judgement:
ivil Appeal Nos. 2115 to 2117 of 1980.
Appeals by special leave from the judgment and order dated the 8 the August, 1978 of the Bombay High Court in Income Tax Reference No. 142 of 1969.
section C. Manchanda and A. Subhashini for the Appellant.
V. N. Ganpule and Mrs. Veena Devi Khanna for the Respondent.
V. N. Ganpule for Intervener No. 1.
section C. Patel for Intervener No. 2.
The Judgment of the Court was delivered by TULZAPURKAR, J.
These appeals by special leave raise the question: "whether on the facts and in the circumstances of the case the assessee Council could be taken to be a body intended to advance any object of general public utility falling within section 2(15) for purposes of section 11 of the Income Tax Act, 1961 ?" The facts giving rise to the aforesaid question may briefly be stated.
The respondent assessee Bar Council of Maharashtra is a body corporate established under the (Act 25 of 1961) which came into force on December 28, 1961.
During the accounting periods relevant to the assessment years 1962 63, 1963 64 and 1964 65 the assessee derived income from 544 securities (interest) and other income by way of enrollment fees particulars whereof, are as follows: Assessment year Interest on securities Other Income 1962 63 Rs. 3,779 Rs 28,035 1963 64 Rs. 8,629 Rs 3,04,103 1964 65 Rs. 9,356 Rs 96,322 The Income Tax Officer subjected to tax the income from both the sources for all the three years.
In appeals preferred to the Appellate Assistant Commissioner it was contended by the assessee that its other income by enrollment fees was exempt under section 10 (23A) and interest on securities was exempt from tax under section 11 of the Income Tax Act, 1961.
The Appellate Assistant Commissioner negatived the exemption claimed under section 10(23A) in the absence of the Central Government 's notification according approval to the association and with regard to the claim for exemption in respect of the interest on securities he held that it was not established that the securities were held on trust for any charitable purpose.
He took the view that the main object of the assessee Council was to benefit the legal profession (its Members) and, therefore, the object was not one of general public utility.
Accordingly he confirmed the assessment orders for the three years.
The matter was carried in further appeal to the Income Tax Appellate Tribunal and since by that time the Central Government had accorded approval to the assessee for the purpose of section 10 (23A) by a notification dated August 5, 1966 with effect from December 28, 1961, the Tribunal held that the assessee Council was entitled to exemption under section 10(23A) in respect of its income by way of enrollment fees.
In regard to the income by way of interest on the securities the Tribunal observed that the character of the body holding the securities was not by itself decisive, that safeguarding the rights, privileges and interest of advocates on its roll could not be said to be an object of general public utility, that the real question to be considered under section 11 was whether the securities were held for any charitable purpose or not and the tribunal found that there was no evidence or material on record touching this aspect.
It, therefore, remanded the case back to the Appellate Assistant Commissioner and directed him to dispose of the case by examining the question as to the purpose for which the securities were held by 545 the assessee Council.
It observed that if the said securities were held for educational purpose or for any other charitable purpose then the exemption under section 11 would be admissible to the extent available under the law.
At the instance of the assessee Council the question set out at the commencement of this judgment was referred to the High Court for its decision under section 256(1) of the Act.
The High Court took the view that having regard to the obligatory functions enjoined upon a State Bar Council under s.6 of the the assessee Council could be regarded as a body constituted for general public utility and that the entire income of the body would be exempt from tax under s.11 of the Income Tax Act, 1961.
In its view the advancement of any object beneficial to the public or a section of the public as distinct from an individual or a group of individuals would be a charitable purpose as defined in s.2 (15) of the Income Tax Act and in this view of the matter the High Court answered the question in the affirmative and against the Revenue.
It is this view of the High Court that is being challenged by the Revenue before us in these appeals.
In support of the appeals counsel for the Revenue sought to raise two contentions.
First, he urged that the relief claimed under s.11 was ruled out by reason of relief having been obtained by the assessee Council in respect of its income from enrollment fees under s.10 (23A) of the Act.
According to him s.10 (23A), while exempting from tax any income of an association or institution established in India having as its object the control, supervision, regulation and encouragement of the profession of law, medicine, accountancy and any other profession as the Central Government may specify, has expressly excluded from exemption such association 's or institution 's income chargeable under the head "interest on securities" or "Income from house properties" or "any income received in rendering any specific service", etc., and, therefore, what has been expressly excluded from exemption under this provision could not be or was not intended to be exempt under s.11 of the Act.
In other words, the assessee Council 's claim for exemption in respect of interest on securities under s.11 was ruled out by reason of s.10(23A) of the Act.
Secondly, counsel contended that on merits the High Court 's view that the assessee Council was a body constituted for advancement of an object of general public utility was erroneous inasmuch as it was a body established principally for the purpose of safeguarding the rights, privileges and interest of the advocates on its roll and since such objective merely served to benefit the members 546 of the profession it was no charitable purpose as defined by s.2 (15) for purposes of s.11 of the Act.
In support of this contention counsel placed reliance on some English decisions.
At the out set it may be stated that we were not inclined to permit counsel for the Revenue to urge his first contention as in our view the Revenue must be deemed to have given up the same.
We may point out that precisely this very contention was raised by the Revenue before the Tribunal and was negatived by it.
The Tribunal on a detailed analysis of the concerned provisions took the view that the two provisions were not mutually exclusive but operated under different circumstances, that s.11 was relatively wider in its scope and ambit, that while s.10 (23A) granted absolute exemption in respect of particular types of income s.11 imposed certain conditions for the exemption but such exemption was available for all sources and there was nothing inherently improbable or inconceivable about the two provisions operating simultaneously and as such the claim for exemption under s.11 was available to the assessee Council provided it satisfied all the requirements of that provision.
We may point out that there are other allied provisions like for instance sub section
(23C) in s.10 which clearly indicate that the Legislature did not intend to rule out s.11 when exemption was claimable under such specific provisions of s.10.
It was after negativing the contention in this manner that the Tribunal went on to consider the claim for exemption made by the assessee Council under s.11 but on merits found that there was no material or evidence on record to show whether or not the securities were held by the assessee Council for any of charitable purposes and, therefore, it remanded the case.
The remand order was never challenged by the Revenue by seeking a reference on the ground that a remand was unnecessary because s.11 was ruled out by reason of exemption having been obtained by the assessee Council under s.10 (23A) of the Act nor was any such contention raised when reference was sought by the assessee Council nor when the matter was being argued in the High Court.
In these circumstances it is clear to us that the Revenue acquiesced in the view taken by the Tribunal that the claim for exemption under s.11 of the Act could not be said to be ruled out by reason of the provisions of s.10 (23A).
We, therefore, proceed to deal with the second contention which was principally argued before us in these appeals.
Under s.11 of the Income Tax Act, 1961, subject to the conditions therein specified, income derived from property held 547 under trust wholly for charitable or religious purposes to the extent to which such income is applied to such purposes in India is exempt from the tax liability under the Act and s.2 (15) gives an inclusive definition of the expression "charitable purpose" thus: "Charitable purpose" includes relief of the poor, education, medical relief and the advancement of any other object of general public utility not involving the carrying on any activity for profit.
It may be noticed that whereas any object of general public utility was included in the definition of "Charitable purpose" in the 1922 Act, the present definition has inserted the restrictive words "not involving the carrying on of any activity for profit" which qualify or govern the last head of charitable purpose.
In Commissioner of Income Tax, Madras vs Andhra Chamber of Commerce a case decided by this Court under the 1922 Act where the restrictive words were absent this Court laid down that if the primary or dominant purpose of a trust or institution was charitable, any other object which by itself might not be charitable but which was merely ancillary or incidental to the primary or dominant purpose would not prevent the trust or institution from being a valid charity.
After the addition of the restrictive words in the definition in the 1961 Act, this Court in Additional Commissioner of Income Tax, Gujarat vs Surat Art Silk Cloth Manufacturers Association affirmed that the aforesaid test of primary of dominant purpose of a trust or institution still holds good, that the restrictive words qualify "object" and not the advancement or accomplishment thereof and that the true meaning of the restrictive words was that when the purpose of a trust or institution was the advancement of an object of general public utility at was that object of general public utility and not its accomplishment or carrying out which must not involve the carrying on of any activity for profit.
And applying these tests trading bodies like Andhra chamber of Commerce and Surat Art Silk Cloth Manufacturers Association have been held to be institutions constituted with a view to advance an object of general public utility because their primary or dominant purpose was to promote and protect industry, trade and commerce either generally or in certain commodities, even though some benefit through some of their activities did accrue to their members which 548 was regarded as incidental and this Court held that the income derived from diverse sources by these institutions (rental income from property in the case of Andhra Chamber of Commerce and income from annual subscriptions collected from its members and commission of a certain percentage of the value of licences for import of foreign yarn and quotas for purchase of indigenous yarn obtained by the assessee from its members in the case of Surat Art Silk Cloth Manufacturers Association was exempt from tax liability under s.11 of the Act.
Reliance on English decisions would not be of much avail because the definition of charitable purposes as given in our Act since it embraces 'any other object of general public utility ' goes further than the definition of charity to be derived from the English cases.
Under English law of charity a trust is charitable only if it is within the spirit and intendment of the Preamble to the Statute of Elizabeth (43 Eliz.
ch. 4) and all objects of general public utility are not necessarily charitable, some may or some may not be, depending upon whether they fall within the spirit and intendment of the Statute of Elizabeth.
Under our definition every object of general public utility would be charitable subject only to the condition imposed by the restrictive words inserted in the 1961 Act.
It is because of this basic difference between Indian Law and English Law of charity that Lord Wright in All India Spinners ' Assn.
vs CIT uttered a warning against blind adherence to English decisions on the subject thus: "The Indian Act gives a clear and succinct definition which must be construed according to its actual language and meaning.
English decisions have no binding authority on its construction and though they may sometimes afford help or guidance, cannot relieve the Indian Courts from their responsibility of applying the language of the Act to the particular circumstances that emerge under conditions of Indian life.
" Having regard to the aforesaid manner in which the definition of "charitable purpose" given in s.2 (15) has been interpreted by this Court the question that arises for consideration in these appeals is whether the securities, interest from which is sought to be exempted from tax liability, were held by the assessee Council on trust wholly for a charitable purpose, namely, for the advancement of an object of general public utility? Admittedly the assessee Council is not indulging in any activity for profit and hence the aspect of considering the applicability of the restrictive words does not arise and the answer to the question must depend upon the 549 nature or character of the functions and activities which the assessee Council can undertake under the for it is clear that it cannot go beyond what is prescribed by that Act.
The Preamble of the shows that it was enacted with a view to amend and consolidate the law relating to legal practitioners and to provide for the constitution of Bar Councils and an All India Bar.
Under s.3 of the Act Bar Councils are constituted for various States and the assessee Council happens to be a State Bar Council for Maharashtra.
Section 4 provides that every Bar Council shall be a body corporate having perpetual succession and a common seal, with power to acquire and hold property both movable and immovable and to contract, and may by the name by which it is known sue or be sued.
Section 6 is the material provision which sets out both obligatory as well as optional functions of every State Bar Council and so far as is material runs thus: "6.(1)The functions of a State Bar Council shall be (a) to admit persons as advocates on its roll; (b) to prepare and maintain such roll; (c) to entertain and determine cases of misconduct against advocates on its roll; (d) to safeguard the rights, privileges and interests of advocates on its roll; (e) to promote and support law reform; (ee) to conduct seminars and organise talks on legal topics by eminent jurists and publish journals and papers of legal interest; (eee) to organise legal aid to the poor in the prescribed manner; (f) to manage and invest the funds of the Bar Council; (g) to provide for the election of its members; (h) to perform all other functions conferred on it by or under this Act; 550 (i) to do all other things necessary for discharging the aforesaid functions.
(2) A State Bar Council may constitute one or more funds in the prescribed manner for the purpose of (a) giving financial assistance to organise welfare schemes for the indigent, disabled or other advocates; (b) giving legal aid or advice in accordance with the rules made in this behalf.
" Sections 9, 9A and 10 of the Act provide for the constitution of various committees for the purposes mentioned therein.
Section 15 confers power on the Bar Council to make rules to carry out the purposes of this Chapter.
The rest of the provisions of the Act are not material for the purpose of the issue under consideration.
Counsel for the Revenue contended that the primary object or purpose with which the Bar Council of a State is constituted is to benefit the members of the legal profession inasmuch as under s.6 (1) (d) it is an obligatory function of the State Bar Council to safeguard the rights privileges and interests of the advocates of its roll and that other functions like promotion of law reform, conducting law seminars etc.
are incidental objects and the benefit to the public is remote or indirect or incidental and, therefore, the assessee Council could not be regarded as a body intended to advance the object of general public utility.
It is impossible to accept this contention.
It is clear that sub section
(1) lays down the obligatory functions while sub section
(2) indicates what are the optional or discretionary functions that could be undertaken by the State Bar Council and from amongst the obligatory functions it will be wrong to pick out one and say it is the primary or dominant object or purpose.
All the clauses of sub section
(1) will have to be considered in light of the main objective sought to be achieved as indicated in the Preamble.
The functions mentioned in cls.
(a) and (b) of sub section
(1), namely, to admit persons as advocates on its roll and to prepare and maintain such roll, are clearly regulatory in character intended to ensure that persons with requisite qualifications who are fit and otherwise proper to be advocates are available for being engaged by the litigating public; the function prescribed in cl.
(c) has been enjoined upon avowedly with the objective of protecting the litigating public from unscrupulous professionals by taking them to task for any misconduct on 551 their part; it is also one of the obligatory functions of a State Bar Council to promote and support measures for law reform as also to conduct law seminars and organise talks on legal topics by eminent jurists, obviously with a view to educate the general public, the function prescribed by cl.
(eee) is obviously charitable in nature, the same being to organise legal aid to the poor.
Amongst these various obligatory functions one under cl.
(d) is to safeguard the rights, privileges and interests of the advocates on its roll and it is difficult to regard it as a primary or dominant function or purpose for which the body is constituted, Even this function apart from securing speedy discharge of obligations by the litigants to the lawyers ensures maintenance of high professional standards and independence of the Bar which are necessary in the performance of their duties to the society.
In other words, the dominant purpose of a State Bar Council as reflected by the various obligatory functions is to ensure quality service of competent lawyers to the litigating public, to spread legal literacy, promote law reforms and provide legal assistance to the poor while the benefit accruing to the lawyer members is incidental.
It is true that sub section
(2) provides that a State Bar Council may constitute one or more funds for the purpose of giving financial assistance to organise welfare schemes for the indigent, disabled or other advocates; but it is an optional or discretionary function to be undertaken by the Council.
Apart from that, admittedly the assessee Council has not so far constituted any such fund for the purpose specified in the instant case.
As and when such a fund is constituted a question may arise for consideration and the Court may have to decide whether the function so undertaken by a State Bar Council has become the dominant purpose for which that Council is operating.
Having regard to the Preamble of the Act and the nature of the various obligatory functions including the one under cl.
(d) enjoined upon every State Bar Council Under s.6 (1) of the Act, it is clear that the primary or dominant purpose of an institution like the assessee Council is the advancement of the object of general public utility within the meaning of s.2 (15) of the Act, and as such the income from securities held by the assessee Council would be exempt from any tax liability under s.11 of the Act.
Having come to the aforesaid conclusion on applying the language of our Act to the nature of functions undertaken by a State Bar Council under the it is truly unnecessary to deal with the English decisions cited during the course of 552 arguments.
However, we might indicate that in two cases (Royal College of Surgeons case and the General Medical Council 's) case on an analysis of the functions undertaken by the two concerned institutions under the Statutes and Charters governing them the Court came to the conclusion that the institutions were not constituted for charitable purpose but they were more of professional institutions, the approach being to find out whether the objects satisfied the limited concept of charity within the spirit and intendment of the Statute of Elizabeth.
In the other two cases (The Yorkshire Agricultural Society 's case and The Institute of Civil Engineers ' case the Court took the view that both the institutions were constituted for charitable purposes entitled the exemptions under s.37 (1) (b) of the Income Tax Act, 1918, and the benefits accruing to the members were regarded as incidental.
In the result we are of the opinion that the High Court was right in answering the question in the affirmative and in favour of the assessee.
The appeals are accordingly dismissed with no order as to costs.
S.R. Appeals dismissed.

summary:
The income derived by the Bar Council of Maharashtra from securities (interest) and other income by way of enrollment fees during the accounting periods relevant to the assessment years 1962 63,1963 64,1964 65 was subjected to tax by the Income Tax Officer.
Since the Central Government had accorded approval to the assessee for the purpose of section 10(23A) during the pendency of the appeal before the Tribunal by a notification dated August 5, 1966 with effect from December 28,1961, the Tribunal held that the assessee Council was entitled to exemption under section 10(23A) in respect of its income by way of enrollment fees.
The Tribunal remanded the case back to the Appellate Assistant Commissioner and directed him to dispose of the case by examining the question as to the purpose for which the securities were held by the assessee Council.
It observed that if the said securities were held for educational purpose or for any other charitable purpose then the exemption under section 11 would be admissible to the extent available under the law.
The High Court, on a reference made at the instance of the assessee Council, answered the question: "Whether on the facts and in the circumstances of the case, the assessee Council could be taken to be a body intended to advance any object of general public utility falling within section 2(15) for purposes of section 11 of the Act ?" in favour of the assessee and hence the appeals by Revenue after obtaining special leave from the Court.
Dismissing the appeals, the Court ^ HELD: 1.
Having regard to the Preamble of the and the nature of the various obligatory functions including the one under clause (d) enjoined upon every State Bar Council under section 6(1) of the , it is clear that the primary or dominant purpose of an institution like the assessee Council is the advancement of the object of general public utility within the meaning of section 2(15) of the Income Tax Act, 1961 and as such the income from securities held by the assessee Council would be exempt from any tax liability under section 11 of the Income Tax Act, 1961.
[551 E G] 543 2.
If the primary or dominant purpose of a trust or institution was charitable any other object which by itself might not be charitable but which was merely ancillary or incidental to the primary or dominant purpose would not prevent the trust or institution from being a valid charity.
The restrictive words "not involving the carrying on any activity for profit" in section 2(15) of the Income Tax Act, 1961, qualify "object" and not the advancement or accomplishment thereof.
In other words, the true meaning of the restrictive words is that when the purpose of a trust or institution was the advancement of an object of general public utility it was that object of general public utility and not its accomplishment or carrying out which must not involve the carrying on of any activity for profit.
Here, admittedly, the State Bar Councils are not indulging in any activity for profit and hence the question of applying the restrictive words in s.2(15) does not arise.
[547 C F, 548 G H] Commissioner of Income Tax, Madras vs Andhra Chamber of Commerce, ; Additional Commissioner of Income Tax, Gujarat vs Surat Art Silk Cloth Manufacturers Association, , reiterated.


judgement:
Civil Appeal No. 1843 of 1974.
Appeal by special leave from the judgment and order dated the 6th September, 1972 of the Allahabad High Court in Civil Misc.
Writ No. 27 of 1972.
S.C. Manchanda, Champat Rai and Miss A. Subhashini for the Appellants.
Pramod Swarup for the Respondent.
The Judgment of the Court was delivered by VENKATARAMIAH, J.
The question which arises for consideration in this appeal by special leave is whether under section 52 of the (hereinafter referred to as the Act) the Central Government is bound to accept in satisfaction of the whole or any part of the duty payable under the Act at such price as may be agreed upon between the Central Government and the person accountable for estate duty any property passing on the death of the deceased when an application is made for that purpose by such person.
On the death of Lala Beni Madho Agarwal which took place on September 29, 1964 his son Prayag Dass Agarwal, the respondent 579 herein filed a statement of account under the Act of the estate passing on the death of the deceased.
The estate duty payable in respect of the estate in question was determined at Rs. 3,37,543.40 by the Assistant Controller of Estate Duty, Allahabad by his order dated November 30, 1970.
When the appeal filed against the said order was still pending, the respondent made an application under section 52(1) of the Act on February 15, 1971 to the Central Board of Direct Taxes offering one of the items of property passing on the death of the deceased, namely premises No. 1, Phaphamau Road, Allahabad, whose principal value had been determined by the Assistant Controller at Rs. 2,53,655 in part payment of the balance of estate duty which was still payable by him under the order of assessment.
The said application elicited a cryptic reply dated September 16, 1971 from the Under Secretary of the Central Board of Direct Taxes, the relevant part of which read as follows: "I am directed to refer to your petition dated 16.2.1971 on the subject mentioned above and to say that your offer is not acceptable.
" The Assistant Controller, however, wrote to the respondent on October 21,1971 stating that the respondent could pay the arrears of estate duty payable by him in monthly instalments of Rs. 10,000 each beginning from October 29, 1971 subject to payment of interest @ 9% per annum on the arrears outstanding.
Thereupon the respondent filed a writ petition before the High Court of Allahabad under Article 226 of the Constitution against the Assistant Controller, the Central Board of Direct Taxes and the Union of India requesting the High Court to issue a writ in the nature of mandamus to the Union of India to consider the application made by him under section 52(1) on its merits, to negotiate and settle the price of the property offered by him in settlement of part of duty payable by him and to give credit to the extent of the price so determined under the Act.
The respondent contended inter alia that section 52 of the Act conferred a right on an accountable person, if he chose to do so, to offer an item of property passing on the death of the deceased in respect of whose estate, duty was payable under the Act in discharge of the whole or part of such duty and that it imposed a reciprocal obligation on the Central Government to accept such property and adjust its price as may be agreed upon between the Central Government and the accountable person towards the duty payable.
He further contended that the Central Government had no right to refuse to accept the offer so made by the accountable person and that he 580 having made the offer to pay the duty by transfer of the property in question he could not be compelled to pay the duty to the extent of its price.
He, therefore prayed for the issue of appropriate direction to the Central Government to comply with section 52 of the Act accordingly.
On behalf of the Union Government it was inter alia urged that it was not bound to accept an offer made under section 52(1) of any property and it was within the discretion of the Union Government to reject the offer.
The High Court held that if the accountable person exercised the option to pay the estate duty by transferring property, the Central Government could not refuse to accept the offer and insist upon payment by another mode when there was agreement about the price between it and the accountable person.
It, however, held that it was not necessary to decide the question whether it was open to the Central Government to refuse the offer of property on a ground other than the price as the impugned order had not disclosed any reason at all for rejecting the offer.
Accordingly the High Court directed the Union Government and the Central Board of Direct Taxes to dispose of the application of the petitioner afresh in accordance with law.
This appeal is filed against the said decision of the High Court under Article 136 of the Constitution.
Section 5(1) of the Act provides that in the case of every person dying after the commencement of the Act there shall, save as expressly provided in the Act, be levied and paid upon the principal value ascertained as per the relevant provisions of the Act of all property, settled or not settled, including agricultural land situate in the territories which immediately before November 1, 1956 were comprised in the States in the First Schedule to the Act which passes on the death of such person, a duty called 'estate duty ' at the rates fixed in accordance with section 35 of the Act.
The rates of estate duty are set out in the Second Schedule to the Act.
The principal value of the property liable for estate duty has to be ascertained in accordance with the provisions in Part V of the Act.
The estate duty levied under the Act can be collected as per provisions in Part VII of the Act.
Section 51 of the Act states that estate duty may be collected by such means and in such manner as the Central Board of Direct Taxes may prescribe.
Rule 18 of the Estate Duty Rules (hereinafter referred to as 'the Rules ') made by the Central Board of Direct Taxes in exercise of the powers conferred by sub section (1) of 581 section 85 of the Act deals with payment of estate duty.
That Rule provides inter alia that payment of any duty may be made by delivery of a cheque on a scheduled bank or by a bank draft issued by a scheduled bank or by depositing the amount of duty in the Government Treasury or by adjustment of any refund of income tax, excess profits tax, business profits tax or excess profits tax deposit.
Section 52 of the Act as it was originally enacted provided that the Board might prescribe that Government securities could be accepted in payment of estate duty on such items as it thought fit.
When it was suggested that a provision corresponding to section 56(1) of the Finance as it stood at the time when the Act was enacted could be introduced into the Act, it was not accepted by the Indian Finance Minister.
Section 49 of the British Finance Act 1946 (9 & 10 Geo 6 C. 64) provided that the Commissioners of Inland Revenue could accept any property under section 56 of the Finance in satisfaction or part satisfaction of any estate duty and amended the latter Act accordingly.
Section 56(1) of British Finance which was again amended by the British Finance Act of 1949 read thus: "56(1) The Commissioners may, if they think fit, on the application of any person liable to pay estate duty or settlement estate duty accept in satisfaction of the whole or any part of such duty any such real (including leasehold) property as may be agreed upon between the Commissioners and that person." The legal position in the United Kingdom as it existed in 1965 in so far as transfer of real and leasehold property in payment of estate duty is concerned is summarized in Dymond 's Death Duties (14th Edition) at pages 720 721 thus: "D Transfer of Property in Payment of Duty : (1) Real and leasehold property: By section 56(1) of the Finance , as extended and amended by section 49 of the Finance Act, 1946 (which applies to deaths at any time) and the Finance Act, 1946 (which applies to deaths at any time) and the Finance Act, 1949, Sched.
XI, Pt.
IV the Commissioner 's may, if they think fit, on the application of any person liable to pay any Death Duties, accept in satisfaction of the 582 whole or part of such duty any such real (including leasehold) property as may be agreed upon between the Commissioners and the accountable person.
The Commissioners have the right to accept foreign real or leasehold property, but they are scarcely likely to do so.
The property accepted need not itself be liable to duty.
It may be accepted in satisfaction of duty on any property, real or personal.
No Stamp Duty is to be payable on the transfer of such property (Finance , section 56(2) .
The disposition of any property accepted by the Commissioners is provided for by sections 50 and 51 of the Finance Act, 1946, under which the Treasury may direct that the land be transferred direct to a body of persons (e.g. the National Trust) or to trustees for such a body, etc,.
instead of to the Commissioners, and the duty receivable by the latter may be paid out of the National Land Fund established by section 48 of the Act.
It is within the discretion of the Commissioners whether they will accept property under this provision, but the Chancellor of the Exchequer in his Budget statement for 1946 said that he expected the power (which hitherto had not in practice been used) to operate on a substantial scale in the future: it is understood that seventy properties had been taken over up to the 31st March, 1963.
He referred also to the National Trust and the Youth Hostels Association as examples of the bodies not established for profit, and having for their object "the provision, improvement or preservation of amenities enjoyed, or to be enjoyed, by the public or the acquisition of land to be used by the public" to which the land may be transferred.
Particulars of properties accepted are given in the Commissioner 's Annual Reports.
There is no provision for the transfer of land by a person other than the accountable person, and the acquisition price cannot exceed the amount of the duty.
The Commissioners ' powers extend to the acquisition of foreign immovable property, but are scarcely likely to be exercised in respect of it.
" The position in the United Kingdom appears to be more or less the same even after the former estate duty was replaced by the new tax known as capital transfer tax by the British Finance Act 583 1975 (vide section 22 of the Finance Act 1975).
The relevant part of paragraph 17 of Schedule 4 to that Act reads thus: "17 (1) The Board may, if they think fit on the application of any person liable to pay tax, accept in satisfaction of the whole or any part of it any property to which this paragraph applies.
(2) This paragraph applies to any such land as may be agreed upon between the Board and the person liable to pay tax.
(3) This paragraph also applies to any objects which are or have been kept in any building (a) If the Board have determined to accept or have accepted that building in satisfaction or part satisfaction of tax or estate duty, or . . " (See Halsbury 's Statutes of England (Third Edition) Vol. 45 at page 1870).
Section 52 of the Act was substituted by a new section 52 by the Direct Taxes (Amendment) Act, 1964.
The new section reads thus: "52.
Payment of duty by transfer of property (1) The Central Government may, on an application of the person accountable for estate duty, accept in satisfaction of the whole or any part of such duty any property passing on the death of the deceased at such price as may be agreed upon between the Central Government and that person, and thereupon such person shall deliver possession of the property to such authority as may be specified by that Government in this behalf.
(2) Notwithstanding anything contained in any other law for the time being in force, on the date the possession of the property is delivered to the authority under sub section (1) (i) the property shall vest in the Central Government; and (ii) the Central Government shall, where necessary, intimate the registering authority concerned accordingly; and the authority shall administer the property in such manner as the Central Government may direct.
584 (3) Where the price referred to in sub section (1) exceeds the aggregate of the amounts due under this Act in respect of the estate of the deceased, the excess shall be applied in the following order to the payment of any tax, penalty, interest or other amount (i) which the legal representative of the deceased is liable to pay in respect of the income, expenditure or wealth of, or gift made by, the deceased under any of the Acts referred to in clause (c) of section 2 of the ; (ii) which the executor is liable to pay under any of the Acts aforesaid in respect of the estate of the deceased for the period of the administration of the estate; (iii)which the person beneficially entitled to the property in question is liable to pay under any of those Acts; and the balance, if any, shall be paid to the accountable person.
" In the Notes on clauses annexed to the Bill which ultimately became the Direct Tax (Amendment) Act 1964, it was stated: "Sub clause (b) seeks to substitute the provisions of section 52 of the by a new provision, enabling the Central Government to accept at an agreed price, the assets comprised in an estate passing on the death of the deceased towards payment of the estate duty, if the accountable person so offers.
Provision is also made that any balance of the price left after satisfying the amounts due under the will be adjusted against amounts due under the other Direct Taxes Act from the deceased, his estate and the accountable person beneficially entitled to the asset in question in that order.
" Let us now analyse section 52 of the Act.
A proceeding under section 52 does not commence until an application is made by the person accountable for estate duty.
It is entirely at his option whether a property passing on the death of the deceased should be transferred so that its price can be adjusted towards payment of the estate duty.
The Central Government cannot compel him to do so.
When the accountable person voluntarily applies to the Central 585 Government, the section says that the Central Government 'may ' accept the property offered in satisfaction of the estate duty at such price as may be agreed upon between it and the accountable person.
Section 52 of the Act does not say that the Central Government shall do so but it may do so.
The question in this case is whether the Central Government is bound to do so.
We shall revert to this question later on.
Then the price of the property has to be agreed upon between the Central Government and the accountable person.
The price so agreed upon should naturally relate to the date on which agreement takes place and it cannot certainly be the principal value of the property determined in the estate duty proceedings.
This provision may perhaps indirectly act as a deterrent against excessive valuation of the property in the estate duty proceedings because when the question of determination of its price under section 52 of the Act arises there ought not to be a wide disparity between the principal value determined in the estate duty proceedings and what is offered by the Central Government as the price under section 52.
When once the price is agreed upon, then the accountable person is bound to deliver possession of the property to such authority as may be specified by the Central Government.
On such delivery the property vests in the Central Government without any further formality.
Sub section (3) of section 52 of the Act provides that where the price agreed upon exceeds the amount due as estate duty, the excess amount shall be applied to the payment of any tax penalty, interest or other amount payable in the order mentioned in clauses (i) to (iii) thereof.
If after adjusting all such dues, any balance still remains, such balance shall be paid to the accountable person.
The Act is a fiscal statute principally intended to levy and collect estate duty which when collected has to be disbursed in accordance with Part XII of the Constitution.
It is not a law providing for acquisition of a property forming part of the estate of the deceased.
Part VII of the Act in which sections 51 and 52 occur only provides the machinery for collection of the duty.
Whereas section 51 of the Act authorises the Board to prescribe the means and manner in which the estate duty may be collected, section 52 gives the option to the accountable person to offer a property passing on the death of the deceased so that its price may be adjusted towards the payment of the estate duty.
Rule 18 of the Rules made by the Board pursuant to section 51 enables the accountable person to discharge his liability in one or more ways mentioned therein and there the Central Government is left with no choice 586 about them.
Payment of duty in any of the said ways discharges the liability of the accountable person under the Act.
Section 52 of the Act however, appears to be an alternative mode by which such liability can be discharged but it has some distinguishing features.
Indisputably the price of the property offered thereunder has to be agreed upon between the Central Government and the accountable person which introduces an element of consensus into the proceeding.
But the point on which the parties are at issue in this case is whether the Central Government is bound to accept a property offered by the accountable person under section 52 and initiate proceedings to settle its price by negotiation.
The language of the statute prima facie does not compel the Central Government to do so.
The section is in the nature of an enabling provision which authorises the Central Government to accept a property in lieu of estate duty payable subject to the conditions mentioned in it.
It is true that even enabling words in a statute which confer a discretionary power may have to be interpreted as compulsory where they amount to words clearly intended to effectuate a legal right.
But ordinarily such words are permissive only.
In the instant case the very fact there is a need for an agreement upon the price of the property between the Central Government and the accountable person makes the power of the Central Government under section 52(1) of the Act discretionary and permissive.
Any other meaning may lead to impractical and incongruous result.
The Central Government cannot be compelled to accept the properties in discharge of the estate duty when no agreement is possible on its price, and when law does not provide for a machinery to determine the price when there is no agreement.
The history of the corresponding legislation in the United Kingdom and the language of section 52 read with the 'Notes on clauses ' attached to the relevant Bill extracted above suggest that the Central Government has the option either to accept or reject the offer made by an accountable person under section 52.
This has to be so having regard to the administrative difficulties involved in the matter.
As mentioned earlier, the Act is a fiscal statute intended to collect duty and not to acquire property.
If section 52 of the Act is held to be mandatory then the Central Government will be obliged to acquire properties in several parts of India where it may not find any use for them and spend money on their management and upkeep and arrange for their disposal.
The cost of administration involved in the Act in that case possibly may be much more than the duty realisable under the Act.
Further if such is the construction to be placed then what happens if the price of the property offered is more than the duty payable ? Then in every such case, the Government would be compelled to acquire property by paying 587 to the accountable person the amount which is in excess of the duty and other sums payable under section 52(2)(i) to (iii) even when it does not need such property.
Surely such could not have been the intention of the Parliament.
We are of the view that on a plain construction of section 52 of the Act, the Central Government may at its discretion either accept the property offered under section 52 or may not if the circumstances so warrant.
The accountable person cannot claim that the Central Government is bound to accept to such property.
The power of the Central Government under section 52 is purely administrative and discretionary.
The High Court was in error in holding that if an assessee wanted to pay the estate duty by transferring property, the Government could not refuse to accept the offer and insist upon payment by another mode, provided there was agreement on the price of the property between the Government and the assessee.
When once it is held that the power of the Government under section 52 of the Act is administrative and discretionary, it follows that the said power should be exercised subject to the same limitation which govern all such administrative and discretionary powers.
The Central Government or the authority which is competent to take a decision should exercise its discretion bona fide and in good faith by addressing itself to the matter before it and should not allow itself to be influenced by extraneous and irrelevant considerations.
The question should not be disposed of in an arbitrary or capricious way.
In this case, the Court can only ask the authority concerned to exercise the discretion vested in it but it cannot be asked to exercise it in a particular way.
On this question we approve the decision of the Andhra Pradesh High Court in Chella Rama Bhupal Reddy vs Central Board of Direct Taxes & Anr.
The true legal position may be summarised thus.
What section 52(1) does is to set forth one more mode in which estate duty may be recovered.
It is a provision made specially for the recovery of estate duty.
It enables the Government to recover the duty in accordance with that mode.
The other statutory modes prescribed under section 51 and specified in the Rules are those where recourse by the accountable person obliges the Revenue to accept the payment made in any of those modes and to treat it, by compulsion of statute, as satisfaction of the dues.
The peculiarity of the mode provided under section 52(1) is that while recourse to it by the accountable person does not automatically imply satisfaction of the 588 dues, there is the duty cast on the Revenue to consider the application by the accountable person offering an item of property as a mode for satisfying the dues.
The Government must consider the application on its merits and in the exercise of sound administrative judgment.
Ordinarily in every contract for the purchase of property there are two stages.
(1) In the first stage, there is complete freedom to the parties to decide whether one should enter into negotiations with the other at all and in that regard the law takes no account of reason of any party for not choosing to entertain the proposal for sale made by the other however arbitrary, illogical or irrelevant the reason may be.
(2) The second stage follows the entertaining of the proposal and the actual negotiations between the parties which may or may not fructify in a contract.
Section 52(1) now under consideration concerned with the first stage, and differs in this from the complete freedom to entertain the proposal in that the proposal made under section 52(1) by the accountable person must be considered by the Central Government and any decision taken by it on that question must proceed on considerations which are relevant and bona fide.
The price of the property is, however, left to be determined by agreement in the event of the Government deciding to accept the offer made by the accountable person.
This forms part of the second stage.
In the instant case, the High Court was, however, right in holding that it had not been shown that the competent authority had properly exercised its discretion.
In the counter affidavit filed by the Assistant Controller of Estate Duty, some reasons were given in support of the decision of the Board.
That counter affidavit is of no use for the deponent could not speak on behalf of the Central Government or the Board.
In the counter affidavit of Balbir Singh, Secretary, Central Board of Direct Taxes and Deputy Secretary to the Government of India, two principal grounds were mentioned for rejecting the offer one, that the Central Government was not bound to accept the offer and two, that it had been shown that "the cash in hand, cash in bank, book debts, business profits, rent and share of the deceased in the firm of Ramnarain Lal Beni Madho amounted to Rs. 4,57,462 which amount was more than sufficient to pay the entire estate duty demand".
On the other hand the respondent contended in his reply affidavit that he had no liquid cash to pay the estate duty as it had been invested in business.
But there appears to have been no further probe into the question.
It is also obvious that the Board proceeded on the assumption that its discretion was unfettered even by considerations relevant to administrative 589 law.
In these circumstances, we feel that there was no proper exercise of the discretion by the Board.
We, therefore, affirm the direction issued by the High Court but subject to the observations made above and direct the Board to dispose of the application afresh in accordance with law.
The appeal is accordingly disposed of.
No costs.

dataset_name: IN-Abs

summary:
On the death of his father which took place on September 29, 1964 the respondent filed a statement of account under the of the estate passing on the death of the deceased.
The estate duty payable in respect of the estate in question was determined at Rs. 3,37,543.40 by the Assistant Controller of Estate Duty, Allahabad, by his order dated November 30, 1970.
When the appeal filed against the said order was still pending, the respondent made an application under section 52(1) of the Act on February 16, 1971 to the Central Board of Direct Taxes offering one of the items of property passing on the death of the deceased, namely, premises No. 1, Phaphamau Road, Allahabad, whose principal value had been determined at Rs. 2,53,625 in part payment of the balance of estate duty which was still payable by him under the order of assessment.
The said offer was not accepted by the Central Board of Direct Taxes but the appellant herein wrote to the respondent stating that the respondent could pay the arrears of estate duty payable by him in monthly instalments of Rs. 10,000 each beginning from October 29, 1971 subject to payment of interest @ 9% per annum on the arrears outstanding.
Thereupon the respondent filed a writ petition before the High Court of Allahabad requesting the High Court to issue a writ in the nature of mandamus to the Union of India to consider the application made by him under section 52(1) on its merits, to negotiate and settle the price of the property offered by him in settlement of part of duty payable by him and to give credit to the extent of the price so determined under the Act.
The High Court held that if the accountable person exercised the option to pay the estate duty by transferring property, the Central Government could not refuse to accept the offer and insist upon payment by another mode when there was agreement about the price between it and the accountable person.
The High Court, however, held that it was not necessary to decide the question whether it was open to the Central Government to refuse the offer of property on a ground other than the price as the impugned order had not disclosed any reason at all for rejecting the offer.
Accordingly, the High Court directed the respondents before it to dispose of the application afresh in accordance with law.
Hence the appeal after obtaining special leave of the Court.
Affirming the High Court directions, the Court 577 ^ HELD :1:1.
What section 52(1) of the does is to set forth one more mode in which estate duty may be recovered.
It is a provision made specially for the recovery of estate duty.
It enables the Government to recover the duty in accordance with that mode.
The other statutory modes prescribed under section 51 and specified in the Rules are those where recourse by the accountable obliges the Revenue to accept the payment made in any of those modes and to treat it, by compulsion of statute, as satisfaction of the dues.
The peculiarity of the mode provided under section 52(1) is that while recourse to it by the accountable person does not automatically imply satisfaction of the dues, there is the duty cast on the Revenue to consider the application by the accountable person offering an item of property as a mode for satisfying the dues.
The Government must consider the application on its merits and in the exercise of sound administrative judgment.
[587 F H, 588 A] 1:2.
Ordinarily in every contract for the purchase of property there are two stages.
(i) In the first stage, there is complete freedom to the parties to decide whether one should enter into negotiations with the other at all and in that regard the law takes no account of the reason of any party for not choosing to entertain the proposal for sale made by the other however arbitrary, illogical or irrelevant the reason may be.
(ii) The second stage follows the entertaining of the proposal and the actual negotiations between the parties which may or may not fructify in a contract.
Section 52(1) is concerned with the first stage, and differs in this from the complete freedom to entertain the proposal in that the proposal made under section 52(1) by the accountable person must be considered by the Central Government and any decision taken by it on that question must proceed on considerations which are relevant and bonafide.
The price of the property is, however, left to be determined by agreement in the event of the Government deciding to accept the offer made by the accountable person.
This forms part of the second stage.
[588 A D] 1:3.
The is a fiscal statute principally intended to levy and collect estate duty which when collected has to be disbursed in accordance with of the Constitution.
It is not a law providing for acquisition of a property forming part of the estate of the deceased.
Section 52 is in the nature of an enabling provision which authorises the Central Government to accept a property in lieu of estate duty payable subject to the conditions mentioned in it.
It is true that even enabling words in a statute which confer a discretionary power may have to be interpreted as compulsory where they amount to words clearly intended to effectuate a legal right.
But ordinarily such words are permissive only.
C D] In the instant case, the very fact that there is a need for an agreement upon the price of the property between the Central Government and the accountable person makes the power of the Central Government under section 52(1) of the Act discretionary and permissive.
Any other meaning may lead to impractical and incongruous result.
[586 D E] 1:4.
On a plain construction of section 52 of the Act the Central Government may at its discretion either accept the property offered under section 52 or may not if the circumstances so warrant.
The accountable person cannot claim 578 that the Central Government is bound to accept such property.
The power of the Central Government under section 52 is purely administrative and discretionary.
Therefore, the said power should be exercised subject to the same limitations which govern all such administrative and discretionary powers.
The Central Government or the authority which is competent to take a decision should exercise its discretion bonafide and in good faith by addressing itself to the matter before it and should not allow itself to be influenced by extraneous and irrelevant considerations.
The question should not be disposed of in an arbitrary or capricious way.
In this case, the Court can only ask the authority concerned to exercise the discretion vested in it but it cannot be asked to exercise it in a particular way.
[587 A B, D F] Chella Rama Bhupal Reddy vs Central Board of Direct Taxes and Anr., Andhra Pradesh, approved.
In the instant case, the High Court was right in holding that it had not been shown that the competent authority had properly exercised its discretion.
The Board proceeded on the assumption that its discretion was unfettered even by considerations relevant to administrative law and did not probe into the question of the availability of liquid cash in the hands of the respondent to pay tee estate duty and the averment of the respondent that the entire liquid cash had been invested in business.
[588 E, H, 589 A]


judgement:
Civil Appeal No. 1146 of 1973.
From the judgment and order dated the 1st, June 1972 of the Calcutta High Court in Appeal No. 150 of 1971 arising out of Matter No. 262 of 1968.
Debi Pal, A.K. Verma and K.J. John for the Appellant.
V.S. Desai, Champat Rai and Miss A. Subhashini for the Respondents.
The Judgment of the Court was delivered by BHAGWATI, J.
This appeal by certificate is directed against an order passed by a Division Bench of the High Court of Calcutta allowing an appeal against a decision of a Single Judge which quashed and set aside a notice dated 28th March 1968 issued by the Income Tax Officer under section 148 of the Indian Income Tax Act, 1961 seeking to reopen the assessment of the assessee for the assessment year 1959 60.
The facts giving rise to the appeal are a little important and they may be briefly stated as follows.
567 Prior to March 1947, one Deo Datt Sharma carried on business in Delhi in the name of Sharma Trading Company.
The business was quite a prosperous one and the record shows that Deo Datt Sharma was making an average profit of about Rs. 36,000 per year.
In March 1947, the assessee was incorporated as a private limited company with Ganga Saran Sharma as its managing director and it took over the business of Sharma Trading Company as a going concern in consideration of allotment of 1703 shares in the share capital of the assessee to Deo Datt Shrama.
The share capital of the assessee consisted of 8500 shares out of which 1703 shares were allotted to Deo Datt Sharma, 5 shares were held by Ganga Saran Sharma and 3500 shares, by a company called Narendra Trading Company controlled by Ganga Saran Sharma and his wife.
It may be pointed out at this stage that Deo Datt Sharma was the brother in law of Ganga Saran Sharma.
When business of Deo Datt Sharma was taken over by the assessee, Deo Datt Sharma was appointed Director of the assessee along with two other persons.
Deo Datt Sharma was placed in charge of management of the business of Delhi Branch of the assessee and he was paid a salary of Rs. 1000 per month, commission at the rate of 1 per cent on the sales of the Delhi Branch and bonus equivalent to three months ' salary.
Ganga Saran Sharma and the other two directors were also paid salary, commission and bonus but it is not necessary to set out the quantum of the emoluments paid to them, because in this appeal we are concerned only with the emoluments paid to Deo Datt Sharma and not with the emoluments paid to other directors.
The Income Tax Officer while assessing the assessee to tax for the assessment year 1949 50 disallowed the claim of the assessee for deduction in respect of payments made to the managing director and other directors on account of commission and bonus.
On appeal by the assessee the Appellate Assistant Commissioner disagreed with the view taken by the Income Tax Officer and allowed the entire amount paid to the managing director and other directors by way of commission and bonus.
So far as Deo Datt Sharma is concerned, the Appellate Assistant Commissioner observed that having regard to the fact that this very business was carried on by Deo Datt Sharma prior to its taking over by the assessee and it was a prosperous business earning on an average about Rs. 36,000 per year and after taking over of the business by the assessee, Deo Datt Sharma continued to be in sole management of the 568 business of the Delhi Branch, the aggregate amount paid to him could not at all be regarded as excessive and was allowable as a permissible deduction.
Thus the entire amount paid by the assessee to the managing director and other directors was allowed by the Appellate Assistant Commissioner as a deduction in computing the taxable income of the assessee.
The assessee had thereafter no difficulty in claiming deduction of the amount paid to the managing director and other directors on account of salary, commission and bonus, but again in the assessment year 1956 57, the Income Tax Officer disallowed a substantial portion of the remuneration paid to the managing director and the assessment made by the Income Tax Officer was confirmed in appeal by the Appellate Assistant Commissioner and in further appeal by the Income Tax Tribunal.
This led to the making of a reference and the High Court answered the question referred to it in favour of the assessee and held that the disallowance of a portion of the remuneration paid to the managing director was not justified.
While making the assessment for the assessment year 1957 58, the Income Tax Officer once again disallowed a part of the remuneration paid to the managing director as also the amounts of interest paid to the directors on the balances lying to the credit of their respective accounts with the assessee on account of undrawn remuneration.
The Appellate Assistant Commissioner in appeal held that the interest paid to the directors on the balances lying to the credit of their respective accounts was an allowable expenditure but he sustained the disallowance of a portion of the remuneration paid to the managing director.
The assessee thereupon preferred a further appeal to the Tribunal and after considering all the facts and circumstances of the case, the Tribunal came to the conclusion that the remuneration paid to the managing director as also to the other directors was not at all excessive and no portion of it could justifiably be disallowed.
The result was that not only was the remuneration paid to the managing director and the other directors allowed in full as a permissible deduction but also the amount of interest paid on the credit balances in their respective accounts was allowed to be deducted as a permissible expenditure.
Obviously, and this could not be disputed on behalf of the Revenue, the accounts of the managing director and other directors including Deo Datt Sharma showing the amount of remuneration credited and the withdrawals debited in each year were produced before the Income Tax Officer and he was aware that only a very small amount was withdrawn by Deo Datt Sharma out of the remuneration credited in his account.
The 569 record also shows that on a query made by the Income Tax Officer the assessee furnished inter alia the assessment file number of Deo Datt Sharma who was being assessed in Delhi.
The assessment for the assessment year 1958 59 also followed the same course upto the stage of appeal before the Income Tax Tribunal and ultimately the amount of interest paid to the directors on the credit balances in their respective accounts was allowed as a permissible deduction to the assessee.
The assessment of the assessee for the subsequent year 1959 60 was thereafter completed on the basis of the decision of the Income Tax Tribunal for the two earlier assessment years and the amounts paid to the managing director and other directors including Deo Datt Sharma by way of salary, commission and bonus were allowed in full as permissible deductions and so was the interest paid on the credit balances in their respective accounts.
On 28th March, 1968 the Income Tax Officer issued a notice under section 148 of the Income Tax Act, 1961 seeking to reopen the assessment of the assessee for the assessment year 1959 60 on the ground that the income of the assessee had escaped assessment at the time of the original assessment.
Since a period of four years had already elapsed from the close of the assessment year 1959 60 and no notice could be issued under section 147 (b), it was obvious that the notice issued by the Income Tax Officer was based on section 147 (a), and it could be justified only if it could be shown that the Income Tax Officer had reason to believe that, by reason of omission or failure on the part of assessee to disclose any material facts, the income of the assessee had escaped assessment.
The Income Tax Officer however did not indicate in the notice as to what were the reasons which had led him to believe that the income of the assessee had escaped assessment by reason of omission or failure to disclose material facts nor did he give any reasons though requested by the assessee to do so.
The assessee thereupon preferred a writ petition in the High Court of Calcutta challenging the validity of the notice on the ground that there was no omission or failure on the part of the assessee to disclose any material facts at the time of the original assessment and that in any event, there was no reason to believe that any part of the income of the assessee had escaped assessment by reason of such omission or failure.
The writ petition was admitted and rule was issued by a single Judge of the Calcutta High Court.
The Income Tax Officer, possibly on service of the rule, addressed a letter dated 19th June 1968 to the assessee stating that 570 the notice was issued by him because he had reason to believe that the payment of remuneration to Deo Datt Sharma was bogus and false.
The Income Tax Officer also stated in the affidavit filed by him in reply to the writ petition that after the assessment of the assessee was completed for the assessment years upto 1963 64, the Income Tax Officer came to learn that Deo Datt Sharma was the brother in law of Ganga Saran Sharma, managing director and that Deo Datt Sharma had disposed of the income received by him by way of remuneration from the assessee, in the following manner: 1.
On 31st July 1957 he made a gift to Shri Narendra Sharma son of Shri Ganga Saran Sharma, Managing Director of the Company.
Rs. 12,550.00 2.
On 25th August 1958 he made a loan to Ganga Saran Sharma.
Rs. 2,25,000.00 Total 2,37,550.00 and thereafter, out of the amount lying to his credit in the account with the assessee, he had made the following gifts: On 5th December 1960 gift to Brahma Devi wife of Ganga Saran Sharma Rs.1,01,101.00 On 21st December 1960 gift to Indu Sharma daughter in law of Ganga Saran Sharma Rs. 15,101.00 On 26th December 1961 gift to Hemlata Sharma daughter in law of Ganga Saran Sharma.
Rs. 50,101.00 The Income Tax Officer stated that out of the total amount of remuneration of Rs. 3,51,000 received by Deo Datt Sharma during the period upto 31st March 1962, he had paid tax in the sum of about Rs. 65,000/ and spent a total sum of Rs. 2,37,550 on account of gifts and loan as aforesaid and the withdrawals made by him for his own purposes thus did not amount to more than Rs. 4000 per year.
These facts, according to the Income Tax Officer, showed 571 that the remuneration paid to Deo Datt Sharma was not genuine and was sham and bogus and the amount of such remuneration alleged to have been paid to Deo Datt Sharma was wrongly allowed as a permissible deduction and hence the assessment of the assessee was liable to be reopened by issue of a notice under section 147 (a).
The learned single Judge of the Calcutta High Court who heard the writ petition took the view that there was no omission or failure on the part of the assessee to disclose any material facts relating to his assessment and that in any event, there was no reason to believe that any part of the income of the assessee had escaped assessment at the time of the original assessment by reason of wrong allowance of the remuneration paid to Deo Datt Sharma as a permissible deduction.
The writ petition was accordingly allowed by him and the notice issued by the Income Tax officer was quashed and set aside.
The Income Tax Officer thereupon preferred an appeal before a Division Bench of the Calcutta High Court and the learned Judges constituting the Division Bench allowed the appeal, holding that the Income Tax Officer had reason to believe that the amount of remuneration paid to Deo Datt Sharma had been wrongly allowed as a permissible deduction by reason of omission or failure on the part of the assessee to disclose the material facts set out above and the notice issued by the Income Tax Officer was justified.
The assessee thereupon preferred the present appeal in this Court after obtaining a certificate of fitness from the High Court of Calcutta.
It is well settled as a result of several decisions of this Court that two distinct conditions must be satisfied before the Income Tax Officer can assume jurisdiction to issue notice under section 147 (a).
First, he must have reason to believe that the income of the assessee has escaped assessment and secondly, he must have reason to believe that such escapement is by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment.
If either of these conditions is not fulfilled, the notice issued by the Income Tax Officer would be without jurisdiction.
The important words under section 147 (a) are "has reason to believe" and these words are stronger than the words "is satisfied".
The belief entertained by the Income Tax Officer must not be arbitrary or irrational.
It must be reasonable or in other words it must be based on reasons which are relevant and material.
The Court, of course, cannot investigate into the adequacy or sufficiency of the reasons which 572 have weighed with the Income Tax Officer in coming to the belief, but the Court can certainly examine whether the reasons are relevant and have a bearing on the matters in regard to which he is required to entertain the belief before he can issue notice under section 147 (a).
It there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly instructed on facts and law could reasonably entertain the belief, the conclusion would be inescapable that the Income Tax Officer could not have reason to believe that any part of the income of the assessee had escaped assessment and such escapement was by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts and the notice issued by him would be liable to he struck down as invalid.
Now here on the facts as admitted or found it is clear that Deo Datt Sharma was carrying on the same business prior to the incorporation of the assessee as a private limited company and this business was yielding him an average profit of about Rs. 36000 per year.
When the assessee, on incorporation, took over the business as a going concern from Deo Datt Sharma it appointed Deo Datt Sharma as a director and placed him in sole charge of the management of the Delhi Branch of the business.
In fact, it could not be disputed on behalf of the Revenue that Deo Datt Sharma was looking after the business of the Delhi Branch of the assessee in the same manner in which he was doing when he was sole proprietor of the business and for this work done by him, Deo Datt Sharma was paid salary at the rate of Rs. 1000 per month, commission at the rate of one per cent on the sales of the Delhi Branch and bonus equivalent of three months ' salary.
The amount of remuneration paid to Deo Datt Sharma was thus not without consideration; in fact, it was paid for valuable services rendered by Deo Datt Sharma in solely managing the business of the Delhi Branch of the assessee.
Now once it is conceded that Deo Datt Sharma was in sole charge and management of the business of the Delhi Branch of the assessee and was rendering full time service to the assessee in that capacity, it is difficult to see how any one could reasonably come to the belief that the payment of remuneration made to him was sham and bogus.
Surely, the Income Tax officer could not expect Deo Datt Sharma to devote his full time and energy to the business of the Delhi Branch of the assessee without any remuneration whatsoever.
The actual remuneration paid to Deo Datt Sharma was in fact found to be genuine and reasonable by the Appellate Assistant Commissioner 573 while disposing of the appeal of the assessee for the assessment year 1949 50 as also by the Income Tax Tribunal while disposing of the appeal for the assessment year 1957 58.
It is true that Deo Datt Sharma was the brother in law of Ganga Saran Sharma, the managing director of the assessee, but this circumstance cannot by any stretch of imagination lead to an inference that the payment of remuneration to Deo Datt Sharma who was solely managing and looking after the business of the Delhi Branch of the assessee was sham and bogus.
Even a close relative who is in management and charge of a business on a full time basis is entitled to be paid remuneration and, in fact, it would be wholly unreasonable to expect him to work free of charge.
The Revenue, however, relied strongly on the fact that out of the total amount of remuneration of Rs. 3,51,000 received by Deo Datt Sharma and credited to his account with the assessee, he had not withdrawn more than Rs. 4,000 per year for himself and an aggregate sum of Rs. 2,37,550 was expended by him in giving a loan to Ganga Saran Sharma and making gifts to the son, wife and daughters in law of Ganga Saran Sharma on diverse dates between 31st July, 1957 and 26th December 1961.
We fail to see how this fact can lend itself to the inference that the payment of remuneration to Deo Datt Sharma was bogus and not genuine.
It is an admitted fact that Deo Datt Sharma was the brother in law of Ganga Saran Sharma and there is nothing unusual in Deo Datt Sharma giving a loan to Ganga Saran Sharma or making gift to the son, wife and daughters in law of Ganga Saran Sharma who were his close relatives.
It is indeed difficult to appreciate how any inference can reasonably be drawn that the payment of remuneration to Deo Datt Sharma was sham and bogus merely from the manner in which he expended the amount of remuneration received by him, particularly when the persons to whom he gave a loan and made gifts were his close relatives.
It is possible that Deo Datt Sharma had other financial resources apart from the remuneration derived by him from the assessee and he therefore decided to give a loan and make gifts to his close relatives out of the remuneration received by him for valuable services rendered to the assessee.
In fact, if he had no other financial resources, it is extremely difficult one might say, almost impossible to believe that he worked for the assessee and managed and looked after the business of the Delhi Branch on a full time basis without any remuneration or in any event on a 574 paltry remuneration of Rs. 4,000 per year when the managing director and other directors who were working like him were getting much more from the assessee and as the proprietor of the business prior to its taking over by the assessee, he was earning an average profit of about Rs. 36,000/ per year.
We are clearly of the view that on these facts the Income Tax Officer could have no reason to believe that the payment of remuneration to Deo Datt Sharma was sham and bogus and that the amount of remuneration paid to him was wrongly allowed as a permissible deduction.
We may point out that, in fact, the statement of account of Deo Datt Sharma with the assessee for the relevant accounting year as also the previous years were with the Income Tax Officer at the time of the original assessment and these statements of account clearly showed that out of the amount of remuneration credited to his account, he had made a gift of Rs. 12,550 to the son of Ganga Saran Sharma on 31st July 1957 and given a loan of Rs. 2,25,000 to Ganga Saran Sharma on 25th August, 1958 and the Income Tax Officer was fully aware that Ganga Saran Sharma was the managing director of the assessee.
It is possible and we may assume it in favour of the Revenue, that the subsequent gifts made by Deo Datt Sharma to the wife and daughters in law of Ganga Saran Sharma were not disclosed to the Income Tax Officer at the time of the original assessment, but these gifts being subsequent to the relevant accounting year, the assessee was not bound to disclose the same to the Income Tax Officer.
Moreover, it is difficult to appreciate how the assessee could be said to be under an obligation to disclose to the Income Tax Officer in the course of its assessment as to how a director who was in sole charge of the management of the business of the assessee and who was being paid remuneration for the services rendered by him to assessee, had utilised the amount of remuneration received by him.
We do not think it possible to sustain the conclusion that the assessee omitted or failed to disclose fully and truly any material facts relating to his assessment.
We must in the circumstances hold that neither of the two conditions necessary for attracting the applicability of section 147(a) was satisfied in the present case and the notice issued by the Income Tax Officer must be held to be without jurisdiction.
We accordingly allow the appeal, set aside the judgment of the Division Bench and restore that of the learned single Judge quashing 575 and setting aside the notice dated 28th March 1968 issued by the Income Tax Officer against the assessee.
The Revenue will pay the costs of the assessee throughout.

summary:
The assessee was incorporated as a Private Limited Company in March, 1947 with G as its Managing Director and it took over the business of the trading company carried on by 'D ' in Delhi.
D was the brother in law of G and was placed in charge of the management of the business of the Delhi Branch of the assessee and he was paid a salary of Rs. 1000 per month, commission at the rate of 1 per cent on the sales of the Delhi Branch and bonus equivalent to three months salary.
The assessments of the assessee for the years 1949 50 to 1959 60 were finalised on the basis of the decisions of the Income Tax Tribunal and the amounts paid to the Managing Director and the other Directors including D by way of salary, commission and bonus were allowed in full as permissible deductions and so was the interest paid on the credit balances in their respective accounts.
On the 28th March, 1968, the Income Tax Officer issued a notice under Section 148 of the Income Tax Act, 1961 seeking to reopen the assessment of the assessee for the assessment year 1959 60 on the ground that the income of the assessee had escaped assessment at the time of the original assessment.
The Income Tax Officer, however, did not state the reasons which had led to the belief that the income of the assessee had escaped assessment by reason of omission or failure to disclose material facts nor did he give any reasons though requested by the assessee.
The assessee 's writ petition challenging the validity of the notice was allowed by a Single Judge and the notice issued by the Income Tax Officer was quashed.
It was held that there was no omission or failure on the part of the 565 assessee to disclose material facts relating to his assessment and that there was no reason to believe that any part of the income of the assessee had escaped assessment at the time of the original assessment by reason of wrong allowance of the remuneration paid to D as a permissible deduction.
The Division Bench allowed the appeal, holding that the Income Tax Officer had reason to believe that the remuneration paid to D had been wrongly allowed as a permissible deduction by reason of omission or failure on the part of the assessee to disclose the material facts and the notice issued by the Income Tax Officer was justified.
Allowing the appeal to this Court, ^ HELD: 1.
(i) Neither of the two conditions necessary for attracting the applicability of Section 147(a), was satisfied.
The notice issued by the Income Tax Officer is therefore without jurisdiction.
[574 G] (ii) It is not possible to sustain the conclusion that the assessee omitted or failed to disclose fully and truly any material facts relating to his assessment.
[574 F] 2.
(i) Before the Income Tax Officer can assume jurisdiction to issue notice under Section 147(a), two distinct conditions must be satisfied.
First, he must have reason to believe that the income of the assessee has escaped assessment and secondly, he must have reason to believe that such escapement is by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment.
If either of these conditions is not fulfilled, the notice issued by the Income Tax Officer would be without jurisdiction.
[571 F] (ii) The important words under Section 147(a) are "has reason to believe" and these words are stronger than the words "is satisfied.".
The belief entertained by the Income Tax Officer must not be arbitrary or irrational.
It must be reasonable or in other words it must be based on reasons which are relevant and material.
The Court, cannot investigate into the adequacy or sufficiency of the reasons which have weighed with the Income Tax Officer, in coming to the belief, but the Court can examine whether the reasons are relevant and have a bearing on the matters in regard to which he is required to entertain the belief before he can issue notice under Section 147(a).
If there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly instructed on facts and law could reasonably entertain the belief, the conclusion would be inescapable that the Income Tax Officer could not have reason to believe that any part of the income of the assessee had escaped assessment and such escapement was by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts and the notice issued by him would be liable to be struck down as invalid.
[571 G 572 C] 3.
Even a close relative who is in management and charge of a business on a full time basis is entitled to be paid remuneration and, in fact, it would be wholly unreasonable to expect him to work free of charge.
[573 C] 566 In the instant case D was the brother in law of G the Managing Director of the assessee but this circumstance cannot lead to an inference that the payment of remuneration to D who was solely managing and looking after the business of the Delhi Bench of the assessee was sham and bogus.
There is nothing unusual in D giving a loan to his brother in law, the Managing Director or making gifts to the son, wife and daughter in law of the Managing Director who were his close relatives.
Any inference that the payment of remuneration to D was sham and bogus cannot be drawn merely from the manner in which he expended the amount of remuneration received by him, particularly when the persons to whom he gave a loan and made gifts were his close relatives.
[573 E 574 B] 4.
The statements of account of D with the assessee for the relevant accounting year as also the previous years were with the Income Tax Officer at the time of the original assessment and these statements of account clearly showed that out of the amount of remuneration credited to his account, he had made gifts to the sons of G on 31st July, 1957 and given a loan to G on the 25th August, 1958 and the Income Tax Officer was fully aware that G was the Managing Director of the assessee.
The assessee could not therefore be said to be under an obligation to disclose to the Income Tax Officer in the course of its assessment as to how the director who was in sole charge of the management of the business of the assessee, and who was being paid remuneration for the services rendered by him to the assessee, had utilised the amount of remuneration received by him.
[574 C F]