in the Return. Section 271(1)(c) is as under:-

"271(1) If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the
course of any proceedings under this Act, is satisfied that any person-

(c) has concealed the particulars of his income or furnished inaccurate particulars of such
income."

A glance at this provision would suggest that in order to be covered, there has to be
concealment of the particulars of the income of the assessee. Secondly, the assessee must
have furnished inaccurate particulars of his income. Present is not the case of concealment of
the income. That is not the case of the Revenue either. However, the Learned Counsel for
Revenue suggested that by making incorrect claim for the expenditure on interest, the
assessee has furnished inaccurate particulars of the income. As per Law Lexicon, the
meaning of the word "particular" is a detail or details (in plural sense); the details of a claim,
or the separate items of an account. Therefore, the word "particulars" used in the Section
271(1)(c) would embrace the meaning of the details of the claim made. It is an admitted
position in the present case that no information given in the Return was found to be incorrect
or inaccurate. It is not as if any statement made or any detail supplied was found to be
factually incorrect. Hence, at least, prima facie, the assessee cannot be held guilty of
furnishing inaccurate particulars. The Learned Counsel argued that "submitting an incorrect
claim in law for the expenditure on interest would amount to giving inaccurate particulars of
such income". We do not think that such can be the interpretation of the concerned words.
 274

The words are plain and simple. In order to expose the assessee to the penalty unless the case
is strictly covered by the provision, the penalty provision cannot be invoked. By any stretch
of imagination, making an incorrect claim in law cannot tantamount to furnishing inaccurate
particulars. In Commissioner of Income Tax, Delhi Vs. Atul Mohan Bindal [2009(9) SCC
589], where this Court was considering the same provision, the Court observed that the
Assessing Officer has to be satisfied that a person has concealed the particulars of his income
or furnished inaccurate particulars of such income. This Court referred to another decision of
this Court in Union of India Vs. Dharamendra Textile Processors [2008(13) SCC 369], as
also, the decision in Union of India Vs.RajasthanSpg. &Wvg. Mills [2009(13) SCC 448] and
reiterated in para 13 that:- "13. It goes without saying that for applicability of Section
271(1)(c), conditions stated therein must exist."

8. Therefore, it is obvious that it must be shown that the conditions under Section
271(1)(c) must exist before the penalty is imposed. There can be no dispute that everything
would depend upon the Return filed because that is the only document, where the assessee
can furnish the particulars of his income. When such particulars are found to be inaccurate,
the liability would arise. In Dilip N. Shroff Vs. Joint Commissioner of Income Tax, Mumbai
&Anr. [2007(6) SCC 329], this Court explained the terms "concealment of income" and
"furnishing inaccurate particulars". The Court went on to hold therein that in order to attract
the penalty under Section 271(1)(c), mens rea was necessary, as according to the Court, the
word "inaccurate" signified a deliberate act or omission on behalf of the assessee. It went on
to hold that Clause (iii) of Section 271(1) provided for a discretionary jurisdiction upon the
Assessing Authority, inasmuch as the amount of penalty could not be less than the amount of
tax sought to be evaded by reason of such concealment of particulars of income, but it may
not exceed three times thereof. It was pointed out that the term "inaccurate particulars" was
not defined anywhere in the Act and, therefore, it was held that furnishing of an assessment
of the value of the property may not by itself be furnishing inaccurate particulars. It was
further held that the assessee must be found to have failed to prove that his explanation is not
only not bona fide but all the facts relating to the same and material to the computation of his
income were not disclosed by him. It was then held that the explanation must be preceded by
a finding as to how and in what manner, the assessee had furnished the particulars of his
income. The Court ultimately went on to hold that the element of mens rea was essential. It
was only on the point of mens rea that the judgment in Dilip N. Shroff Vs. Joint
Commissioner of Income Tax, Mumbai &Anr. was upset. In Union of India Vs.
Dharamendra Textile Processors (cited supra), after quoting from Section 271 extensively
and also considering Section 271(1)(c), the Court came to the conclusion that since Section
271(1)(c) indicated the element of strict liability on the assessee for the concealment or for
giving inaccurate particulars while filing Return, there was no necessity of mens rea. The
Court went on to hold that the objective behind enactment of Section 271(1)(c) read with
Explanations indicated with the said Section was for providing remedy for loss of revenue
and such a penalty was a civil liability and, therefore, willful concealment is not an essential
ingredient for attracting civil liability as was the case in the matter of prosecution
under Section 276-C of the Act. The basic reason why decision in Dilip N. Shroff Vs. Joint
Commissioner of Income Tax, Mumbai &Anr. (cited supra) was overruled by this Court in
Union of India Vs. Dharamendra Textile Processors (cited supra), was that according to this
Court the effect and difference between Section 271(1)(c) and Section 276-C of the Act was
lost sight of in case of Dilip N. Shroff Vs. Joint Commissioner of Income Tax, Mumbai
&Anr. (cited supra). However, it must be pointed out that in Union of India Vs. Dharamendra
Textile Processors (cited supra), no fault was found with the reasoning in the decision in
Dilip N. Shroff Vs. Joint Commissioner of Income Tax, Mumbai &Anr. (cited supra), where
 275

the Court explained the meaning of the terms "conceal" and inaccurate". It was only the
ultimate inference in Dilip N. Shroff Vs. Joint Commissioner of Income Tax, Mumbai &Anr.
(cited supra) to the effect that mens rea was an essential ingredient for the penalty
under Section 271(1)(c) that the decision in Dilip N. Shroff Vs. Joint Commissioner of
Income Tax, Mumbai &Anr. (cited supra) was overruled.

9. We are not concerned in the present case with the mens rea. However, we have to only see
as to whether in this case, as a matter of fact, the assessee has given inaccurate particulars. In
Webster's Dictionary, the word "inaccurate" has been defined as:- "not accurate, not exact or
correct; not according to truth; erroneous; as an inaccurate statement, copy or transcript".

We have already seen the meaning of the word "particulars" in the earlier part of this
judgment. Reading the words in conjunction, they must mean the details supplied in the
Return, which are not accurate, not exact or correct, not according to truth or erroneous. We
must hasten to add here that in this case, there is no finding that any details supplied by the
assessee in its Return were found to be incorrect or erroneous or false. Such not being the
case, there would be no question of inviting the penalty under Section 271(1)(c) of the Act. A
mere making of the claim, which is not sustainable in law, by itself, will not amount to
furnishing inaccurate particulars regarding the income of the assessee. Such claim made in
the Return cannot amount to the inaccurate particulars.

10. It was tried to be suggested that Section 14A of the Act specifically excluded the
deductions in respect of the expenditure incurred by the assessee in relation to income which
does not form part of the total income under the Act. It was further pointed out that the
dividends from the shares did not form the part of the total income. It was, therefore,
reiterated before us that the Assessing Officer had correctly reached the conclusion that since
the assessee had claimed excessive deductions knowing that they are incorrect; it amounted
to concealment of income. It was tried to be argued that the falsehood in accounts can take
either of the two forms; (i) an item of receipt may be suppressed fraudulently; (ii) an item of
expenditure may be falsely (or in an exaggerated amount) claimed, and both types attempt to
reduce the taxable income and, therefore, both types amount to concealment of particulars of
one's income as well as furnishing of inaccurate particulars of income. We do not agree, as
the assessee had furnished all the details of its expenditure as well as income in its Return,
which details, in themselves, were not found to be inaccurate nor could be viewed as the
concealment of income on its part. It was up to the authorities to accept its claim in the
Return or not. Merely because the assessee had claimed the expenditure, which claim was not
accepted or was not acceptable to the Revenue, that by itself would not, in our opinion, attract
the penalty under Section 271(1)(c). If we accept the contention of the Revenue then in case
of every Return where the claim made is not accepted by Assessing Officer for any reason,
the assessee will invite penalty under Section 271(1)(c). That is clearly not the intendment of
the Legislature.

11. In this behalf the observations of this Court made in Sree Krishna Electricals v. State of
Tamil Nadu &Anr. [(2009) 23VST 249 (SC)] as regards the penalty are apposite. In the
aforementioned decision which pertained to the penalty proceedings in Tamil Nadu General
Sales Tax Act, the Court had found that the authorities below had found that there were some
incorrect statements made in the Return. However, the said transactions were reflected in the
accounts of the assessee. This Court, therefore, observed: "So far as the question of penalty
is concerned the items which were not included in the turnover were found incorporated in
the appellant's account books. Where certain items which are not included in the turnover are
 276

disclosed in the dealer's own account books and the assessing authorities include these items
in the dealer's turnover disallowing the exemption, penalty cannot be imposed. The penalty
levied stands set aside."

The situation in the present case is still better as no fault has been found with the particulars
submitted by the assessee in its Return.

12. The Tribunal, as well as, the Commissioner of Income Tax (Appeals) and the High Court
have correctly reached this conclusion and, therefore, the appeal filed by the Revenue has no
merits and is dismissed.

(iv)DCIT Vs. Shri Suresh Karmakar (ITAT Kolkata) - 1 November, 2017 -M.Balaganesh,
AM & Shri S.S.Viswanethra Ravi, JM

This appeal by the Revenue arises out of the order of the Learned Commissioner of Income
Tax(Appeals)-20, Kolkata [in short the ld CIT(A)] in Appeal No247/CIT(A)- 20/CC-2(2)/13-
14 dated 28.08.2015 against the order passed by the DCIT, Central Circle-XXVIII, Kolkata [
in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short "the Act")
dated 27.12.2011 for the Assessment Year 2010-11.

2. The only issue to be decided in this appeal is as to whether the Ld. CIT(A) was justified in
deleting the penalty imposed u/s 271AAA of the Act in the facts and circumstances of the
case.

3. The brief facts of this issue is that the assessee was subjected to search & seizure operation
on 08.01.2010. The assessee belongs to Bidhan Jewellers group of cases. The assessee is a
proprietor of M/s Bidhan Jewelleries. At the time of search, the assessee ITA
No.1399/Kol/2015 Suresh Karmakar A.Yr.2010-11 gave a statement u/s 132(4) wherein he
admitted a sum of Rs. 3 crores as an undisclosed income. The assessee also explained vide
reply to question no. 4 of the statement recorded on the date of search that he had derived this
undisclosed income of Rs. 3 crores out of unaccounted sale of jewellery made through
estimate slip that were issued to the customers and the assessee had also stated the application
of undisclosed income in certain properties, unaccounted stock and cash balance. In other
words, the assessee duly substantiated the manner of deriving the undisclosed income
together with application thereon in the statement recorded under 132(4) of the Act on the
date of search itself. The assessee however, did not come forward to offer the same in the
original return of income filed for the assessment year 2010-11 on 30.08.2011. This return
was also followed by revised return. Even in this revised return, the assessee did not offer this
undisclosed income of Rs. 3 crores. However, the assessee later on filed second revised
return on 01.11.2011 wherein he duly offered additional income Rs. 2,90,74,000/- for
assessment year 2010-11 and Rs. 9,26,000/- for assessment year 2008-

09. The assessee also filed revised return for assessment year 2008-09 including the
additional income of Rs. 9,26,000/-. The assessee paid the taxes together with interest on this
additional income of Rs. 3 crores for the respective assessment years before the date of filing
the second revised return of income on 01.11.2011. The assessee filed a written submission
vide letter dated 14.11.2011 giving details of undisclosed income pertaining to various
financial years, among other details before the Ld. AO. The assessment was completed based
on the second revised return filed by the assessee on 01.11.2011. Penalty proceedings u/s
271AAA of the Act was initiated by the Ld. AO. In the course of penalty proceedings, the
 277

assessee explained that the assessee had satisfied all the three conditions contemplated in
271AAA(2) of the Act and hence, is entitled for immunity from levy of penalty thereon. The
Ld. AO however observed that since the assessee had retracted from his 132(4) disclosure
statement by not offering the income of Rs. 3 crores in the original return of income, the
assessee had not complied with the condition of 271AAA(2) of the Act. The Ld. AO also
observed that the taxes were paid ITA No.1399/Kol/2015 Suresh Karmakar A.Yr.2010-11 by
the assessee belatedly i.e. after the date of filing of original return of income hence, he held
that the assessee is not entitled for immunity provided in 271AAA(2) of the Act. Based on
these findings, he levied a penalty of Rs. 30,36,743/- for the assessment year 2010-11.

4. The ld. CIT(A) observed that the assessee had satisfied all three conditions provided u/s
271AAA(2) of the Act. The Ld. CIT(A) also placed reliance on the decision of Hon'ble
Supreme Court in the case of ACIT vs. GebilalKanhaialal HUF, reported in 348 ITR 561
(SC) wherein it was held that there was no time limit prescribed in the Statute for payment of
tax and interest on the undisclosed income offered u/s 132(4) of the Act in the context of
explanation 5 to Section 271(1)(c) of the Act. The Hon'ble Supreme Court accordingly held
that the assessee is indeed for immunity provided in Clause 2 of Explanation 5 to Section
271(1)(c) of the Act. Aggrieved the Revenue is in appeal before us on the following grounds :

1. Whether on the facts and circumstances of the case the Ld. CIT(A) was justified in law,
while deleting the penalty imposed u/s 271AAA of the Income Tax Act, 1961 on the ground
that the assessee cannot be charged with filing inaccurate particulars of its income.
2. That on the facts and circumstances of the case the Ld. CIT(A) has erred in fact facts in
observing that the assessee has fulfilled the condition prescribed for non-levy of penalty u/s
271AAA of the Act.
3. Reliance is placed on the ratio of judgment in case of MAK Data Pvt. Ltd. vs. CIT 358 ITR
593 (SC).
4. That the appellant craves leave to add, amend or alter the grounds of appeal, if any.

5. The Ld. DR vehemently relied on the order of the Ld. AO. In response to this, the Ld. AR
stated that there is no requirement in law provided in Section 271AAA(2) of the Act that the
assessee should offer the undisclosed income declared under 132(4) of the Act in the return
of income. It only says that the assessee should admit the undisclosed ITA No.1399/Kol/2015
Suresh Karmakar A.Yr.2010-11 income at the time of search; substantiate the manner in
which such undisclosed income was derived by the assessee; and pay the tax together with
interest on such undisclosed income. If these cumulative conditions are satisfied, the assessee
is entitled for immunity from levy of penalty u/s 271AAA(2) of the Act. In the instant case,
all the three conditions are satisfied by the assessee.

6. We have heard the rival submissions. We find that the assessee had satisfied all the three
conditions prescribed in 271AAA(2) of the Act. The assessee had even though retracted the
132(4) statement by not offering the undisclosed income in the original return of income and
in the first revised return of income, but had voluntarily offered the undisclosed income in the
second revised return of income filed on 01.11.2011 (which is within the time limit
prescribed u/s 139(5) of the Act). It is not in dispute that the Ld. AO had taken due
cognizance of the second revised return of income filed by the assessee, while completing the
assessment for the assessment year 2010-11. While this is so, it cannot be said that the
assessee had not offered the undisclosed income in the return filed before the Ld. AO. This
 278

cannot be treated as a retraction by the assessee from his disclosure statement. Moreover, we
find that Section 271AAA(2) nowhere mandates requirement of offering the undisclosed
income in the return of income to be filed by the assessee. For the sake of convenience the
provision of 271AAA(2) are reproduced hereunder. :

"(2) Nothing contained in sub-section (1) shall apply if the assessee,-

(i) In the course of the search, in a statement under sub-section (4) of section 132, admits the
undisclosed income and specifies the manner in which such income has been derived;
(ii) Substantiates the manner in which the undisclosed income was derived;
and
(iii) Pays the tax, together with interest, if any, in respect of the undisclosed income."

We also find wherever the legislature in its wisdom had mandated offer of undisclosed
income in the return of income filed by the assessee, the same has been specifically provided
in the Act itself as is provided in Section 271AAB of the Act. Hence, we find ITA
No.1399/Kol/2015 Suresh Karmakar A.Yr.2010-11 that the assessee had duly complied with
all the three cumulative conditions supported in Section 271AAA(2) of the Act in the instant
case and accordingly, we hold that the assessee in indeed entitled for immunity from levy of
penalty u/s 271AAA of the Act. Hence, we do not find any infirmity in the order of the Ld.
CIT(A) in this regard. Accordingly, the grounds raised by the Revenue are dismissed.

7. In the result, the appeal of the Revenue is dismissed.

21. Income-tax Settlement Commission

Brij Lal v. Commissioner of Income Tax [2010] [328 ITR 477] - S.H. Kapadia, B.
Sudershan Reddy, K.S. Radhakrishnan, Surinder Singh Nijjar, Swatanter Kumar

2. Vide referral orders dated 14.12.2004 and 20.1.2005 the following questions have been
referred to the Constitution Bench of this Court:

(i) Whether sections 234A, 234B and 234C of the Income Tax Act, 1961 (for short "the Act")
are at all applicable to proceedings of the Settlement Commission under Chapter XIX-A of
the Act?
(ii) Whether the Settlement Commission can reopen its concluded
proceedings by having recourse to section 154 of the Act so as to levy interest
under sections 234A, 234B and 234C of the Act, though it was not so done in the original
proceedings?
(iii) Whether in the absence of period of limitation prescribed for making the order of the
Settlement, the relevant date for determining the quantum of interest could be the date of the
said order?

3. For the sake of convenience, after hearing learned counsel on both sides, we reframe the
above questions.
 279

(I) Whether section 234B applies to

proceedings of the Settlement

Commission under Chapter XIX-A of the said Act?

(II) If answer to the above question is in the affirmative, what is the terminal point for levy of
such interest - Whether such interest should be computed up to the date of the Order
under section 245D(1) or up to the date of the Order of the Commission under section
245D(4)?

(III) Whether the Settlement Commission could reopen its concluded proceedings by
invoking section 154 of the said Act so as to levy interest under section 234B, though it was
not so done in the original proceedings?

Relevant provisions of the Income Tax Act, 1961:

4. In order to answer the reframed questions, quoted above, it would be necessary for us to
cite the relevant provisions of the Act and the Income Tax Rules, as they stood at the material
time, which are as under:

Definitions 2(40) "regular assessment" means the assessment made under sub-section (3)
of section 143 or section 144 ;

2(45) "total income" means the total amount of income referred to in section 5, computed in
the manner laid down in this Act; Chapter XIV - Procedure for Assessment Self-assessment
140A. (1) Where any tax is payable on the basis of any return required to be furnished
under section 139 or section 142 or as the case may be, section 148, after taking into account
the amount of tax, if any, already paid under any provision of this Act, the assessee shall be
liable to pay such tax together with interest payable under any provision of this Act for any
delay in furnishing the return or any default or delay in payment of advance tax, before
furnishing the return and the return shall be accompanied by proof of payment of such tax
and interest.

Chapter XVII - Collection and Recovery of Tax Liability for payment of advance tax.

207. Tax shall be payable in advance during any financial year, in accordance with the
provisions of sections 208 to 219 (both inclusive), in respect of the total income of the
assessee which would be chargeable to tax for the assessment year immediately following the
financial year, such income being hereafter in this Chapter referred to as "current income".
Computation of advance tax.

Interest for defaults in payment of advance tax.

234B. (1) Subject to the other provisions of this section, where, in any financial year, an
assessee who is liable to pay advance tax under section 208 has failed to pay such tax or,
where the advance tax paid by such assessee under the provisions of section 210 is less than
ninety per cent of the assessed tax, the assessee shall be liable to pay simple interest at the
rate of two per cent for every month or part of a month comprised in the period from the 1st
day of April next following such financial year to the date of determination of total income
under sub-section (1) of section 143 and where a regular assessment is made, to the date of
 280

such regular assessment, on an amount equal to the assessed tax or, as the case may be, on the
amount by which the advance tax paid as aforesaid falls short of the assessed tax.

Interest for deferment of advance tax. 234C.

Power of Settlement Commission to reopen completed proceedings.

245E. If the Settlement Commission is of the opinion (the reasons for such opinion to be
recorded by it in writing) that, for the proper disposal of the case pending before it, it is
necessary or expedient to reopen any proceeding connected with the case but which has been
completed under this Act by any income-tax authority before the application under section
245C was made, it may, with the concurrence of the applicant, reopen such proceeding and
pass such order thereon as it thinks fit, as if the case in relation to which the application for
settlement had been made by the applicant under that section covered such proceeding also :

Conclusions:

16. (1) Sections 234A, 234B and 234C are applicable to the proceedings of the Settlement
Commission under Chapter XIX-A of the Act to the extent indicated hereinabove.

(2) Consequent upon conclusion (1), the terminal point for the levy of interest under section
234B would be up to the date of the order under section 245D(1) and not up to the date of the
Order of Settlement under section 245D(4).

(3) The Settlement Commission cannot re-open its concluded proceedings by

invoking section 154 of the Act so as to levy interest under section 234B, particularly, in
view of section 245I.

17. Accordingly, Reference to the Constitution Bench vide orders dated 14.12.2004 and
20.1.2005 stands duly answered and the matters are accordingly disposed of.

22. General Anti-avoidance Rules (GAAR)

Formula One Championship Ltd. v. CIT (SC Civil Appeal No. 3849 of 2017) - A.K. Sikri,
Ashok Bhushan

These appeals are filed by Formula One World Championship Limited (hereinafter referred
to as 'FOWC'), Jaypee Sports International Limited (for short, 'Jaypee') and Union of India
(hereinafter referred to as the 'Revenue'). In all these appeals, challenge is laid to the
judgment dated November 30, 2016 passed by the High Court of Delhi whereby three writ
petitions preferred by FOWC, Jaypee and Revenue have been decided.

The matter originated from filing of applications by FOWC and Jaypee before the Authority
for Advance Ruling (AAR). FOWC had entered into a 'Race Promotion Contract' (RPC)
dated September 13, 2011 with Jaypee, granting Jaypee the right to host, stage and promote
the Formula One Grand Prix of India event for a consideration of US$ 40 million. Some other
agreements were also entered into between FOWC and Jaypee as well as group companies of
FOWC and Jaypee, particulars whereby would be mentioned later at an appropriate stage. In
the applications filed by FOWC and Jaypee before the AAR, advance ruling of AAR was
solicited on two main questions/queries:
 281

whether the payment of consideration receivable by FOWC in terms of the said RPC from
Jaypee was or was not royalty as defined in Article 13 of the 'Double Taxation Avoidance
Agreement' (DTAA) entered into between the Government of United Kingdom and the
Republic of India?; and

(ii) whether FOWC was having any 'Permanent Establishment' (PE) in India in terms
of Article 5 of DTAA?

Another related question was also raised, viz.,

(iii)whether any part of the consideration received or receivable by FOWC from Jaypee
outside India was subject to tax at source under Section 195 of the Indian Income Tax Act,
1961 (hereinafter after referred to as the 'Act').

AAR answered the first question holding that the consideration paid or payable by Jaypee to
FOWC amounted to ‘Royalty’ under the DTAA. Second question was answered in favour of
FOWC holding that it did not have any PE in India. As far as the question of subjecting the
payments to tax at source under Section 195 of the Act is concerned, AAR ruled that since
the amount received/receivable by FOWC was income in the nature of Royalty and it was
liable to pay tax there on to the Income Tax Department in India, it was incumbent upon
Jaypee to deduct the tax at source on the payments made to FOWC. FOWC and Jaypee
challenged the ruling on the first issue by filing writ petitions in the High Court contending
that the payment would not constitute Royalty under Article 13 of the DTAA. Revenue also
filed the writ petition challenging the answer of the AAR on the second issue by taking the
stand that FOWC had PE in India in terms of Article 5 of the DTAA and, therefore, tax was
payable accordingly.

As mentioned above, all these three writ petitions have been decided by the High Court vide
common judgment dated November 30, 2016. Interestingly, the High Court has reversed the
findings of the AAR on both the issues. Whereas it has held that the amount paid/payable
under RPC by Jaypee to FOWC would not be treated as Royalty, as per the High Court
FOWC had the PE in India and, therefore, taxable in India. While deciding this question, the
High Court has not accepted the plea of the Revenue that it was not a dependent PE. The
High Court has also held, as the sequitur, that Jaypee is bound to make appropriate
deductions from the amount payable to FOWC under Section 195 of the Act. It is for this
reason all the three parties are again before us.

As per FOWC and Jaypee, no tax is payable in India on the consideration paid under RPC as
it is neither Royalty nor FOWC has any PE in India. It is pertinent to mention that the
Revenue has not challenged the findings of the High Court that the amount paid under RPC
does not constitute royalty. Therefore, that aspect of the matter has attained finality. The main
question in the appeals, therefore, pertains to PE.

FACTUAL MATRIX

In order to decide this question, following facts, having bearing on the matter, need a
recapitulation:
 282

Federation Internationale de I' Automobile (for short, 'FIA'), a non-profit association, is

established as the Association Internationale des Automobile Clubs Reconnus to represent the
interests of motoring organizations and motor car users globally. FIA, as the federation of the
world’s leading motoring organizations and the governing body for motorsports worldwide,
consists of 213 national member organizations in 125 countries internationally. FIA is the
principal body for establishing the rules and regulations for all major international four-wheel
motorsport events. FIA is a regulatory body; it regulates the FIA Formula One World
Championship ('Championship') which has been the premier form of motor racing since its
inception in 1950. This Championship is established and run every year subsequently since.
The Championship is an annual series of motor races, conducted in the name and style of the
Grand Prix over a three day duration at purpose-built circuits, and in some cases, across
public roads, in different countries around the world. The Championship is considered the
most prestigious motor sport series in the world. 'Formula One' (F-1) refers to the rules and
regulations that define the characteristics of the race, as opposed to any other form of motor
race. Thus, 'the formula', is with reference to a set of rules that all participants’ cars must
conform to. F-1 seasons consist of a series of races, known as Grand Prix (from French,
meaning grand prizes), held across the world on specially designed and built F-1 circuits
across 26 different locales.

F-1 Grand Prix events are held under the aegis of the FIA Formula One World
Championship’s competition – in which F-1 racing cars, assembled and manufactured strictly
in terms of the F-1 technical regulations, compete against each other, under F1 Sporting
Regulations and the F-1 International Sporting Code framed and made effective by the FIA.
F-1 drivers across the world have the ability, competence and skill to drive an F-1 car and
participate in F-1 racing events. About 12 to 15 teams typically compete in these
Championship in any one annual racing season. Some celebrated and well-known
participating teams are the Ferrari, McLaren, Red Bull etc. The teams assemble and construct
their vehicles, which comply with defined technical specifications, and engage drivers who
can successfully manoeuvre the F-1 cars in the racing events.

FOWC is incorporated under the laws of the United Kingdom, and is a tax resident of the
United Kingdom. It is the Commercial Rights Holder (CRH) in respect of the Championship
with effect from January 01, 2011. FOWC has entered into an agreement with the FIA and
Formula One Asset Management Limited (‘FOAM’). Under these agreements, FOAM
licensed all commercial rights in the FIA Formula One World Championship (hereinafter
referred to as ‘F1 Championship’) to FOWC for 100 year term effective from January 01,
2011. As mentioned above, the teams which participate in F1 World Championship
Competitions have to strictly comply with the terms and conditions set out for such
competitions as per Sporting Regulations and Sporting Code. For this purpose, all these
teams, known as ‘Constructors’, enter into a contract, known as the 'Concorde Agreement',
with FOWC and the FIA. In these agreements, they undertake to participate to the best of
their ability, in every F-1 event included in the official annual F-1 racing calendar. They also
bind themselves to an unequivocal negative covenant with FOWC that they would not
participate in any other similar motor racing event whatsoever nor would they promote in any
manner any other rival event. The F-1 racing teams exclusively participate in about 19 to 21
listed F-1 annual racing events on the official racing calendar, set by the FIA. This is, in
effect, a closed circuit event since no team other than those bound by contract with FOWC
are permitted participation.
 283

Thus, on the one hand, participating teams enter into Concorde Agreement. Likewise,
promoters are also chosen for holding these F-1 racing events. Every F-1 racing event is
hosted, promoted and staged by a promoter with whom FOWC as the right holder, enters into
contract and whose event is nominated by the CRH (i.e. Commercial Right Holder, which is
in effect, FOWC) to the FIA for inclusion in the official F-1 racing calendar. In other words,
FOWC is the exclusive nominating body at whose instance the event promoter is permitted
participation. The points scored by each F- 1 racing team in every event is listed in the
official racing calendar and it counts towards the Constructor's Championship and the
Driver’s Championship for the racing season as a whole. Any team’s position in these
Championships at the end of the season determines, together with certain other factors which
are elaborately dealt with in the Concorde Agreements (which in the present instance, was
latest in the series of Concorde Agreements the last being the one of 2009 i.e. August 05,
2009), the prize money payable to the teams for their participation during the season. Grant
of a right to host, stage and promote the F-1 racing event, therefore, carries with it a covenant
or representation that F-1 racing teams with their cars, drivers and other auxiliary and
supporting staff will participate in the motor racing event hosted at the promoter’s motor
racing circuit displaying the highest levels of technical skill achievement etc. in the fields of
construction of single seat motorcars to attain the highest levels of performance in the world.
These teams and the FOWC also represent that the highest levels of skill in racing
management and maintenance of the cars would be on display in the event. All these are a
part of the relevant contractual provisions, embodied in RPC 2011. In this manner, FOWC
has acquired all commercial rights in respect of the F-1 Championship wherever such
tournaments take place, i.e. with the permission of FOWC.

Jaypee was interested to acquire this right for hosting, staging and promoting the F-1 Grand
Prix of India event. In order to do so, it entered into agreement with FOWC dated September
13, 2011 which is known as ‘Race Promotion Contract’ (RPC). By this agreement, FOWC
granted Jaypee the right to host, stage and promote F-1 Grand Prix of India event for a
consideration of US$ 40 millions. Another agreement known as ‘Artwork License
Agreement’ (‘ALA’) was entered into between FOWC and Jaypee on the same day whereby
FOWC permitted Jaypee to use certain marks and intellectual property belonging to FOWC
for a consideration of US$ 1 million. Prior to this RPC of 2011, another RPC of October 25,
2007 had been entered into between FOA and Jaypee which was replaced by agreement dated
September 13, 2011 between FOWC and Jaypee. Pursuant thereto, races were held in India in
2011, 2012 and 2013.

After entering into the aforesaid arrangement for hosting F-1 Grand Prix in India, both
FOWC and Jaypee approached AAR seeking its advance ruling on the two questions, the
nature of which, including the opinion of AAR thereupon, is already mentioned above.

As pointed out earlier, first question was as to whether considerations received/receivable

under the RPC by FOWC from Jaypee Sports was in the nature of business income and
‘Royalty’ as defined under the Act as well as DTAA. Plea of FOWC and Jaypee was that
what was granted to Jaypee by FOWC was a commercial right to use the event, i.e., a hosting
right and the consideration received/receivable therefrom by FOWC was not for the use of
trademark, copyright, equipment etc. and hence was not in the nature of ‘Royalty’. It was also
stated by them that there was a limited permitted use of Formula One (‘F-1’) Mark which was
only to enable the promoter (Jaypee) to advertise the Indian Grand Prix and reproduction of
names of the sports events was routine and customary in business parlance. For this purpose,
 284

ALA was executed to enable Jaypee to use F-1 Marks in a limited way and to prevent it from
using the Marks for any commercial exploitation.

Revenue had opposed the aforesaid plea of FOWC and Jaypee on the ground that the
consideration comprised not only of hosting rights but also permission to use F-1 Marks and,
therefore, entire consideration of US$ 40 million was attributable to the usage of F-1 Marks
in terms of ALA. According to the Revenue, RPC and ALA had to be read together for a
comprehensive view of the matter, particularly, whey they were executed on the same day.

The AAR accepted the argument of the Revenue holding that the consideration received by
FOWC amounted to royalty and was to be, accordingly, taxed under the Indian Income Act.
However, this view is reversed by the High Court by the impugned judgment after detailed
discussion on this issue and in the opinion of the High Court the consideration received under
the Agreement cannot be termed as royalty. As mentioned above, Revenue has accepted the
judgment of the High Court on this issue and, therefore, it is not necessary to discuss in detail
the reasons given by the High Court for coming to the aforesaid conclusion. This fact is
mentioned only for the sake of completeness of the issues raised and their outcome.

The bone of contention before this Court pertains to the issue of existence of a PE of FOWC
in India. We may say at the outset that the arguments advanced by both the parties before us
were virtually the same arguments which were advanced before the High Court as well.
Therefore, spelling out the submissions of the parties before the High Court may not be
necessary as it would be duplicating and repetitive. At this stage, we would, therefore, record
the arguments which were presented before us and in the process mention the basis of the
conclusion arrived at by the High Court for the purpose of forming an opinion as to whether
the view of the High Court is correct and justified in law.

RELEVANT STATUTORY PROVISIONS & DTAA REGIME

Before adverting to the question at hand, it would be appropriate to take note of the scheme
of the Act as well as relevant provisions of DTAA on this subject. The Act provides two
modes of taxation, namely, resident based and source based. Any person who is a resident of
India is subjected to the Act and liable to pay income tax on the ‘total income’ earned by such
a resident, after getting various deductions therefrom as admissible under different provisions
of the Act. Charging section is Section 4 which, inter alia, stipulates that income tax shall be
charged for any Assessment Year in respect of total income of the previous year of every of
such person. Section 5 contains the scope of total income of a resident and includes all
income from whatever source derived by a person who is resident which is received or
deemed to be received in India, accrues or arises or is deemed to accrue or arise to him in
India or accrues or arises to him outside India during such year. Thus, a resident is supposed
to pay income tax on all incomes so earned whether in India or outside India.

On the other hand, those persons who are not ordinarily residents of India (which term is
defined under sub-section (6) of Section 6) are not liable to pay income tax on any income
which accrues or arises to such non- resident outside India. However, in the case of non-
resident persons, if the income is derived from a business controlled in or a profession set up
in India, these non-residents are subjected to pay tax for such an income earned in India. In
their case, all such incomes from whatever source derived which is received or is deemed to
be received in India in such a year by or on behalf of such person or accrues or arises or is
deemed to accrue or arise to them in India during that year, is taxable in India. In this sense,
 285

the income tax on non-resident is source based, i.e., source of such income is India and,
therefore, even a non-resident is liable to pay tax on incomes earned in India. ‘Resident in
India’ and ‘Not-ordinarily Resident in India’ are covered by the provisions contained
in Section 6.

In the present case, we are concerned with the consideration received by FOWC as a result of
Agreement signed with Jaypee Sports. FOWC, being a UK Company, is admittedly the non-
resident in India. Since the question is whether the aforesaid consideration/income earned by
FOWC is subject to tax in India or not, it is to be decided as to whether that income accrued
or arose in India. For this purpose, relevant provision is Section 9 of the Act. This section
contains varied situations where income is deemed to accrue or arise in India and it is not
necessary to spell out each of such contingencies. Insofar as income by way of royalty earned
by a non- resident is concerned, that is mentioned in clause (vi) of Section 9(1) of the Act. As
the consideration of US$ 40 million received by FOWC from Jaypee is held as ‘no income by
way of royalty’, we may conveniently skip that provision.

Clause (i) of sub-section (1) of Section 9 of the Act mentions certain kinds of income which
are deemed to accrue or arise in India. This clause is reproduced below:

“(i) all income accruing or arising, whether directly or indirectly, through or from any
business connection in India, or through or from any property in India, or through or from
any asset or source of income in India, or through the transfer of a capital asset situate in
India:” It is clear from the reading of the said clause that it includes all those incomes,
whether directly or indirectly, which are accruing or arising through or from any business
connection in India. It is, thus, clear that an income which is earned directly or indirectly, i.e.
even indirectly, is to be deemed to accrue or earned in India. Further, such an income should
have some business connection in India. Explanation (1) for the purpose of this clause
provides five explanations from clauses (a) to (e). Clause (a) stipulates that where all the
business operations are not carried in India and only some such operations of business are
carried in India, the income of the business deemed under this clause to accrue or arise in
India shall be only such part of the income as is reasonably attributable to the operations
carried in India. We are not concerned with clauses (b) to (e).

“ARTICLE 5 PERMANENT ESTABLISHMENT

1. For the purposes of this Convention, the term “permanent establishment” means a fixed
place of business through which the business of an enterprise is wholly or partly carried on.

2. The term “permanent establishment” shall include especially:

a place of management; a branch;

an office; a factory; a workshop;

premises used as a sales outlet or for receiving or soliciting orders;

a warehouse in relation to a person providing store facilities for others;

a mine, an oil or gas well, quarry on other place of extraction of natural resources;

an installation or structure used for the exploration or exploitation of natural resources;

 286

a building site or construction, installation or assembly project or supervisory activities in

connection therewith, where such site, project or supervisory activity continues for a period
of more than six months, or where such project or supervisory activity, being incidental to the
sale or machinery or equipment, continues for a period not exceeding six months and the
charges payable for the project or supervisory activity exceed 10 per cent of the sale price of
the machinery and equipment;

the furnishing of services including managerial services, other than those taxable
under Article 13 (Royalties and fees for technical services), within a Contracting State by an
enterprise through employees or other personnel, but only if:

activities of that nature continue within that State for a period or periods aggregating more
than 90 days within any twelve-month period; or services are performed within that State for
an enterprise within the meaning of paragraph 1 of Article 10 (Associated enterprises) and
continue for a period or periods aggregating more than 30 days within any twelve- month
period;

Provided that for the purposes of this paragraph an enterprise shall be deemed to have a
permanent establishment in a Contracting State and to carry on business through that
permanent establishment if it provides services or facilities in connection with, or supplies
plant and machinery on hire used or to be used in, the prospecting for, or extraction or
production of mineral oils in that State.

3. The term “permanent establishment” shall not be deemed to include:

the use of facilities solely for the purpose of storage or display of gods or merchandise
belonging to the enterprise;

the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the
purpose of storage or display;

the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the
purpose of processing by another enterprise;

the maintenance of a fixed place of business solely for the purpose of purchasing goods or
merchandise, or for collecting information, for the enterprise;

the maintenance of a fixed place of business solely for the purpose of advertising, for the
supply of information or for scientific research, being activities solely of a preparatory or
auxiliary character in the trade of business of the enterprise. However, this provision shall not
be applicable where the enterprise maintains any other fixed place of business in the other
Contracting State for any purpose or purposes other than the purposes specified in this
paragraph;

the maintenance of a fixed place of businesses solely for any combination of activities
mentioned in sub-paragraphs (a) to (e) of the paragraph, provided that the overall activity of
the fixed place of business resulting from this combination is of a preparatory or auxiliary
character.
 287

He has quoted the following passage from the judgment of the Andhra Pradesh High Court,
authored by Justice (Retd.) Jagannadha Rao (as His Lordship’s then was, later Judge of this
Court) in Commissioner of Income Tax, A.P.-I v. Visakhapatnam Port Trust:

“The words ‘permanent establishment’ postulate the existence of a substantial element of an

enduring or permanent nature of a foreign enterprise in another country which can be
attributed to a fixed place of business in that country. It should be of such a nature that it
would amount to a virtual projection of the foreign enterprise of one country into the soil of
another country.” Emphasising that as a creature of international tax law, the concept of PE
has a particularly strong claim to a uniform international meaning, Philip Baker discerns two
types of PEs contemplated under Article 5 of OECD Model.

Some of the examples of fixed place of business given by Baker are the following: The place
of business must be fixed and permanent. Thus, a shed which had been rented for thirteen
years for storing and preparing hides was held to constitute a PE. Similarly, a writer’s study
has been held to constitute a PE. A stand at a trade fair, occupied regularly for three weeks a
year, through which the enterprise obtained contracts for a significant part of its annual sales,
has also been held to constitute a PE. A temporary restaurant operated in a mirror tent at a
Dutch flower show for a period of seven months was held to constitute a PE. An office,
workshop and storeroom for the maintenance of aircraft, which were leased out by the
enterprise, has been held to constitute a PE.

Some of the illustrative cases decided by courts of different jurisdictions given by Baker in
his commentary are contained in the following passages from that book:

In the Canadian case of William Dudney v. R, the taxpayer was a resident of the United States
who was contracted to supply training to employees of a Canadian company. For the
purposes of the training contract, the taxpayer was given various offices at the premises of the
Canadian company, which he was only allowed to enter at normal office hours. He was
allowed to use the client’s telephone only on client’s business. He spent 300 days in one tax
year and 40 in the subsequent year at the premises. The Tax Court of Canada and the Federal
Court of Appeal confirmed that he had no fixed base – which was treated as having the same
meaning as PE – at the premises since he had no right to use the premises as the base for the
operation of his own business.

In a case generally referred to as Hotel Manager, the Bundesfinanzhof held that a UK hotel
management company had a PE in Germany when it entered into a 20 year contract with a
limited partnership which owned a hotel. The agreement required the UK company to supply
a general manager: the general manager’s office constituted the PE (and not the entire hotel)
since the UK company had a secured right to use this office for the purposes of the
agreement.

According to Philip Baker, the aforesaid illustrations confirm that the fixed place of business
need not be owned or leased by the foreign enterprise, provided that is at the disposal of the
enterprise in the sense of having some right to use the premises for the purposes of its
business and not solely for the purposes of the project undertaken on behalf of the owner of
the premises.

Interpreting the OECD Article 5 pertaining to PE, Klaus Vogel has remarked that insofar as
the term ‘business’ is concerned, it is broad, vague and of little relevance for the PE
 288

definition. According to him, the crucial element is the term ‘place’. Importance of the term
‘place’ is explained by him in the following manner:

“In conjunction with the attribute ‘fixed’, the requirement of a place reflects the strong link
between the land and the taxing powers of the State. This territorial link serves as the basis
not only for the distributive rules which are tied to the existence of PE but also for a
considerable number of other distributive rules and, above all, for the assignment of a person
to either Contracting State on the basis of residence (Article 1, read in conjunction
with Article 4 OECD and UN MC).” We would also like to extract below the definition to the
expression ‘place’ by Vogel, which is as under:

“A place is a certain amount of space within the soil or on the soil. This understanding of
place as a three-dimensional zone rather than a single point on the earth can be derived from
the French Version (‘installation fixe’) as well as the term ‘establishment’. As a rule, this
zone is based on a certain area in, on, or above the surface of the earth. Rooms or technical
equipment above the soil may quality as a PE only if they are fixed on the soil. This
requirement, however, stems from the term ‘fixed’ rather than the term ‘place’, given that a
place (or space) does not necessarily consist of a piece of land. On the contrary, the term
‘establishment’ makes clear that it is not the soil as such which is the PE but that the PE is
constituted by a tangible facility as distinct from the soil. This is particularly evident from the
French version of Article 5(1) OECD MC which uses the term ‘installation’ instead of
‘place’.

Similarly, a Special Bench of Delhi’s Income Tax Appellate Tribunal denied the existence of
a PE in the case of Ericsson. The Tribunal held that it was not sufficient that Ericsson’s
employees had access to the premises of Indian mobile phone providers to deliver the
hardware, software and know-how required for operating a network. By contrast, in the case
of a competing enterprise, the Bench did assume an Indian PE because the employees of that
enterprise (unlike Ericsson’s) had exercised other businesses of their employer.

It is relevant to mention that before RPC dated September 13, 2011 was entered into between
FOWC and Jaypee, one Organisation Agreement (OA) dated January 20, 2011 was signed
between FIA/FMSCI and Jaypee. As per this agreement, Jaypee was to organise the event.
Thereafter, another agreement known as ‘Title Sponsorship Agreement’ dated August 16,
2011 was signed between Beta Prema 2 (an associated company of FOWC) and Bharti Airtel,
as per which Beta Prema 2 transferred title sponsorship rights to Bharti Airtel for US$ 8
million in respect of the race which was conducted on October 29, 2011. It is thereafter that
RPC dated September 13, 2011 was signed by FOWC and Jaypee. That was one month
before the scheduled date of race, which was fixed as October 29, 2011. Under this
agreement, right to host, stage and promote the event was given to Jaypee by FOWC.

The High Court was conscious of the fact that after its finding to the effect that FOWC had
PE in India, the issue as to whether FOWC carried on business through its agents or not,
became academic. Notwithstanding the same, it chose to discuss that issue as well so that the
judgment had the coverage of all the questions that had arisen before it. This aspect has been
discussed in the light of sub-articles (4) and (5) of Article 5 of DTAA. It is pertinent to
mention that argument of the Revenue was that since FOWC had to exploit commercial rights
arising from races and this business is carried on through exploitation of these commercial
rights either by itself or through anyone or more members of CRH group, as mentioned in the
ConordeAgreement, FOWC is obliged to propose consolidated accounts incorporating profits
 289

of all entities forming part of CRH group. The Revenue had relied on the Events right from
the time when commercial rights were originally owned by FIA and thereafter transferred to
SLEC Holding Company (parent company of FOWC) for a consideration, then given to
FOAM and with effect from January 01, 2011 transferred to FOWC. It was also pointed out
that FOWC’s three affiliates, i.e. Formula One Management Ltd. (‘FOM’), Allsports
Management SA and Beta Prema 2 Ltd. were its agents who carried on its business and on its
behalf, through the fixed place.

AAR had rejected this submission of the Revenue holding that the theory of Revenue that all
the three entities were acting on behalf of FOWC was unfounded as there was no evidence to
this effect and all arrangements and agreements in relation to activities performed by three
entities were sham. The High Court approved the aforesaid approach of AAR in the
following manner:

ments independently entered into by them with Jaypee contains no pointers to this fact.”

THE ARGUMENTS

Mr. Ganesh, opened the case of FOWC, whereafter M/s. Arvind P. Datar and Dushant Dave,
learned senior advocates, made their submissions on behalf of Jaypee. Mr. Mukul Rohatgi,
learned Attorney General for India, argued on behalf of the Revenue and countered those
submissions. He also argued the appeal of Union of India insofar as it challenges the findings
of the High Court interpreting Article 5(4) and (5) and holding that the other companies of
FOWC group did not act as agents of FOWC in India. M/s. S. Ganesh and Arvind P. Datar
made their submissions in rejoinder and also refuted the arguments of Mr. Mukul Rohatgi
advanced in the appeal of Union of India, to which Mr. Rohatgi made his submissions in
rejoinder.

Mr. Ganesh also drew the attention of this Court to Organisation Agreement dated January
20, 2011 signed between FIA, Jaypee and Federation of Motors Sports Clubs of India
wherein Jaypee is described as the ‘Organiser’ and given the responsibility to organise the
Event.

Mr. Ganesh, extensively referred to the findings of AAR on this issue wherein the case of
FOWC and Jaypee on this aspect was accepted by AAR and pleaded that the aforesaid
findings be accepted and restored by this Court. Referring to the judgment of the High Court,
his submission was that the Organisation Agreement entered into between FIA and Jaypee
was not even discussed and the conclusions given in paragraphs 52 and 53 of the said
judgment were erroneous. He also relied upon certain observations of this Court in Union of
India &Anr. Vs. Azadi BachaoAndolan&Anr. in respect of his submission that transactions
could not be treated as sham.

Mr. Datar, learned senior counsel appearing for Jaypee, supplemented the aforesaid
submissions of Mr. Ganesh on the issue of the PE. He argued that the judgment of the High
Court was flawed in its approach as it had gone by inductive logic instead of deductive logic.
According to him, the first question which has to be focused upon was as to what is the
business of FOWC. His submission was that since in this case business of FOWC was not to
organise these races, the question of its PE in India, that too in the form of circuit where the
race is to be held, could not be PE of FOWC.
 290

Without prejudice to the aforesaid submissions, next argument of Mr. Datar was that having
regard to the facts of this case, no interest should be held payable under Section 201 of the
Act. Referring to the scheme of Chapter XXIX-B which pertains to advance rulings, he
submitted that the parties had shown their bona fides in having the question raised before the
AAR, and it was specifically agreed to between FOWC and Jaypee in Clause 24.6 of the
Agreement that the parties should approach AAR for determination of the questions which
were referred. He pointed out that once an application was made before the AAR, procedure
that is contained in Section 245R, on receipt of such applications, had to be followed by AAR
and in that event Section 245 RR mandates that no income tax authority or the appellate
tribunal shall proceed to decide any issue in respect of which an application has been made
by the applicant, being a resident, under Section 245QQ for advance ruling. Once advance
ruling is pronounced by AAR, it was binding on the applicant who had sought the same in
respect of a particular transaction as well as on the Principal Commissioner and
Commissioner of Income Tax Authorities subordinate to him. According to him, in such a
scenario, it should not be considered that Jaypee had failed to deduct tax at source from the
amounts paid to FOWC and as a consequence of failure to deduct, it should be fastened with
the liability to pay interest under Section 201.

Mr. Dushant Dave, learned senior counsel, again appearing for Jaypee, made an additional
submission to the effect that international treaties which are signed between the two
sovereign countries have to be given adequate and due respect which they command. He
exhorted the Court to keep this fundamental principle in mind while interpreting clause 5 of
DTAA and submitted that such an approach has been commanded by this Court time and
again. By way of example, he cited the judgements in the cases of Azadi BachaoAndolan and
MaganbhaiIshwarbhai Patel Etc. v. Union of India and Another. He also referred to
paragraph 6 of the UK judgment in the case of Sepet v. Secretary of State for the Home
Department wherein it was pressed that single autonomous meaning was required to be given
to the treaties which are living instruments whose meaning does not change over time but
application will.

… The interpretation of a treaty imported into municipal law by indirect enactment was
described by Lord Wilberforce as being ‘unconstrained by technical rules of English law, or
by English legal precedent, but conducted on broad principles of general acceptation. This
echoes the optimistic dictum of Lord Widgery, C.J. that the words ‘are to be given their
general meaning, general to lawyer and layman alike … the meaning of the diplomat rather
than the lawyer’. [Francis Bennion: Statutory Interpretation, p. 461 [Butterworths, 1992 (2nd
Edn.)].]”

134. Developing countries need foreign investments, and the treaty-shopping opportunities
can be an additional factor to attract them. The use of Cyprus as a treaty haven has helped
capital inflows into eastern Europe. Madeira (Portugal) is attractive for investments into the
European Union. Singapore is developing itself as a base for investments in South-East Asia
and China. Mauritius today provides a suitable treaty conduit for South Asia and South
Africa. In recent years, India has been the beneficiary of significant foreign funds through the
“Mauritius conduit”. Although Indian economic reforms since 1991 permitted such capital
transfers, the amount would have been much lower without the India-Mauritius Tax Treaty

Mr. Rohatgi also submitted that comparisons of first Agreement of 2007 with the second
Agreement dated September 13, 2011 clearly demonstrates that the second agreement was
totally subterfuge to avoid payment of tax in India. He pointed out that in the Agreement
 291

dated October 25, 2007, FOWC was granted only the right to 'promote' the event (Clause
4(1)), whereas in the Agreement dated September 13, 2011, right to 'host, stage and promote'
the event was allegedly given to Jaypee by FOWC. According to him, right to host and stage
the event was conferred upon Jaypee only on paper to give it a semblance as if Jaypee was in
real control of the affairs, which was not actually so. Therefore, in any case, it would not
make any difference when in reality the rights of hosting and staging the competition were
with FOWC.

Referring to the Agreement dated September 13, 2011 between Jaypee and three affiliates of
FOWC, the argument of Mr. Rohatgi was that the so- called rights given to Jaypee were
transferred back to FOWC affiliates inasmuch as Beta Prema 2 acquired circuit rights, mainly
media and title sponsorship, whereas Allsports was given paddock rights. His submission was
that business was carried from the circuit, paddock, etc. and, therefore, it cannot be said that
no business activity was carried from this place. He also pointed out how FOWC granted
rights to FOAM to provide various services in case FOWC had no control over the race. It
also showed physical management of the business as well.

Coming to the issue of dependent PEs, submission of the learned Attorney General was that
in view of the flowchart depicting commercial rights with FOWC and its affiliates, this issue
was virtually an academic issue once it is found that FOWC and its affiliates are one
conglomerate, the commercial rights of different nature, viz. the CRH bouquet was with the
group companies under the control of same management which exploited all these rights.
These companies had pooled all the profits and sharing thereof was in the ratio of 50:50
between the teams and CRH companies.

As far as power of the High Court under Article 226 of the Constitution of India to go into
the issue is concerned, Mr. Rohatgi drew the attention of the Court to its earlier judgment
in Columbia Sportswear Company v. Director of Income Tax, Bangalore wherein this Court
had impressed that from the rulings of AAR the aggrieved person was required to approach
the High Court in the first instance. He, thus, submitted that it was the first forum of judicial
review of the opinion given by the AAR and, therefore, the High Court was very well within
its power to revisit the issue; albeit within the scope of jurisdiction of Article 226 of the
Constitution of India, and decide the same. According to him, the High Court had not
exceeded its jurisdiction while deciding the aforesaid issues in the writ petitions filed by the
appellants themselves.

Refuting the arguments of Mr. Datar predicated on Section 195 of the Act, Mr. Rohatgi
referred to the judgment of this Court in GE India Technology Centre Private Limited v.
Commissioner of Income Tax &Anr. wherein following principle is laid down in paragraph
18:

“18. If the contention of the Department that any person making payment to a non-resident is
necessarily required to deduct TAS then the consequence would be that the Department
would be entitled to appropriate the monies deposited by the payer even if the sum paid is not
chargeable to tax because there is no provision in the IT Act by which a payer can obtain
refund. Section 237 read with Section 199 implies that only the recipient of the sum i.e. the
payee could seek a refund. It must therefore follow, if the Department is right, that the law
requires tax to be deducted on all payments. The payer, therefore, has to deduct and pay tax,
even if the so- called deduction comes out of his own pocket and he has no remedy
whatsoever, even where the sum paid by him is not a sum chargeable under the Act. The
 292

interpretation of the Department, therefore, not only requires the words “chargeable under the
provisions of the Act” to be omitted, it also leads to an absurd consequence. The
interpretation placed by the Department would result in a situation where even when the
income has no territorial nexus with India or is not chargeable in India, the Government
would nonetheless collect tax. In our view, Section 195(2) provides a remedy by which a
person may seek a determination of the “appropriate proportion of such sum so chargeable”
where a proportion of the sum so chargeable is liable to tax.” He, thus, submitted that if there
was any breach of the said provision, the Income Tax Department was well within its right to
charge interest and/or impose penalty.

In rejoinder, M/s. Ganesh and Datar gave their answers to the aforesaid submissions, but it
may not be necessary to reproduce the same at this stage as we would like to take note of the
same while dealing with the respective submissions.

Conclusion

We have pondered over the aforesaid submissions of the learned counsel for the parties with
all seriousness and sincerity they deserve. We have also minutely gone through the material
placed on record. We have kept in mind the governing law that has already been stated in
detail. We are also conscious of the approach that is needed to examine these kinds of issues,
as discussed in the judgments referred to by Mr. Dave. Likewise, we have also
microscopically examined the judgment of the High Court which is under challenge.

53. Having regard to the nature of the preceding discussion, it is evident that though FOWC's
access or right to access was not permanent, in the sense of its being everlasting, at the same
time, the model of commercial transactions it chose is such that its exclusive circuit access -
to the team and its personnel or those contracted by it, was for up-to six weeks at a time
during the F1 Championship season. This nature of activity, i.e racing and exploitation of all
the bundle of rights the FOWC had as CRH, meant that it was a shifting or moving presence:
the teams competed in the race in a given place and after its conclusion, moved on to another
locale where a similar race is conducted. Now with this kind of activity, although there may
not be substantiality in an absolute sense with regard to the time period, both the exclusive
nature of the access and the period for which it is accessed, in the opinion of the Court, makes
the presence of a kind contemplated under Article 5(1), i.e. it is fixed. In other words, the
presence is neither ephemeral or fleeting, or sporadic. The fact that RPC- 2011's tenure is of
five years, meant that there was a repetition; furthermore, FOWC was entitled even in the
event of a termination, to two years' payment of the assured consideration of US$ 40 million
(Clause 24 of the RPC). Having regard to the OECD commentary and Klaus Vogel's
commentary on the general principles applicable that as long as the presence is in a
physically defined geographical area, permanence in such fixed place could be relative
having regard to the nature of the business, it is hereby held that the circuit itself constituted a
fixed place of business.

The High Court has also referred to some of the judgments which are of relevance. We would
like to take note of those judgments as we had agreed with the conclusions of the High Court
on this issue:

In Universal Furniture Ind. AB v. Government of Norway, a Swedish company sold furniture

abroad that was assembled in Sweden. It hired an individual tax resident of Norway to look
after its sales in Norway, including sales to a Swedish company, which used to compensate
 293

him for use of a phone and other facilities. Later, the company discontinued such payments
and increased his salary. The Norwegian tax authorities said that the Swedish company had
its place of business in Norway. The Norwegian court agreed, holding that the salesman’s
house amounted to a place of business: it was sufficient that the Swedish Company had a
place at its disposal, i.e the Norwegian individual’s home, which could be regarded as ‘fixed’.

In Joseph Fowler v. Her Majesty the Queen[26], the issue was whether a United States tax
resident individual who used to visit and sell his wares in a camper trailer, in fairs, for a
number of years had a fixed place of business in Canada. The fairs used to be once a year,
approximately for three weeks each. The court observed that the nature of the individual’s
business was such that he held sales in similar fares, for duration of two or three weeks, in
two other locales in the United States. The court held that conceptually, the place was one of
business, notwithstanding the short duration, because it amounted to a place of management
or a branch having regard to peculiarities of the business.

Coming to the second aspect of the issue, namely, whether FOWC carried on any business
and commercial activity in India or not, substantial part of this aspect has already been
discussed and taken care of above. Without being repetitive and pleonastic or tautologous, we
may only add that FOWC is the Commercial Right Holder (CRH). These rights can be
exploited with the conduct of F-1 Championship, which is organised in various countries. It
was decided to have this championship in India as well. In order to undertake conducting of
such races, the first requirement is to have a track for this purpose. Then, teams are needed
who would participate in the competition. Another requirement is to have the public/viewers
who would be interested in witnessing such races from the places built around the track.
Again, for augmenting the earnings in these events, there would be advertisements, media
rights, etc. as well. It is FOWC and its affiliates which have been responsible for all the
aforesaid activities. The Concorde Agreement is signed between FIA, FOA and FOWC
whereby not only FOWC became Commercial Rights Holder for 100 years, this agreement
further enabled participation of the teams who agreed for such participation in the FIA
Championship each year for every event and undertook to participate in each event with two
cars. FIA undertook to ensure that events were held and FOWC, as CRH, undertook to enter
into contracts with event promoters and host such events. All possible commercial rights,
including advertisement, media rights, etc. and even right to sell paddock seats, were
assumed by FOWC and its associates. Thus, as a part of its business, FOWC (as well as its
affiliates) undertook the aforesaid commercial activities in India. Without explaining this
aspect further, our purpose would be served by reproducing the following discussion, so
starkly put in the judgment of the High Court:

57. It is also noteworthy that by virtue of the Concorde Agreement, the teams have
undertaken to engage in every race - with the added condition that each team would involve
two cars for every race in any circuit chosen by FOWC.

58. Consequently, the Court concludes that the FOWC carried on business in India within the
meaning of expression under Article 5(1) of the DTAA. It is consequently held that the AAR
fell into error of law in holding that FOWC did not function through a PE/carry on business
through a fixed place of business in India.” In view of the above, it is difficult to accept the
arguments of the appellants that it is Jaypee who was responsible for conducting races and
had complete control over the Event in question. Mere construction of the track by Jaypee at
its expense will be of no consequence. Its ownership or organising other events by Jaypee is
also immaterial. Our examination is limited to the conduct of the F-1 Championship and
 294

control over the track during that period. Specific arrangement between the parties relating to
the aforesaid, which is elaborated above and which FOWC and Jaypee unsuccessfully
endeavoured to ignore, has in fact turned the table against them. It is also difficult to accept
their submission that FOWC had no role in the conduct of the Championship and its role
came to an end with granting permission to host the Event as a round of the championship.
We also reject the argument of the appellants that the Buddh International Circuit was not
under the control and at the disposal of FOWC.

No doubt, FOWC, as CRH of these events, is in the business of exploiting these rights,
including intellectual property rights. However, these became possible, in the instant case,
only with the actual conduct of these races and active participation of FOWC in the said
races, with access and control over the circuit.

We are of the opinion that the test laid down by the Andhra Pradesh High Court in
Visakhapatnam Port Trust case fully stands satisfied. Not only the Buddh International
Circuit is a fixed place where the commercial/economic activity of conducting F-1
Championship was carried out, one could clearly discern that it was a virtual projection of the
foreign enterprise, namely, Formula-1 (i.e. FOWC) on the soil of this country. It is already
noted above that as per Philip Baker, a PE must have three characteristics: stability,
productivity and dependence. All characteristics are present in this case. Fixed place of
business in the form of physical location, i.e. Buddh International Circuit, was at the disposal
of FOWC through which it conducted business. Aesthetics of law and taxation jurisprudence
leave no doubt in our mind that taxable event has taken place in India and non-resident
FOWC is liable to pay tax in India on the income it has earned on this soil.

We are now left with two other incidental issues which were raised by Mr. Datar. First was
on the interpretation of Section 195 of the Act. It cannot be disputed that a person who makes
the payment to a non-resident is under an obligation to deduct tax under Section 195 of the
Act on such payments. Mr. Rohatgi had submitted, and rightly so, that this issue is covered
by the judgment in the case of GE India Technology Centre Private Limited. Precisely this
very judgment is taken note of and relied upon by the High Court also in holding that since
payments made by Jaypee to FOWC under the RPC were business income of the FOWC
through PE at the Buddh International Circuit, and, therefore, chargeable to tax, Jaypee was
bound to make appropriate deductions from the amounts paid under Section 195 of the Act.

We are, however, inclined to accept the submission of Mr. Datar that only that portion of the
income of FOWC, which is attributable to the said PE, would be treated as business income
of FOWC and only that part of income deduction was required to be made under Section
195 of the Act. In GE India Technology Centre Private Limited[29], this Court has clarified
that though there is an obligation to deduct tax, the obligation is limited to the appropriate
portion of income which is chargeable to tax in India and in respect of other payments where
no tax is payable, recourse is to be made under Section 195(2) of the Act. It would be for the
Assessing Officer to adjudicate upon the aforesaid aspects while passing the Assessment
Order, namely, how much business income of FOWC is attributable to PE in India, which is
chargeable to tax. At that stage, Jaypee can also press its argument that penalty etc. be not
charged as the move on the part of Jaypee in not deducting tax at source was bona fide. We
make it clear that we have not expressed any opinion either way.

Insofar as the argument of Mr. Datar on the powers of the High Court under Article 226 of
the Constitution of India is concerned, we are not impressed by the said argument. It is
 295

Jaypee itself which had filed the writ petition (and for that matter FOWC as well) and they
had challenged the orders of AAR on certain aspects. The High Court has examined legal
issues while delivering the impugned judgment, of course having regard to the facts which
were culled out from the documents on record.

In view of the foregoing, the appeals preferred by the FOWC and Jaypee are dismissed,
subject to observations as made above.

Insofar as the appeal filed by the Commissioner of Income Tax is concerned, it was submitted
by Mr. Rohatgi himself that the issue of dependent PE had become academic. Therefore, we
need not examine this issue and dispose of the appeal of the revenue accordingly.

Taxation of Royalties
Engineering Analysis Centre for Excellence Private Limited (EAC) vs. CIT and Another5
Bench: Bench: Rohinton Fali Nariman, B.R. Gavai, Hrishikesh Roy

A batch of 103 appeals was pending before the court for a decision on the issue filed by either
the revenue department or taxpayers as a result of the High Court's divergent decisions. The
controversy was about the taxation of software payments as royalty or business income in the
non-resident taxpayers' hands.

The court divided the pending cases into four broad categories based on the agreements
between the supplier/licensor of software and distributors/end-users:
Purchase of computer software directly by a resident from a non-resident supplier or
manufacturer.
Purchase of software by a resident Indian company acting as a distributor or reseller and
reselling to Indian end-users;
Purchase of software by a non-resident distributor from a non-resident supplier and reselling
to Indian distributors or end-users; and
Computer software bundled with hardware sold by non-resident suppliers to resident Indian
distributors or end-users.

The issue predominantly revolves around whether the payments made by resident towards
various usages of software to non-residents requires withholding obligations under Section
195 of Income Tax Act, 1961 (for brevity ‘ITA’).

The tax payer’s principle assertion (through the payer) is that since the payments were made
for usage of software, the same would not fall under the definition of ‘royalty’ as provided in
Explanation 2 to Section 9(1)(vi) of ITA. Further, assuming that the amendment made to
Section 9(1)(vi) by inserting Explanation 4 in 2012 with retrospective effect from 1976, to

5
[2021] 432 ITR 471 (SC)
 296

make it clear that granting of license is also included in all or any of the rights involved in a
copyright, the tax payer argument was that since the said amendment was not on statute book
as on the date of payments to non-resident vendors, the provision cannot be applied to the
matters in hand. Apart from the above, the tax payer also argued that he would be covered
under the protection of Double Taxation Avoidance Arrangement (for brevity ‘DTAA’) and
thereby there is no income which accrues or arise or deemed to accrue or deemed to arise in
India and accordingly the payer is not required to deduct any tax under Section 195 on the
payments made. The tax payer argued that what was transferred to end-user was a non-
exclusive restricted license to use the software. In other words, a copyrighted article is being
sold and not the copyright. The payments which are mentioned either under Section 9(1)(vi)
or Article 12 of DTAA are those which cover the payments for transfer of copyrights and not
deal with copyrighted article.

The Revenue’s principle assertion is that the grant of license of a computer programme, being
specifically included in Explanation 4 to Section 9(1)(vi) makes the legislative intent clear to
treat such payments to fall under the ambit of ‘royalty’. Since the ITA deals with the
definition of ‘royalty’, there is no requirement to look for the meaning under Copyright Act,
1957 (for brevity ‘Copyright Act’). Further, all the DTAAs define the ‘royalty’ to mean
payment of consideration for use or right to use the copyright. Since the subject payments are
for use or right to use the computer software, the said payments are obviously covered under
the DTAA and accordingly the payer is required to withhold tax on the same. Further, the
Revenue also stated that the retrospective amendment made qua Explanation 4 is only for
removal of the doubts and has to be interpreted not as a new thing. The Revenue argued that
derivative product of copyright is also covered under the ambit of Section 9(1)(vi) and
thereby payment made for usage of software would mean to accrue or arise or deemed to
accrue or deemed to arise in India for the non-resident vendors. The revenue also stated that
in certain facts of the appeals, the agreement involved is the distribution agreement with the
non-resident, by virtue of entering the distribution agreement the non-resident parted with the
rights mentioned in Section 14(b)(ii) of Copyright Act6 and accordingly the payment would
fall under the ambit of ‘royalty’, since the said payment was a consideration for transfer of all
or any of the rights mentioned in Section 14.

6
The seven acts as enumerated in section 14(a) in respect of literary works are:

1. To reproduce the work in any material form, including the storing of it in any medium electronically;
2. To issue copies of the work to the public, provided they are not copies already in circulation;
3. To perform the work in public, or communicate it to the public;
4. To make any cinematographic film or sound recording in respect of the work;
5. To make any translation of the work;
6. To make any adaptation of the work; and
7. To do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to
the work in sub-clauses (1) to (6).

Section 14(b) speaks explicitly of two sets of acts:

1. The seven acts enumerated in sub-clause (a); and

2. The eighth act of selling or giving of commercial rental or offering for sale or commercial rental any
copy of the computer program.
 297

Following section will throw some light on the history of the issue and the other aspects
connected with the case.

The facts in the matter of EAC, a resident Indian company has purchased an end-user shrink
wrapped computer software, directly imported from United States of America (for brevity
‘USA’). The payment was made for the shrink wrapped computer software without any
deduction of tax at source. The tax authorities opined that the said payment for shrink
wrapped computer software involves payment for copyright which attracted the payment of
royalty under both Article 12(3) of Indo-USA DTAA and Section 9(1)(vi) of ITA. 7The EAC
pleaded that the subject payment is only for usage of the software but does not involve any
payment for the copyright and cannot be categorised as royalty, which would require
withholding of tax. The Assessing Officer was not convinced with the submissions has
upheld the order confirming the withholding of tax. The matter when taken to Commissioner
(Appeals) was held against EAC. However, EAC succeeded before the Tribunal. The
Tribunal following its earlier judgment in Samsung Electronics Co.8 Limited has dismissed
the order of Commissioner (Appeals) and held that there was no obligation on the EAC to
withhold any tax. Aggrieved by this, the Revenue has preferred an appeal to High Court of
Karnataka. The High Court of Karnataka hearing the matter of EAC along with other clubbed
appeals, framed nine questions of which, two of them deal with issue of copyright.

The High Court after framing of the questions, without venturing into the merits, has
concluded that the payments made by end-users for purchase of software requires deduction
of tax at source. The High Court has passed the above judgment vide its order dated
24.09.2009. The High Court has majorly placed reliance on the decision of Supreme Court in
the matter of Transmission Corporation of AP9 Limited for arriving the said conclusion. The
High Court accepted the submissions by revenue that unless the payer makes an application
under Section 195(2) and has obtained a permission for non-deduction of tax, it was not
permissible for the payer to contend that the payment made to non-resident did not give rise
to income taxable in India.

The above judgment of High Court of Karnataka was appealed before the Honourable
Supreme Court in a batch of appeals.10 The Supreme Court after detailing the facts and
analysing the judgment of Transmission Corporation of AP Limited (supra) stated that the
High Court of Karnataka has misunderstood the ratio in the matter of Transmission
Corporation of AP Limited (supra) and thereby misapplied the same in the matter of Samsung
Electrical Co. Limited11 and reiterated that every payment made to non-resident would not
require deduction of tax at source and only such payments which are chargeable to tax in
India would only fall under the ambit of the withholding obligation. This became a landmark
judgment by Supreme Court in the matter of GE Technology Centre Private Limited. The
said judgment reversed the decision of High Court of Karnataka in the matter of Samsung
Electrical Co. Limited and asked the High Court to consider the matter at fresh.

7
Explanation 4 was inserted in section 9(1)(vi) of the ITA in 2012 to clarify that the "transfer of all or any
rights" in respect of any right, property, or information included and had always included the "transfer of all or
any right for use or right to use a computer software". The court ruled that Explanation 4 to section 9(1)(vi)
expanded the scope of royalty under Explanation 2 to section 9(1)(vi).
8
[2010] 327 ITR 456 (SC)
9
[1999] 007 SCC 266
10
[2010] 327 ITR 456 (SC)
11
This was a batch of appeals involving EAC matter also. The judgment was delivered in the name of lead
party, which is Samsung Electrical Co. Limited.
 298

When the matter came for the second time before the High Court of Karnataka, vide its
judgment dated 15.10.11 in the matter of Samsung Electrical Co. Limited12 held that, what
was sold by way of a computer software included a right or interest in copyright, which thus
gave rise to payment of royalty and would be an income deemed to accrue in India in terms
of Section 9(1)(vi) and accordingly obligating the payer to deduct tax. This was challenged
before Supreme Court, where the Court has taken EAC as the lead matter for analysing the
facts involved and to arrive at a conclusion.

This case involves a large number of petitions which involve determination of taxation on
various usages of software. The Revenue’s principal argument was that the introduction of
Explanation 4 to Section 9(1)(vi) is only a clarificatory in nature and accordingly the payer
was obliged to deduct taxes even such explanation was not on statue book as on the date of
payment. The Revenue stressed that importance has to be given to phrase ‘in respect of’
appearing in Explanation 2(v) of Section 9(1)(vi) to bring home the point that derivate
products of copyright are also covered under the ambit of ‘royalty’. The Revenue placed
reliance on decision on PILCOM,13 wherein it was held that irrespective of the fact that the
payment was chargeable to tax in India, the payer has to withhold tax. The PILCOM
judgment was in the context of Section 194E.

The Revenue stated that since in some of the cases, adaptation of software could be made,
albeit for installation and use on a particular computer, the same would be possible only if the
original owner has parted with his copyrights and asked to consider that such payments
would be falling under the ambit of ‘royalty’. The Revenue also stated that in terms of
Section 52(1)(ad) of Copyright Act, that only making copies or adaptation of a computer
programme from a legally obtained copy for non-commercial, personal use would not amount
to infringement, and in cases where the same are copied for commercial purpose would
constitute infringement and in certain cases, the same were being copied for commercial
purposes would result in infringement, thereby meaning that the original owner has parted the
rights therein. In light of the above, the Revenue stated that the payments were for royalties
and accordingly the payer would have to withheld taxes at source and failing to do so, the tax
payers has not met the obligations.

The Supreme Court after setting out the provisions of ITA and Copyright Act has brushed
away the argument of Revenue which canvassed the view that the payer has to withhold tax
at source even such income is not chargeable to tax in India. The Court stated that Section
195 is clear to state that the obligation of withholding would trigger only if such income was
chargeable to tax in India, which is again determined by applying the provisions of Section 5
read with Section 9. The Court reiterated that the above position is made abundantly clear in
the matter of GE Technology Centre Private Limited (supra). The Court also brushed the
reliance of Revenue in the matter of PILCOM (supra) stating that, the said judgment was in
the context of Section 194E and not under Section 195. The Court stated that the provisions
of Section 194E does not have any reference to chargeability of income under the provisions
of ITA, which do find a place in Section 195. Hence, the decision in PILCOM which was
dealing on obligation of withholding of tax for payments made under Section 194E, which do
not have reference to any chargeable to tax in India cannot be applied to situation under
Section 195.

12
[2010] 327 ITR 456 (SC)
13
2020 SCC Online SC 426
 299

The Court held that any expansive language contained in the explanations to section 9(1)(vi)
of the Act would have to be ignored if it is broader and less beneficial to the taxpayer than the
definition contained in the DTA. The term ‘copyright’ has to be understood in the context of
the Copyright Act.

The Court stated that though the phrase ‘copyright’ has not been defined in the Copyright Act
separately, the provisions of Section 14 of the said act makes it clear that ‘copyright’ to mean
the ‘exclusive right’ subject to provisions of the act, to do or authorise the doing of certain
acts ‘in respect of a work’. Thus, when an author in relation to ‘literary work’ which includes
a ‘computer programme’, creates such work, such author has an exclusive right, subject to the
provision of the Act, to do or authorise the doing of several acts in respect of such work.
When the owner of copyright in a literary work assigns wholly or in part, all of any rights
contained in Section 14(a) and (b), in the said work for a consideration, the assignee of such
right becomes entitled to all such rights comprised in the copyright that is assigned, and shall
be treated as owner of copyright of what is assigned to him. Further, the owner of copyright
in any literary work may grant any interest in any right mentioned in Section 14(a) by license
in writing by him to the licensee, under which, for parting with such interest, royalty becomes
payable. When such license is granted, copyright is infringed when any use, relatable to the
said right/interest that is licensed, is contrary to the conditions of the license so granted.
Hence, if the right parted by the original owner/author is to allow another person to reproduce
and commercially exploit the intellectual property involved, then the person would not be
said to be infringing the copyright since he has not violated any conditions of the license.
Accordingly, the Court brushed away the plea of Revenue, wherein it was asserted that
making copies of copyright and using them would mean infringement of copyright.

The Court then referring to the conditions in various contracts has stated that what is granted
to the distributors is only a non-exclusive, non-transferable license to resell computer
software and it is expressly stated that no copyright in the computer programme is transferred
either to the distributor or to the end-user. The Court stated that the distributor retains only
part of the consideration as profit and the retention is also for the reason that the distributor is
a reseller but not because he has obtained a right to use the product. Further, the end-user
who is directly sold the computer programme, can use only it by installing it in the computer
hardware owned by the end-user and cannot in any manner reproduce the same for sale or
transfer, contrary to the term of EULA. The Court stated that none of the facts involved in the
current appeals involves grant of license in terms of Section 30 of Copyright Act, which
transfers an interest in all or any of the rights contained in Section 14(a) and 14(b). The Court
stated that only such grant of licenses which fall under the category of Section 30 can be said
to be grant of copyright in order to characterise the income arising thereof as a royalty. Since
all the EULAs impose restrictions or conditions for use of computer software, it cannot be
said what was granted was a license in terms of Section 30. The Court took an example to
elucidate the said point. If an English publisher sells 2000 copies of a particular book to an
Indian distributor, who then resells the same at a profit, no copyright in the aforesaid book is
transferred to the Indian distributor, either by way of license or otherwise, in as much as the
Indian distributor only makes a profit on the sale of each book. Importantly, there is no right
in the Indian distributor to reproduce the aforesaid book and then sell the copies of the same.
On the other hand, if an English publisher were to sell the same book to an Indian publisher,
this time with the right to reproduce and make copies of the aforesaid book with permission
of the author, it can be said that copyright in the book has been transferred by way of license
or otherwise, and what the Indian publisher will pay for, is for the right to reproduce the
 300

book, which can then be characterised as royalty for the exclusive right to reproduce the book
in the territory mentioned by the license.

The Court then proceeded to make a reference to the judgment of State Bank of India 14 which
was under the Customs Act, 1962 (for brevity ‘Custom Laws’). The issue involved therein is
State Bank of India has imported a consignment of computer software and manual from
Kindle Software Limited, Ireland and cleared the goods for home consumption on payment of
customs duty. State Bank of India has filed a refund application stating that interpretative
note relating to Rule 9(1)(c) of Customs Valuation (Determination of Price of Imported
Goods) Rules, 1998 suggests that royalties and licenses paid for right to reproduce the
imported goods should not be added to the price actually paid or payable. State Bank of India
has taken a plea that since the software imported involves right to reproduce, the royalties
paid should not be added to the assessable value of the goods. Since the same were already
included, State Bank of India has applied for refund. The Court in the said matter made an
important observation vide Para 21. It stated that reproduction and use are two different
things. Since in the facts of State Bank of India, what was permitted by Kindle Software
Limited is use but not the right to reproduce. The Court stated that what was paid by State
Bank of India was for the license and not the right to reproduce and accordingly State Bank
of India would not be eligible for refund. Taking clue from the above judgment, the Supreme
Court in the matter of EAC stated that the right to reproduce would entail parting of copyright
and whereas right to use does not entail any copyright.

The Court also referring to the real nature of transactions involved stated that what is licensed
by foreign, non-resident supplier to the distributor and resold to the resident end-user, or
directly supplied to end-user, is in fact the sale of a physical object which contains an
embedded computer programme and therefore, essentially a sale of goods as held by the
Supreme Court in the matter of Tata Consultancy Services.15

The Supreme Court then proceeded to analyse the definition of ‘royalty’ in the context of
DTAA and ITA. The Court analysed that the definition under Article 12(3) of Indo-Singapore
DTAA which deals with ‘royalty’ is exhaustive and differs with the definition under the local
law at least in three aspects. The main aspect under the provision of ITA is the presence of
Explanation 2(v) to Section 9(1)(vi). Vide such part of the explanation, ‘the transfer of all or
any rights (including the granting of license) in respect of copyright, literary, artistic or
scientific work including...’ is covered under the definition of ‘royalty’. Harping on this, the
Revenue contested that the consideration received by foreign supplier for granting of license
comes under the ambit of ‘royalty’ because it specifically gets mentioned in Explanation 2(v).

However, the Supreme Court rejected the above contention by stating that a payment to fall
under the ambit of Explanation 2(v) should in the first place involve transfer of all or any
rights. The rights that are being discussed are the rights that were mentioned in Section 14(a),
Section 14(b) and Section 30 of Copyright Act. Hence, unless the rights which are mentioned
in Section 14(a) and Section 14(b) are transferred either in full or any, there is nothing which
falls under the ambit of Explanation 2(v). The phrase ‘including the granting of license’ has
also to be read to mean that the grant of license includes the parting of rights as mentioned in
Section 14(a) and Section 14(b). Since in all the matters, the facts involved the granting of

14
[2001] 1 SCC 727
15
(2005) 1 SCC 308
 301

license which is not in the nature of Section 14(a) and Section 14(b), such consideration
arising for grant shall not fall under the ambit of Explanation 2(v) to Section 9(1)(vi).

Findings of the Supreme Court

The Supreme Court stated that the object of Section 14(b)(ii) is to prohibit reproduction of
the said computer programme and consequent transfer of the reproduced computer
programme to subsequent acquirers/end-users. Hence, the distributor who is engaged in
resale of the computer programme does not get in the way of Section 14(b)(ii). The Court
concluded that once it is understood that the object of Section 14(b)(ii) is not to prohibit the
sale of computer software that is ‘licensed’ to be sold by a distributor, but that it is to prevent
copies of computer software once sold being reproduced and then transferred by way of sale
or otherwise, it becomes clear that any sale by the author of a computer software to a
distributor for onward sale to an end-user, cannot possibly be hit by the said provision.
Accordingly, the Court concluded that the contention of Revenue that the distribution of
copyrighted computer software would constitute grant of an interest in copyright under
Section 14(b)(ii) cannot be accepted.

Accordingly, the Supreme Court concluded that amounts paid by resident Indian end-
users/distributors to non-resident computer software manufacturers/suppliers, as
consideration for resale or use of the computer software through EULAs/distribution
agreement, is not the payment of royalty for the use of copyright in the computer software
and the same does not give rise to any income taxable in India. The Court held that the above
conclusions would apply to all the four categories.

Interpretation of Tax Treaties

The judgment also contained some crucial observations on the interpretation of tax treaties.
The Court said the definition of royalties in the tax treaties considered in the cases is either
identical or similar to the definition contained in Article 12 of the OECD Model Tax
Convention and noted that the Commentary on the OECD Model would have persuasive
value for the interpretation of the term ‘royalties’. The court noted that India took positions
about the OECD Commentary, but India and the other contracting states made no bilateral
amendment in accordance with its position to change the definition of royalties in any of the
DTAs reviewed in the appeals.16
The Court held that taxpayers have a right to know their position and obligations under a
treaty and they can rely on the OECD Commentary and OECD Model Tax Convention,
which are used without any substantial change by bilateral DTAs, in the absence of
judgments of municipal courts clarifying the same, or in the event of conflicting municipal
decisions.
The Court noted that India had entered or amended tax treaties with several countries after
expressing its reservation, yet the definition of royalty was not changed and remained similar
to the OECD Model definition. Hence, its reservation would not apply.

16
Vogel, Klaus; Rust, Alexander. Introduction. /In/ Klaus Vogel on Double Taxation Conventions. (E. Reimer &
A Rust (eds), 4th edn. Aalphenaan den Rijn: Kluwer, 2015