judgement:
Appeal No. 700 of 1963.
Appeal by special leave from the judgment and order dated January 11, 1961 of the Madras High Court in Case Referred No. 131 of 1956.
21 H. N. Sanyal, Solicitor General, N. D. Karkhanis and R. N. Sachthei, for the appellant.
K. Srinivasan and R. Gopalakrishnan, for the respondent.
April 29, 1964.
The judgment of SUBBA RAO AND SIKRI JJ.
was delivered by SUBBA RAO J. SHAH J. delivered a dissenting opinion.
SUBBA RAO, J.
This appeal by special leave is directed against the order of the High Court of Madras in a reference made to it by the Income tax Appellate Tribunal under section 66(2) of the Indian Income tax Act, 1922, hereinafter called the Act.
The facts that have given rise to the appeal may briefly be stated.
There are 5 firms in Sivakasi manufacturing matches under the name and style of Shenbagam Match Works, Brilliant Match Works, Manoranjitha Match Works, Pioneer Match Works and Gnanam Match Works.
The total number of the partners of all the 5 firms does not exceed 1 0 or II in number.
Rajamoney Nadar is the sole proprietor of Shenbagain Match Works and in the other 4 firms there are more than one partner.
In the year 1948 a person from each of those firms in his representative capacity formed a partnership to carry on the business of banking and commission agents, the principal business being the marketing of the products of the different match factories in Sivakasi.
When the said partnership applied for registration for the assessment year 1949 50, it was refused by the Income tax Department on the ground that different firms could not constitute a valid partnership.
Thereafter, Sankaralinga Nadar, Arumughaswami Nadar, Arunachala Nadar, Palaniswamy Nadar and Rajamoney Nadar the first four being one of the partners of their respective firms and the last being the sole proprietor of his firm, in their individual capacity entered into a part nership for the aforesaid purpose and executed a partnership deed dated April 1, 1950.
They presented the said deed of partnership to the Income tax Officer for registration.
The Income tax Officer by his order dated October 27, 1952, re gistered the same under section 26A of the Act: but the Commissioner of Income tax under s.33B of the Act, cancell 22 ed the registration by an order dated October 23, 1954, and directed the assessment to take place as that of an unregis tered firm.
On appeal, the Income tax Appellate Tribunal held, on a construction of the partnership deed and also on the basis of some other circumstances, that the said deed "is not genuine and brought into existence only as a simulate arrangement, that the profits which are distributed under the deed to the individuals mentioned therein are not the true profits of those individuals." In short it held that the said partnership deed was not a genuine one.
On a reference made to the High Court of Judicature at Madras, a Division Bench of that High Court, on a construction of the document, came to the conclusion that the Match Works were not the real parties to the partnership but the parties of the document were the real partners.
Hence the present appeal.
Learned counsel for the Revenue raises before us the fol lowing two points, namely, (i) the findings of the Appellate Tribunal was one of fact and that the High Court had no jurisdiction to canvass the correctness of its finding on a reference made under section 66(2) of the Act, and (ii) the con clusion arrived at by the Tribunal was the correct one and the High Court erroneously interfered with it.
It is common place that under section 66(2) of the Act a reference to the High Court lies only on a question of law.
The scope of the provision has been elaborately considered by this Court in Sree Meenakshi Mills Ltd. vs Commissioner of income tax, Madras( ').
Therein the scope of the provision has been laid down under different propositions.
On the basis of the judgment it cannot be gainsaid that if the order refusing registration goes beyond the scope of the jurisdiction conferred on the Income tax Officer under section 26A of the Act and the Rules made thereunder or if the decision depends upon the construction of the partnership deed or if there is no evidence to sustain the finding of the Tribunal, then the High Court will have jurisdiction to entertain the reference under section 66(2) of the Act.
In our view, the finding of the Tribunal falls squarelv under the said three heads.
The relevant provisions of the Act read thus: (1) ; 23 Section 26A. (1) Application may be made to the Income tax Officer on behalf of any firm, constituted under an instrument of partnership specifying the individual shares of the partners, for registration for the purposes of this Act and of any other enactment for the time being in force relating to income tax or super tax.
(2) The application shall be made by such person or persons, and at such times and shall contain such particulars and shall be in such form, and be verified in such manner, as may be prescribed; and it shall be dealt with by.
the Income tax Officer in such manner as may be prescribed.
In exercise of the powers conferred by section 59 of the Act, the Central Board of Revenue made the following rules: Rule 2.
Any firm constituted under an instrument of partnership specifying the individual shares of the partners may, under the provisions of Section 26A of the Indian Income tax Act, 1922 (hereinafter in, these rules referred to as the Act), register with the Income tax Officer, the particulars contained in the said Instrument on application made in this behalf.
Such application shall be given by all the partners (not being minors) personally and shall be made (a) before the income of the firm is assessed for any year under Section 23 of the Act, or Rule 3.
The application referred to in Rule 2 shall be made in the form annexed to this rule and shall be accompanied by the original Instrument of Partnership under which the firm is constituted, together with a copy thereof; 24 FORM I For of Application for Registration of a Firm tinder section 26A of the Indian Income tax Act, 1922 Rule 4.
If, on receipt of the application referred to in Rule 3, the Income tax Officer is satisfied that there is or was a firm in existence constituted is shown in the instrument of partnership and that the application has been properly made, lie shall enter in writing at the foot of the instrument or certified copy, as the case may be, a certificate in the following form, namely: .
Rule 6B.
In the event of the Income tax Officer bein satisfied that the certificate granted under Rule 4, or under Rule 6A, has been obtained without there being a genuine firm in existence, he may cancel the certificate so granted.
A combined effect of section 26A of the Act and the rules made thereunder is that if the application made by a firm gives the necessary particulars prescribed by the rules, the Income tax Officer cannot reject it, if there is a firm in existence as shown in the instrument of partnership.
A firm may be said to be not in existence if it is a bogus or not a genuine one, or if in law the constitution of the partnership is void.
The jurisdiction of the Income tax Officer is, therefore, confined to the ascertain I ing of two facts, namely, (i) whether the application for registration is in conformity with the rules made under the Act, and (ii) whether the firm shown in the document pre sented for registration is a bogus one or has no legal existence.
Further, the discretion conferred on him under section 26A is a judicial one and he cannot refuse to register a firm on mere speculation.
but he shall base his conclusion on relevant evidence.
What are the facts in the present case? The partnership deed is dated April 1, 1950.
In the document five persons are shown as its partners.
The name of the firm is given, the 25 objects of the partnership business are described, the dura tion of the business is prescribed and the capital fixed is divided between them in equal share.
Clause 16 of the Partnership deed, on which the Tribunal relied, reads: "This firm shall collect a commission of half an anna per gross on the entire production of the match factories of the partners, respectively, the Brilliant Match Works, Manoranjitha Match Works, Pioneer Match Works, Shenbagam Match Works and Gnanam Match Works produced from 1st April 1950 whether sales were effected through this firm or not and a further commission of half an anna per gross on the sales effected through this firm.
This commission will be collected on all kinds of matches produced from the abovesaid factories.
The commission of half an anna per gross on the entire production of these factories accrued due at the end of every month shall be debited to the respective factories under advice to them.
" Clauses 22 and 23 which throw further light on the question raised read: Clause 22.
The business of this firm shall have and has no connection with the match manufacturing business carried on now by the partners separately or in partnership with others.
Clause 23.
Any loss to the firm by way of fire accident or by any other cause during the course of the business of the firm, notwithstanding the fact that the loss might have arisen on the sale of or transaction relating to the match manufacturing concerns of the partners to this deed, shall be borne by this firm and shall be equally divided between the partners to this deed.
It is not disputed that the partnership deed ex facie conforms to the requirements of the law of partnership as well as the Income tax Act.
Under s.4 of the Indian Partnership Act partnership is the relation between persons who have agreed 26 to share the profits of the business carried on by all or any of them acting for all persons who have entered into the partnership with one another called individually partners and collectively a firm and the name under which the business is carried on is called the firm name.
The document certainly conforms to the said definition.
There is also no prohibition under the Partnership Act against a partner or partners of other.firms combining together to form a separate partnership to carry on a different business.
The fact that such a partner or partners entered into a sub partnership.
with others in respect of their share does not detract from the validity of the partnership; nor the manner in which the said partner deals with the share of his profits is of any relevance to the question of the validity of the partnership.
The document, therefore, embodies a valid partnership entered into in conformity with the law of partnership.
But the Tribunal has held that the partnership is not a genuine one for the following reasons: (i) previously the firm entered into a partnership but the registration of the same was rejected; (ii) under cl.
16 of the partnership deed the firm has the right to collect the commission of the entire match production of the larger partnerships whether they effect their sales through the firm or not; (iii) the books of Gnanam Match Works show unmistakably that the capital was contributed not by Palaniswamy Nadar in his individual capacity but by the larger firm as such; and (iv) regarding the other three larger firms also the profit delivered by their representatives from the assessee firm was divided amongst all the partners according to their profit sharing ratio in the larger firms.
On the other hand, the High Court found, on a construction of the relevant clauses of the partnership deed that the business was the business of the partners of the firm, alone and that the two circumstances relied upon by the Tribunal were irrelevant in acertaining whether the said partnership was real or not.
We have already pointed out that the document ex facie discloses a valid partnership.
The partnership was avowedly entered into by the partners in their individual capacity as their previous partnership in their representative capacity was not registered on the ground that such a part 27 nership was illegal.
If the larger firms cannot constitute members of a new partnership, some of the partners of those firms can certainly enter into a partnership shedding their representative capacity if they can legally do so.
If they can do so, the mere fact that one of them borrowed the capital from a parent firm we are using this expression for convenience of reference or some of them surrendered their profits to the parent firm cannot make it anytheless a genuine firm.
Nor does cl. 16 of the partnership deed detract from its genuineness: that clause does not create any right in the partnership to collect the commission; in view of the close Connection between the assessee firm and the parent firms, the parent firms were expected to effect all their sales through the assessee firm.
If they did not and if they refused to pay commission, the assessee firm could not enforce its right under the said clause.
Clause 22 in express terms emphasizes the separate identities of the assessee firm and the parent firms, and cl. 23 declares that notwithstanding the fact that the loss to the assessee firm has arisen on the sale or transaction relating to the match manufacturing concerns, the assessee firm alone shall bear the loss and thereby indicates that the loss of the assessee firm will not be borne by the parent firms.
If the assessee firm has a separate legal existence, the two circumstances relied upon by the Tribunal, namely, that Palaniswamy Nadar, one of the partners of the assessee firm, brought in the capital from his parent firm or that the profits earned by some of the partners were surrendered to the parent firms, would be irrelevant.
A partner of a firm can certainly secure his capital from any source or surrender his profits to his sub partner or any other person.
Those facts cannot conceivably convert a valid partnership into a bogus one.
The Tribunal mixed up the two concepts, viz., the legality of the partnership and the ultimate destination of the partners ' profits.
It also mixed up the question of the validity of the partnership and the object of the individual partners in entering into the partnership.
If to avoid a legal difficulty 5 individuals, though four of them are members of different firms, enter into a partnership expressly to comply With a provision of law, we do not see any question of fraud 28 or genuineness involved.
It is a genuine document and it complies with the requirements of law.
It is not an attempt to evade tax, but a legal device to reduce its tax liability.
The fact that all the partners of all the firms did not exceed 12 in number and if they chose all of them could have entered into the partnership indicates that there was no sinister inotive behind the partnership.
As the Tribunal misconstrued the provisions of the partnership deed and relied upon irrelevant considerations in coming to the conclusion it did., the High Court rightly differed from the view of the Tribunal.
In the circumstances, in view of the decision of this Court in Sree Meenakshi Mills ' case( '), a question of law within the meaning of s.66(2) of the Act arose for decision.
The High Court rightly answered the question in the negative.
In the result, the appeal is dismissed with costs.
SHAH J. Sivakasi Match Export Companv hereinafter referred to as 'the assessee ' is a partnership "carrying on business as bankers, commission agents and distributors of the products of different match factories at Sivakasi in the State of Madras".
The assessee was formed under a deed dated April 1, 1950.
There were five partners of the firm (1) N. P. A. M. Sankaranlinga Nadar (2) K. section section Arumugha swami Nadar (3) K. A. section Arunuchala Nadar (4) K. P. A. T. Rajamoney Nadar and (5) V. section V. P. Palaniswamy Nadar.
Before April 1, 1950, there existed a firm also named Sivakasi Matches Exporting Company which "consisted of a combine of six match factories" at Sivakasi constituted under a partnership deed dated March 12, 1948.
Registration of this partnership under section 26 A of the Income tax Act, 1922, was refused on the ground that the partnership deed did not specify the actual shares of the individual partners.
Thereafter a deed forming the partnership which is sought to be registered in these proceedings was executed on April 1, 1950.
It was recited in the preamble that originally four out of the five partners had been carrying on business in partnership as representatives of their respective match concerns, and it was found necessary that they should carry on the said business from April 1, 1950, jointly in their individual capacity, and it was agreed to admit into their part (1) [I956] S.C.R. 691 29 nership as and from April 1, 1950 the fifth person, namely V. section V. Palaniswamy Nadar.
The following are the material paragraphs of the agreement of partnership: "(16) This firm shall collect a commission of half an anna per gross on the entire production of the match factories of the partners, respectively, the Brilliant Match Works, Manoranjitha Match Works, Pioneer Match Works, Shenbagam Match Works and Gnanam Match Works, produced from 1st April 1950 whether sales were effected through this firm or not and a further commission of half an anna per gross on the sales effected through this firm.
This commission will be collected on all kinds of matches produced from the abovesaid factories.
The commission of half an anna per gross on the entire production of these factories accrued due at the end of every month shall be debited to the respective factories under advice to them. "(22) The business of this firm shall have and has no connection with the match manufacturing business carried on now by the partners separately or in partnership with others.
(23) Any loss to the firm by way of fire, accident or by any other cause during the course of the business of the firm, notwithstanding the fact that the loss might have arisen on the sale of or transaction relating to the match manufac turing concerns of the partners to this deed, shall be borne by this firm and shall be equally divided between the partners to this deed.
" It is common ground that each partner was concerned in the manufacture of matches either as owner or as partner with others.
Sankaralinga Nadar carried on business as a manufacturer of matches with two others in the name of the Brilliant Match Works; Armughaswamy Nadar as a partner with three other,, in the name of the Manoranjitha Match Works; Arunachala Nadar as a partner with two others in the name of the Pioneer Match Works, Rajamoney Nadar 30 as a sole proprietor of the Shenbagam Match Works, and Palaniswamy Nadar as a partner with three others in the name of the Gnanam Match Works.
On October 27, 1952, the Income tax Officer passed an order under section 26 A granting registration of the partnership constituted under the deed dated April 1, 1950, but the Commissioner of Income tax, Madras, exercising revisional jurisdiction under section 33 B of the Act, set aside the order and directed that the partnership be assessed to tax as an unregistered firm.
In the view of the Commissioner the partnership deed did not represent the true state of affairs and that "the actual position as distinguished from the recitals in the partnership deed was that all the partners of the Match Factories were directly partners of the assesses" and as the names of all the partners were not set out in the deed and the other requirements relating to registration had not been complied with, registration be refused.
The order was confirmed in appeal to the Income tax Appellate Tribunal.
At the direction of the High Court of Madras Linder section 66(2) of the Indian Income tax Act, 1922, the Tribunal referred the following question: "Whether on the facts and the circumstances of the case the refusal of registration of the assessee firm under section 26 A of the Income tax Act was correct in law?" The High Court answered this question in the negative.
Against that order, with special leave, the Commissioner of Income tax has appealed to this Court.
The Tribunal held that the covenants in the deed of partnership and especially in paragraphs 3 and 16 viewed in the light of the entry in the books of account of Gnanam Match Works debiting the capital contributed in the name of Palaniswamy Nadar to the assessee, and not in the name of its partner, and division of the profits received from the assessee by Palaniswamy Nadar, Sankarlinga Nadar, Aru maghaswamy Nadar and Arunachalam Nadar with others owners of their respective business, indicated that the named partners were acting as representatives of those owners.
The 31 High Court also held that cl. 16 of the partnership agree ment did not impose any liability upon the manufacturing concerns to pay any commission as stipulated therein on the " production of the match factories".
The High Court ob served: "Clause 16 does not lay any liability upon the manufacturing concerns and cannot operate as an enforceable contract against those other match companies.
If one of those match companies should decline to put through its sales business through the assessee firm, the only result would perhaps be that the partnership would not advance moneys or finance to that manufacturing concern; it might also be that the particular partner interested in the manufacturing concern might stand to lose the benefit of this partnership.
But that is not the same thing as to say that those manufacturing concerns themselves had become partners of the assessee partnership.
" The High Court also observed that the assessee was not concerned with the disposal of the profits received by its partners.
Finally the High Court observed that "an indi vidual member of the partnership is not prevented from engaging in business as member of another partnership.
The law does not prohibit such a course and even the Income tax law relating to registration of partnerships only refuses registration when the formation of such partnerships is intended to evade the incidence of income tax and nothing more.
We are not satisfied that the Tribunal correctly appreciated the facts of the present case in coming to the conclusion that the match works were the real parties to this instrument of partnership".
The Solicitor General appearing for the Commissioner contended that the High Court had in exercising its advisory urisdiction, in substance assumed appellate powers and had ought to reappraise the evidence on which the conclusion of the Tribunal was founded.
Counsel contended that the Tribunal had recorded a clear finding on the facts that the 32 "match works were the real" partners, and the High Court was bound on the question framed to record its opinion on the questions of law referred on the basis of that finding.
Section 26 A of the Indian Income tax Act enacts the procedure for registration of firms.
By that section on be half of any firm application may be submitted to the Income tax Officer for registration, if the firm is constituted under an instrument of partnership, specifying the individual shares of the partners.
The application has to be made by such person or persons and at such times and shall contain such particulars and shall be in such form as may be prescribed.
It is open to a firm to carry on business without registration under the Indian Registration Act.
By obtaining an order of registration, the partners of the firm are enabled to et the benefit of lower rates of tax than those applicable to the whole income of the firm, when charged as a unit of assessment.
In the relevant year of assessment if the firm was unregistered the tax payable by it had to be determined as in the case of any other distinct entity and tax had to be levied on the firm itself.
If, however, the firm was registered, the firm did not pay the tax and therefore the tax payable by the firm was not determined, but the share of profit received from the firm was added to the income of each partner, and on the total so determined tax was levied against the partners individually.
It is manifest that if the firm desired to secure this privilege it had to conform strictly to the requirements prescribed by law.
Under the rules framed under section 59 of the Indian Income tax Act.
1922, rules 2 to 6B deal with registration and renewal of registration of firms.
The application for registration has to be signed by all the partners (not being minors) personally, and the application has to be in the fornm prescribed by rule 3.
The form prescribed requires the partners of the firm to disclose the names of each partner, his address, date of admittance to Partnership, and other relevant particulars including each Dartrer 's share in the profits and loss, "particulars of the firm as constituted at the date" of the application, and particulars of the apportionment of the income, profits of gains or loss of the business, profession or vocation in the previous year between the partners who in that previous 33 year were entitled to share in such income, profits or gains or loss, where the application is made after the end of the relevant previous year.
If the Income tax Officer is satisfied that there is a firm in existence constituted as shown in the instrument of partnership and the application has been properly made, he has to enter in writing at the foot of the instrument or certified copy, as the case may be, a certificate of registration of the partnership under section 26 A of the Act.
This certificate of registration ensures only for the year mentioned therein, but the firm is entitled to obtain renewal of the registration.
On the conclusion recorded by the Tribunal that the partnership deed dated April 1, 1950 was in truth an ins trument relating to an agreement to carry on business 'by all the persons who owned the five businesses of which the representatives signed the deed, the application submitted by the live named partners of the assessee did not conform to the requirements of rules 2 and 3 and the Income tax Officer was bound to refuse registration.
It is true that the ,ground given by the Tribunal that the share of profits received by individual partners of the assessee was distributed by four of those partners who had entered into partnership contracts with other persons in the business of their respective match factories, standing independently of other grounds, may not be of much value in deciding whether all the partners of the match factories were intended to be partners of the assessee.
It is open to a partner who receives his share in the profits of the firm to dispose of that share in any manner he pleases, and no inference from the distribution of the share of such profits alone can lead to the ,inference that the persons who ultimately received the benefit of the profits are partners of the firm which had distributed the profits.
But the Tribunal adverted to three circumstances.
The terms of the deed of partnership purported to impose an obligation to pay Commission on the production of the five match factories, representatives of which sought to join as partners eo nomine.
Imposition of such ,an obligation was in the view of the Tribunal inconsistent with the representatives of those factories being partners of the assessee in their individual capacities.
Again it was 51 section C. 3 34 found that Gnanam Match Works had contributed capital to the assessee directly and not through its representative.
These wo circumstances, coupled with the ultimate distribution of profits by the individual partners among the partners of the match factories, led to the inference that each partner who signed the deed dated April 1, 1950 was acting not in his personal capacity, but as representing his match factory.
Granting that the evidence from which the inference was drawn was not very cogent, it was still exclusively within the province of the Tribunal to decide that question on the evidence before it, and its decision that in entering into the deed of partnership, the named partners represented their respective match factories, was not open to be canvas sed in a reference under section 66(2) of the Indian Income tax Act.
The High Court observed that cl. 16 of the partnership deed did no, impose any obligation upon the partners or their representatives of the five firms to pay commission as stipulated under that clause.
Undoubtedly, there is no covenant expressly imposing such liability upon the mach factories, but it was open to the Tribunal from he incor poration of such an unusual covenant to infer that the named partners of the assessee were acting as representatives of their respective factories.
To assume from the erms of cl. 16 that the owners of these match factories were not bound by the covenants contained in cl. 16 is to assume the answer to the question posed for opinion.
There was also the circumstance that in the books of account of the Gnanam Match Works of which Palaniswamy Nadar was a representative, capital was debited as contributed to the assessee.
This indicated that the Gnanam Match Works was directly interested in the partnership.
If that factory had made an advance to Palaniswamy Nadar to enable the latter to contribute his share of the capital, the entry in the factory 's books of account would have been in the name of its partner and not in the name of the assessee.
That also is a circumstance justifying an inference that in entering into the deed dated April 1, 1950 Palaniswamy acted for and on behalf of all the partners of the Gnanam Match Works.
Sharing of profits received by the named partners, with their partners in the respective match factories may not, as I have 35 already observed, by itself be a decisive circumstance.
But that did not authorise the High Court to disregard the find ing of the Tribunal on a question which was essentially one of fact.
When the High Court observed that they were satisfied that the Tribunal had not correctly appreciated the evidence in arriving at the conclusion that each Match factory was the real party in the instrument of partnership, they assumed to themselves jurisdiction which they did not possess.
It was not the case of the assessee that there was no evidence on which the conclusion arrived at by the Tribunal could be founded, nor was it the case of the assessee that the conclusion was so perverse that no reasonable body of men properly instructed in the law could have arrived at that conclusion.
It is also clear from the record that no such question was even canvassed before the Tribunal.
Manifestly such a question could not arise out of the order ,of the Tribunal, and none such was referred to the High Court.
By the question actually referred, the Tirbunal sought the opinion of the High Court whether on the facts and circumstances refusal of the application for registration of the assessee was correct in law.
If it was the case of the assessee that the conclusion of the Tribunal was based on no evidence, or that it was perverse, the High Court could be asked to call for a reference from the Tribunal on that question.
But that was never done.
It is true that the object of enacting section 26 A and the rules relating to the procedure for registration is to prevent escapement of liability to tax.
But it is not necessary that before an order refusing registration is made, it must be established that there was evasion of tax attempted or actual.
It is always open to a person, consistently with the law, to so arrange his affairs that be may reduce his tax liability to the minimum permissible tinder the law.
The fact that the liability to tax may be reduced by the adoption of an expedient which the law permits, is wholly irrelevant in considering the validity of that expedient.
But where the law prescribes conditions for obtaining the benefit of reduced liability to taxation, those conditions, unless otherwise provided, must be strictly complied with, and if they are not 36 so complied with, the taxing authorities would be bound to refuse to give the taxpayer the benefit claimed.
When application for registration of the firm is made, the Incometax Officer is entitled to ascertain whether the names of the partners in the instrument are of persons who have agreed to be partners, whether the shares are properly specified and whether the statement about the shares is real or is merely a cloak for distributing the profits in a different manner.
If all persons who have in truth agreed to be partners have not signed the deed or their shares are not truly set out in the deed of partnership, it would be open to the Incometax Officer to decline to register the deed, even if under the general law of partnership the rights and obligations of the partners eo nomine thereto may otherwise be adjusted.
As a corollary to this, if the requirements relating to the form in which the petition is to be presented are not complied with, and the relevant information is withheld, the Incometax Officer may be justified in refusing registration.
In my view the High Court was in error in holding on the question submitted that the registration of the assessee under section 26 A of the Income tax Act was wrongly refused.
The answer to the question referred to the High Court should be in the affirmative.
ORDER In accordance with the opinion of the majority, the appeal is dismissed with costs.

summary:
There were five firms in Sivakasi manufacturing matches under the name and style of Shenbagam Match Works, Brilliant Match Works, Manoranjitha Match Works, Pioneer Match Works and Gnanam Match Works.
The sole proprietor of Shenbagam Match Works and one partner from each of the four firms entered into a partnership in their individual capacity and executed a partnership deed dated April 1, 1950.
The Income tax Officer registered the said partnership 'deed under section 26(A) of the Act; but the Commissioner of Income tax acting under section 33B of the Act, cancelled the registration of the said partnership deed.
On appeal, the Tribunal held that the said partnership deed was not a genuine one.
On a reference the High Court held on a construction of the partnership deed that the Match Works were not the real parties to the partnership but the parties to the document were the real partners.
This appeal has come by way of special leave.
HELD: (i) (per K. Subba Rao and section M. Sikri JJ) that the discretion conferred on the Income tax Officer under section 26 A of the Act is a judicial one and he cannot refuse to register a firm on mere speculation, but he shall base his conclusion on relevant evidence.
The jurisdiction of the Income tax Officer under section 20 A is, confined to the ascertaining of two facts namely, (i) whether the application for registration is in conformity with the rules made under the Act, and (ii) whether the firm shown in the document.
(Partnership deed) presented for registration is a bogus one or has no legal existence.
(ii) In the present case the partnership deed ex facie conforms to the requirements of the law of partnership as well as the Income tax Act.
There is no prohibition under the partnership Act against a partner or partners of other firms combining together to form a separate partnership to carry on a different business.
The fact that such a partner or partners entered into a sub partnership with others in respect of their share does not detract from the validity of the partnership; nor the manner in which the said partner deals with the share of his profits is of any relevance to the question of validity of the partnership.
(iii) The tribunal erred in holding the partnership deed as not a genuine one.
In the present case the assessde firm has a separate legal existence, and as such the two circumstances relied upon by the Tribunal, namely, that one of the partners of the assessee firm, brought in the capital from his parent firm or that the profits earned by some of the partners were surrendered to the parent firm, would be irrelevant.
A partner of a firm can certainly ' secure his capital from any source or 20 surrender his profits to his sub partner or any other person.
Those facts cannot conceivably convert a valid partnership into a bogus one.
In the present case the partnership deed is a genuine document and it complies with the requirements of law.
It is not an attempt to evade tax, but a legal device to reduce its tax liability.
(iv) A question of law within the meaning of section 66(2) of the Act arose for decision in this case as the Tribunal misconstrued the provisions of the partnership deed and relied upon irrelevant considerations in coming to the conclusion.
Sree Meenakshi Mills Ltd. vs Commissioner of Income tax, Madras.
[19561 S.C.R. 691, relied on.
Per Shah, J. (i) It was exclusively within the province of the Tribunal to decide the question whether the partners entered into the partnership in their individual capacities or as representing their match factories and its decision that in entering into the deed of partnership, the named partners represented their respective match factories, was not open to be canvassed in a reference under section 66(2) of the Indian Incometax Act.
In a reference under section 66(2) the High Court was not authorised to disregard the finding of the Tribunal on a question which was essentially one of fact.
In the present case the High Court was not justified in interfering with the finding of the Tribunal on a question of fact because it was not the case of the assessee that the conclusion of the Tribunal was based on no evidence or that it was perverse.
(ii) Where the law prescribes conditions for obtaining the benefit of reduced liability to taxation, those conditions, unless otherwise provided, must be strictly complied with, and if they are not so complied with, the taxing authorities would be bound to refuse to give the tax payer the benefit claimed.
It would be open to the Income tax Officer to decline to register a 'deed, even if under the general law of partnership the rights and obligations of the partners ex nomine thereto may otherwise be adjusted.
If the requirements relating to the form in which the petition is to be presented are not complied with, and the relevant information is withheld the Income tax Officer may be justified in refusing registration.
In the present case the Income tax Officer was bound to refuse registration as the application submitted by the five partners of the assessee did not conform to the requirements of rr. 2 and 3 of Indian Income tax Rules.


judgement:
Appeal No. 673 of 1963.
Appeal from the judgment and decree dated September 22, 1960, of the Allahabad High Court in Income tax Mis cellaneous Case No. 188 of 1953.
section K. Kapur and R. N. Sachthey, for the appellant.
Veda Vyasa and Naunit Lal, for the respondent.
April 30, 1964.
The Judgment of the Court was delivered by SUBBA RAo, J.
The question for decision in this appeal is whether when the Income tax Officer in his discretion assessed an association of persons to income tax, the Appel late Assistant Commissioner in appeal or the Income tax Appellate Tribunal in further appeal can set aside that order and direct him to assess the members of that association individually. 'Me facts lie in a small compass and they areas follows: 'Me assessee consisted of several persons combined together for the purpose of purchasing coal in order to supply the 87 same to customers for domestic purposes and other small scale industries.
For the assessment year 1948 49 the Income tax Officer levied tax upon the total income in the hands of the said association of persons.
The assessee claimed that in the circumstances of the case it should not be assessed to tax as an association of persons, but the proportion of the income in the hands of each of the members of the association might be assessed to tax instead.
As the Income tax Officer did not comply with this request, the assessee preferred an appeal to the Appellate Assistant Com missioner, but it was dismissed.
On a further appeal to the Income tax Appellate Tribunal, the Tribunal held that though the Income tax Officer had the power to assess the income of the association of persons as such or in the alternative on the individual members thereof in respect of their propor tionate share in the income,, it (the Tribunal) had no power under the Act to direct the Income tax Officer to exercise his rower in one way or other.
The following question was referred to the High Court, of Allahabad under section 66(2) of the Indian Income tax Act, 1922: "If in pursuance of section 3 of the Indian Income tax Act the Income tax Officer levies the income tax in respect of the total income of the previous year of an association of persons upon the said association of persons as a collective unit, whether the Tribunal is competent to direct the Income tax Officer to levy the income tax proportionately upon the individual members of the said association of persons in respect of the proportionate income of each of the members consisting the said association of persons.
" A Division Bench of the High Court held that the Appellate Tribunal had power to sat aside the Income tax Officer 's assessment against the association and to give consequential and ancillary directions to the said Officer to assess the Individuals.
Learned counsel for the Revenue contends that under the Indian Income tax Act, 1922, he reinafter called the Act, the Income tax Officer has no option but to assess the total 88 income of the association of members, though the indivi dual 's share in the income may be added to his individual income for the purpose of ascertaining his total income.
He further argues that even if the Income tax Officer has the option to assess to income tax the association of persons on its total income or the individual members thereof in respect of their proportionate share of the income, if he had exercised the option in one way or other neither the Appellate Assistant Commissioner in appeal nor the Income tax Appellate Tribunal in further appeal has power to direct the Incometax Officer to exercise his discretion in a different way; and for this conclusion he seeks to draw strength from his further submission that no appeal lies at the instance of the association of persons when they are assessed as one unit on the ground that the Officer should have assessed the individual members of the said association.
At the outset it will be convenient to read the relevant provisions of the Act.
Section 3.
Charge of Income tax: Where any Central Act enacts that income tax shall be charged for any year at any rate or rates, tax at that rate or those rates shall be chareed for that year in accordance with, and subject to the provisions, of, this Act in respect of the total income of the previous year of every indi vidual, Hindu undivided family, company and local authority, and of every firm and other association of persons or the partners of the firm or the members of the association individually.
Section 14.
(2) The tax shall not be payable by an assessee (b) if a member of an association of persons other than a Hindu undivided family, a company of a firm, in respect of any portion of the amount which he is entitled to receive from the associa, tion on which the tax has already been paid by the association.
89 Section 30.
(1) Any assessee objecting to the amount of income assessed under section 23 . . . . . or the amount of tax determined under section 23 under this Act may appeal to the Appellate Assistant Commissioner against the assessment or against such refusal or order: Section 31.
(3) In disposing of an appeal the Appellate Assistant Commissioner may, in the case of an order of assessment, (a) confirm, reduce, enhance or annul the assessment, or (b) set aside the assessment and direct the Incometax Officer to make a fresh assessment after making such further inquiry as the Income tax Officer thinks fit or the Appellate Assistant Commissioner may direct, a ,id the Income tax Officer shall thereupon proceed to make such fresh assessment and determine where necessary the amount of tax payable on the basis of such fresh assessment.
x x x x x x (4) Where as the result of an appeal any change is made in the assessment of a firm or association of persons or a new assessment of a firm or associations of persons is ordered to be made, the Appellate Assistant Commissioner may authorise the Income tax Officer to amend accordingly any assessment made on any partner of the firm or any member of the association.
Section 3 imposes a tax upon a person in respect of his total income.
The persons on whom such tax can be imposed ,are particularized therein, namely, Hindu undivided family, company, local authority, firm, association of persons, partners of firm or members of association individually.
The section, therefore, does not in terms confer any power on any particular officer to assess one of the 90 persons described therein, but is only a charging section imposing the levy of tax on the total income of an assessable entity described therein.
The section expressly treats an association of persons and the individual members of an association as two distinct and different assessable entities.
On the terms of the section the tax can be levied on either of the said two entities according to the provisions of the Act.
There is no scope for the argument that under section 3 the assessment shall be only on the association of persons as a unit though after such assessment the share of 'he income of a member of that association may be added to his other income under section 14(2) of the Act.
This construction would make the last words of the section, viz., "members of the association individually" a surplusage.
This argument is also contrary to the express provisions of section 3, which mark out the members of the association individually as a separate entity from the association of persons.
Income of every person whether he is a member of an association or not is liable to the charge under the head " 'every individual".
Section 14(2) (b) only says that if such an individual happens to be a member of an association of persons which has already been assessed, the tax would not be payable in respect of the share of his income again.
That under the Act an assessment can be made on an association of persons as a unit or, alternatively, on the individual members thereof in respect of their respective shares of the income was assumed by this Court in Commissioner of Income tax vs Raja Reddy Mallaram(1).
We, therefore, hold that section 3 impliedly gives an option to an appropriate authority to assess the total income of either the association of persons or the members of such association individually.
The next question is whether the said option is given only to the Income tax Officer and is denied to the Appellate Assistant Commissioner and the Appellate Tribunal.
Under the Act the Income tax Officer, after following the proce dure prescribed, makes the assessment under section 23 of the Act.
Doubtless in making the assessment at the first instance he has to exercise the option whether he should assess the association of persons or the members thereof (1) [1964]51 I.T.R. 285 (S.C.) 91 individually.
It is not because that any section of the Act confers an exclusive power on him to do so, but because it is part of the process of assessment; that is to say, he has to ascertain who is the person liable to be assessed for the tax.
If he seeks to assess an association of persons as an assessable entity, the said entity can object to the assessment, inter alia, on the ground that in the circumstances of the case the assessment should be made on the members of the association individually.
The Income tax Officer may reject its contention and may assess the total income of the association as such and impose the tax on it.
Under section 30 an assessee objecting to the amount of income assessed under section 23 or the amount of tax determined under the said section or denying his liability to be assessed under the Act can prefer an appeal against the order of the Income tax Officer to the Appellate Assistant Commissioner.
It is said that an order made by the Income tax Officer rejecting the plea of an association of persons that the members thereof shall be assessed individually does not fall under one or other of the three heads mentioned above.
What is the substance of the objection of the assessee? The assessee denies his liability to be assessed under the Act in the circumstances of the case and pleads that the members of the association shall be assessed only individually.
The expression "denial of liability" is comprehensive enough to take in not only the total denial of liability but also the liability to tax under particular circumstances.
In either case the denial is a denial of liability to be assessed under the provisions of the Act.
In one case the assessee says that he is not liable to be assessed to tax under the Act, and in the other case the assessee denies his liability to tax under the provisions of the Act if the option given to the appropriate officer under the provisions of the Act is judicially exercised.
We, therefore, hold that such an assessee has a right of appeal under section 30 of the Act against the order of the Income tax Officer assessing the association of members instead of the members thereof individually.
If an appeal lies, section 31 of the Act describes the powers of the Appellate Assistant Commissioner in such an appeal.
Under section 31 (3) (a) in disprosing of such an appeal the Appellate Assistant Commissioner may, in the, case of an order of assessment, confirm, reduce, enhance or 92 annul the assessment; under cl.
(b) thereof he may set aside the assessment and direct the Income tax Officer to make a fresh assessment.
The Appellate Assistant Commissioner has, therefore, plenary powers in disposing of an appeal.
The scope of his power is coterminous with that of the Income tax Officer.
He can do what the Income tax Officer can do and also direct him to do what he has failed to do.
If the Income tax Officer has the option to assess one or other of the entities in the alternative, the Appellate Assistant Commissioner can direct him to do what he should have done in the circumstances of a case.
Under section 3 3 (I ), au assessee objecting to an order passed by an Appellate Assistant Commissioner under section 28 or section 31 may appeal to the Appellate Tribunal within 60 days of the date on which such order is communicated to him.
Under section 33(4), "The Appellate Tribunal may, after giving both parties to the ,appeal an opportunity of being heard, pass such orders thereon as it thinks fit, and shall communicate any such orders to the assessee and to the Commissioner." Under section 33(5), "Where as the result of an appeal any change is made in the assessment of a firm or association of persons or a new assessment of a firm or association of persons is ordered to be made, the Appellate Tribunal may authorise the Income tax Officer to amend accordingly any assessment made on any partner of the firm or any member of the association".
Under this section the Appellate Tribunal has ample power to set aside the assessment made on the association of persons and direct the Income tax Officer to assess the individuals or to direct the amendment of the assessment already made on the members.
The comprehensive phraseology used both in section 31 and section 33 of the Act does not countenance the attempt of the Revenue to restrict the powers of the Appellate Assistant Commissioner or of the Appellate Tribunal; both of them have power to direct the appropriate authority to assess the members individually instead of the association of persons as a unit.
We, therefore, hold, agreeing with the High Court, that the Appellate Tribunal has jurisdiction to give directions to the appropriate authority to cancel the assessment made or the association of persons and to give appropriate directions 93 to the authority concerned to make a fresh assessment on the members of that association individually.
The answer given by the High Court to the question propounded is correct.
In the result, the appeal fails and is dismissed with costs.
Appeal dismissed.

dataset_name: IN-Abs

summary:
Income tax was assessed upon the total income in the hands of the respondent assessee, an association of several persons combined together for the purpose of purchase of coal and its supply to customers for domestic purposes and other small scale industries.
The assessee claimed that it should not be assessed to tax as an association of persons, but the proportion of the income in the hands of each members of the association might be assessed to tax instead.
The Income tax Officer refused this request and an appeal to the Appellate Assistant Commissioner was dismissed.
The Income tax Appellate Tribunal, on a further appeal.
held that though the Income tax Officer had power to assess income of the association of persons as such or in the alternative on the individual members thereof in respect of their proportionate share in the income, the tribunal had no power under the Act to direct the Income tax Officer to exercise his power in one way or other.
On a 86 reference, the High Court held that the Appellate Tribunal had power to set aside the Income tax Officer 's assessment against the association and to give consequential and ancillary 'directions to the said officer to assess individuals.
HELD: (i) Section 3 of the Income tax Act impliedly gives an option to an appropriate authority to assess the total income of either the association of persons or the members of such association individually.
Commissioner of Income tax vs Reddy Mallaram, followed.
(ii) Such an assessee has a right to appeal under section 30 of the Act against the order of the Income tax Officer assessing the association of persons instead of the members individually.
(iii) The Appellate Tribunal has jurisdiction to give directions to the appropriate authority to cancel the assessment made on the association of persons and to give appropriate directions to the authority concerned to make fresh assessment on the members of that associations individually.
The phraseology used both in section 31 and section 33 does not restrict the powers of the Appellate Assistant Commissioner or the Appellate Tribunal; both have the power of such direction.


judgement:
Appeal, Nos.
606 610 of 1963.
Appeals by special leave from the judgment dated January 20, 1961 of the Kerala High Court in Income tax Referred Case No. 16 of 1959.
K. N. Rajagopal Sastri and R. N. Sachthey, for the appellant (in all the appeals).
38 section T. Desai and Sardar Bahadur, for the respondent (in all the appeals).
April 29, 1964.
The Judgment of the Court was delivered by SUBBA RAo J.
These appeals by special leave raise the question of the construction of the provisions of section 4(3) (i) of the Indian Income tax Act, 1922, hereinafter called the Act, as am ended by the Indian Income tax (Amendment) Act, 1953, hereinafter called the Amending Act.
The facts are as follows.
One P. section Warriar, an eminent Ayurvedic physician, carried on business in Ayurvedic drugs under the name and style of "Arya Vaidya Sala" and was also running a hospital named "Arya Sikitsa Sala" and a school called "Arya Vaidya Pata Sala".
The said Warriar died on January 30, 1944, after executing a will wherein he created a trust in respect of his properties, including the Arya Vaidya Sala.
He gave directions to the trustees appointed under thesaid will to conduct the said business and to disburse theincome therefrom in certain proportions to the Arya Vaidya Sala, Arya Sikitsa Sala and Arya Vaidya Pata Sala and to his descendants.
Broadly stated 60 per cent of the income was directed to be spent on the said three institutions and 40 per cent to be given to his descendants.
Till the Amending Act came into force the Incometax Department gave exemption from assessment for the 60 per cent of the income under section 4(3) (i) of the Act; but, after the Amending Act came into force, which was given retrospective operation from April 1, 1952, the said Depart ment refused to give exemption from assessment even in regard to the 60 per cent of the income.
For the assessment years 1954 55 and 1955 56 the Income tax Officer ,assessed the entire income from the said properties; and in respect of the income pertaining to the assessment years 1952 53 and 1953 54, which had already been assessed in the usual course giving exemption for the said 60 per cent of the income, the Income tax Officer issued notices under section 34 of the Act and by two separate orders dated September 28, 1956, assessed the said 60 per cent of the income on the basis of escaped assessment.
On December 20, 1956, 39 for the assessment year 1956 57 the Income tax Officer, in the like manner, assessed the entire income from the said properties.
The appeals filed by the assessee against the said orders of assessment to the Appellate Assistant Com missioner were dismissed.
The appeals filed against the orders of the Appellate Assistant Commissioner to the Income tax Appellate Tribunal, Madras, were consolidated and by its order dated February 28, 1958, the said Tribunal allowed the appeals exempting 60 per cent of the said income from assessment to income tax under section 4(3) (i) of the Act.
The references made to the High Court of Kerala were dismissed.
Hence the present appeals.
Mr. Rajagopala Sastri, learned counsel for the Revenue, contends that under section 4(3)(i) of the Act whereunder the said income is given exemption from taxation, the property wherefrom the income is derived shall have been held under trust wholly or in part for religious or charitable purposes, that the business run under the name and style of Arya Vaidya Sala was not capable of being held in trust, that even if it was capable of being held under trust, it was not wholly or in part so held in trust for religious or charitable purposes, as only a part of the income was directed to be spent for religious or charitable purposes and that in the circumstances cl.
(b) of the proviso was attracted but the conditions laid down thereunder were not complied with.
Learned counsel for the respondent, Mr. section T. Desa, contends that business is property within the meaning of section 4(3) (i) of the Act and that it is held in trust in part for religious and charitable purposes and, therefore, the sub stantive part of the provision is attracted to the facts of the case and hence the proviso is excluded.
Before we construe the relevant provisions of the Act and consider the arguments advanced on either side, it would be convenient at the outset to read the material part of the will and to ascertain the scope of the bequest created thereunder.
The will is marked as Annexure A2 in the case.
The relevant parts of the Will read: "1. Will executed by Panniampalli Warriath deceased Parvathi alias Kunkikutty Warassiar 's 40 son Sri Sankunny Warriar known as Vaidyaratnam Sri P. section Warriar, residing at Puthan Warian in Kottakkal Amsom and Desom of Ernad Taluk." "7.
Apart from the properties mentioned in Schedule B, C and D all other properties, movable as well as immovable, belonging to me I hereby constitute into a trust to be managed by the trustees as per the directions in the will.
They are described in Schedule E, and on my demises those properties will vest in the trustees.
It is MY intention that except the properties mentioned in pares 4 and 5 (B, C & D Schedule), all my properties are to be included in the Trust and therefore, even if some item of property is left out by inadvertence, it is also to be deemed included in the Trust and vested in the Trustees." "8.
Provisions regarding the Trust.
I hereby nominate the following persons as the first Board of Trustees: "9.
The above Trust is to be managed and conducted according to the terms and conditions detailed below: (A to F) . . . . .
The primary and chief objects of the Trust are to carry on for ever the two institutions viz., the Arya Vaidya Sala and the Arya Vaidya Hospital on the lines followed now with the object of enlarging and increasing their scope and utility.
The work of Arya Vaidya Sala now consists of, 1.
preparation of Ayurvedic medicines, 2.
sale of the same, 3.
treatment of .
patients, receiving from them compensation according to their capacity and means, 41 4.
to conduct research into Arya Vaidyam with a view to make it more and more useful to the public.
The following are the matters conducted in the institution called the Arya Vaidya Hospital.
To examine poor patients free of charge, to prescribe treatment for them and give medicines gratis (out patient Department).
To take in at least 12 poor patients at any time, give them lodging and board and also free medicines and treatment free (the in patient Department) .
To carry out the said services with the help of an Arya Vaidyan and necessary operations with the help of an Allopathi doctor.
Give treatment and medicines to all persons seeking them, receiving from such of them as are able such remuneration as they can afford including cost of medicines.
The Arya Vaidya Hospital is now carried on with the medicines supplied by and taken from the Arya Vaidya Sala and the incidental expenses are now met from out of the funds of the Arya Vaidya Sala.
The trustees are to run the above institutions according to the intentions expressed above with such modifications as the circumstances may warrant.
In the Arya Vaidya Patasala run under the auspices of the Arya Samajam, Aryavaidyam is taught in accordance with the service of Ayurveda.
I have been meeting the expenses of the said institutions, not covered by its income.
From out of the profits of Arya Vaidya Sala.
L. Out of the net profits of the Arya Vaidya Sala 25 per cent is to be devoted to the develop ment of the Arya Vaidya Sala, 25 per cent for meeting the expenses of the Arya Vaidya Hospital and 25 per cent for division equally between the two tavazhies (this only for 25 years) out of the remaining 25 per cent a sum not exceeding 10 per cent may be according to requirements, utilised for the purposes of the Arya Vaidya Patasala.
The balance, if any, that may remain out of the 10 per cent after disbursement to the Arya Vaidya Patasala, may be used for the Arya Vaidya Sala itself.
The balance 15 per cent .are to be deposited by the Trustees each year in approved banks as a Reserve fund for the two tavazhies for a period of 20 years and the fund thus accumulated inclusive of interest is to be divided equally among the two tavazhies equally i.e., in moiety and it will be the duty of the Trustees to invest 'the same on the authority of immovable properties.
The Trustees are not bound to pay any amount to the said two tavazhies after the expiry of 20 years.
The 40 per cent of the profit so earmarked for 20 years and so released after the expiry of 20 years are therefore to be utilised for the development of the Arya Vaidya Sala and Arya Vaidya Hospital according to the discretion of the Trustees.
E Schedule: All remaining properties constituted into the Trust.
will be seen from the said recitals of the Will that the stator created a trust in respect of his entire properties, cluding those mentioned in Schedules B, C and D and specifically vested them in the trustees appointed there under.
The properties so vested included the business mrried on in the name and style of Arya Vaidya Sala.
The main objects of the trust were to carry on the said two institutions, namely, Arya Vaidya Sala and Arya Vaidya Hospital 43 and also the other objects mentioned thereunder.
Out of the income from the business so vested in the trustees, he directed the trustees to spend 25 per cent for the develop ment of Arya Vaidya Sala, 25 per cent to meet the expenses of the Arya Vaidya Hospital, not exceeding 10 per cent for the Arya Vaidya Patasala, 25 per cent to be shared equally by the two branches of the family of the testor for a period of 20 years and thereafter to be utilized for the purpose of the Arya Vaidya Sala and Arya Vaidya Hospital and 15 per cent to be given to the said branches; that is to say, 60 per cent of the total properties for a period of 20 years from the demise of the testator should be utilized for religious and charitable purposes and thereafter 85 per cent to be utilized for the said purposes and the rest to be spent on non religious and non charitable purposes.
Therefore, under the Will the E Schedule properties, including the business, were held under trust and the object of the trust was to utilize 60 per cent of the profits of the business for 20 years and 85 per cent thereafter for religious and charitable purposes.
The assessment years in question fell within 20 years from the death of the testator and, therefore, we are concerned only with 60 per cent of the income from the trust properties.
The question is whether the 60 per cent of the income from the trust properties is exempt from assessment to income tax under section 4(3) (i) of the Act.
The relevant provisions of the Act read: Section 4.
(3) Any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them: (i) any income derived from property held under trust or other legal obligation wholly for religious or charitable purposes, and in the case of property so held in part only for such purposes, the income applied, or finally set apart for application, thereto: Provided that such income shall be included in the total income. . . . (b) in the case of income derived from business carried on behalf of a religious or charit 44 ,able institutions, unless the income is applied wholly for the purpose of the institution and either (i) the business is carried on in the course of the actual carrying out of a primary purpose of the institution, or (ii) the work in connection with the businem is mainly carried on by beneficiaries of the institution.
A brief history of the proviso may not be out of place here.
Before the amendment of this clause by the Amending Act of 1953 the proviso was in the form of a separate substantive clause and was numbered as cl.
(i a).
The said cl.
(i a) came under judicial scrutiny.
It was argued on behalf of the Revenue that though a business was held under trust for religious or charitable purposes, it would fall under cl.
(i a) and the income therefrom could not be exempted from income tax unless the conditions laid down in the said clause were complied with.
In Charitable Gadodia Swadeshi Stores vs Commissioner of Income tax, Punjab (1).
the Labore High Court rejected that contention, and one of the reasons given for the rejection was that if the &aid clause was intended to narrow down the scope of cl.
(i), the said clause would have been added as a proviso to the old clause.
Presumably on the basis of this suggestion the Amending Act of 1953 substituted cl.
(i a) by cl.
(b) of the proviso.
But it is not an inflexible rule of construction that a proviso in a statute should always be read as a limitation upon the effect of the main enactment.
Generally the natural presumption is that but for the proviso the enacting part of the section would have included the subject matter of the proviso; but the clear language of the substantive provision as well as the proviso may establish that the proviso is not a qualifying clause of the main provisions, but is in itself a substantive provision.
In the words of Maxwell, "the true principle is that the sound view of the enacting clause, the saving clause and the proviso taken and construed together is to prevail".
So construed we find no difficulty, as we will indicate later (1) (i944) in our judgment, in holding that the said cl.
(b) of the proviso deals with a case of business which is not vested in trust for religious or charitable purposes within the meaning of the substantive clause of section 4(3) (i).
With this introductory remarks we shall proceed to construe the provisions of section 4(3)(i) of the Act, along with cl.
(b) of the Proviso.
Under cl.
(i), so far as it is relevant to the question raised before us, to earn the exemption the income shall have been derived from property under trust wholly or in part held for religious or charitable purposes.
Under cl.
(b) of the proviso to that clause, in the case of income derived from business carried on on behalf of a religious or charitable institution, unless the condition laid down thereunder are complied with, the said income cannot be exempted.
If business is property and is held under trust ,wholly or partly for religious or charitable purposes, it falls squarely under the substantive part of cl.
(i) and in that *vent cl.
(b) of the proviso cannot be attracted, as under that clause of the proviso the business mentioned therein is not held under trust but one carried on on I behalf of a religious or charitable institution.
To take a business out of the substantive cl.
(i) of section 4(3) and place it in cl.
(b) of the proviso, it is suggested that business is not property and that even if it is property the said property is not wholly or partly held in trust for religious or charitable purposes.
That business is property is now well settled.
The Privy Council in In re Trustees of the Tribune( ') did not question the view expressed by the Bombay High Court that business of running the newspaper Tribune was property held under trust for charitable purposes.
This Court in J. K. Trust, Bombay vs Commissioner of Income tax.
Excess profits Tax Bombay( ') endorsed the said view and held that "property" is a term of the widest import and that business would undoubtedly be property unless there was something to the contrary in the enactment.
If business was property, it could be held under trust for religious and charitable purposes.
As the,business of running the Arya Vaidya Sala vested under trust for religious and charitable purposes, it would fall under (1) (2) (1958) S.C.R. 65 46 cl.
(i), if the other conditions laid down therein were satisfied.
The necessary condition for the application of cl.
(i) of section 4(3) of the Act is that the said property, namely, the business, shall have been wholly or in part held for religious or charitable purposes.
As 40 per cent of the profits in the business would be given to purposes other than religious or charitable purposes it cannot be said that the business was held wholly for religious or charitable purposes.
But as 60 per cent of the profits thereof would be spent for religious or charitable purposes, the question is whether it can be held that the business was held in trust in part for religious or charitable purposes.
The argument advanced on behalf of the Revenue is that the expression "in part" in cl.
(i) applies only to a case where an aliquot part of property is vested in trust and that is not legally possible in the case of business.
It is said that a business is one and indivisible and, therefore, the subject matter of trust can only be the share of the profits payable to a partner during the continuance of the partnership or after its dissolution.
Reliance is placed in support of the said proposition on the decisions in K. A. Ramachar vs Commissioner of Income tax, Madras( '), David Burnet vs Charles P. Leininger(2), Mohammad Ibrahim Riza vs Commissioner of Income tax, Nagpur(3).
The first two decisions dealt with a different problem, viz., whether an assessee is liable to tax on his share of profits in a firm after setting or assigning the same in favour of a third party and the courts have held that the profits accrued to the assessee before the assignments could operate on them and he was liable to be assessed to tax on the said profits.
In the third decision, the Judicial Committee held that there was no valid trust for charitable purposes, as the utilization of the income to charitable or secular purposes was left to the absolute discretion of the head of the community.
None of the three decisions has any bearing on the question whether a business could be held in trust wholly or in part for religious or charitable purposes.
That question falls to be considered on different considerations.
In our view, the expression "in part" does not refer to an aliquot part; if half a house is held in trust wholly for (1) ; (2) ; (3) (1930) 57 T.A. 260 47 religious or charitable purposes, it would be covered by the first part of the substantive clause of cl.
(i), for in that event the subject matter of the trust is only the said half of the house and that half is held wholly for religious or charitable purposes.
The expression "in part", therefore, must apply to a case other than a property a part of which is wholly held for religious or charitable purposes.
In India there are a variety of trusts wherein there is no complete dedication of the property but only a partial dedication.
A property may be dedicated entirely to a religious or charitable institution or to a deity.
This is an instance of complete dedication.
A property may be dedicated to a deity, subject to a charge that a part of the income shall be given to the grantor 's heirs.
A property may be given to an individual subject to, or burdened with, a charge in favour of are idol or a religious institution or for charitable purposes.
An owner of property may retain the property for himself but carve out a beneficial interest therefrom in favour of the public by way of easement or otherwise.
There may be many other instance, where though there is a trust, it involves only a partial dedication of the property held under trust in the sense that only a Dart of the income of that property is utilized for religious or charitable purposes.
The dichotomy between the two expressions "wholly" and "in part".
is not based upon the dedication of the whole or a fractional part of the property, but between the dedication of the said property wholly for religious or charitable purposes or in part for such purposes.
If so understood, the two limbs of the substantive clause fall into a piece.
The first limb deals with a property or a part of it held in trust wholly for religious or charitable purposes, and the second limb provides for such a property held in trust partly for religious or charitable purposes.
On the said reading of the provision it follows that the entire business of Arya Vaidya Sala is held in trust for utilizing 60 per cent of its profits i.e., a part of the income, for religious or charitable purposes.
The present case, therefore, falls squarely within the scope of the substantive part of cl.
(i) of section 4(3) of the Act.
Even so it is contended that cl.
(b) of the proviso imposes further limitations before the exemption can be 48 granted.
But the said clause of the proviso only applies to the case of income derived from business carried on on r behalf of a religious or charitable institution.
A business held in trust wholly or in part for religious or charitable purposes is not a business carried on on behalf of a religious or charitable institution, for the business itself is held in trust.
A few decisions cited at the Bar bringing out the distinction between the substantive part of cl.
(i) of section 4(3) and cl.
(b) of the proviso may usefully be referred to at this stage.
Where a business was held in trust for charitable purposes, a Division Bench of the Bombay High Court in Dharma Vijiya Agency vs Commissioner of Income tax, Bombay City( ') held that it was not business which was carried on on behalf of religious or charitable institutions within the meaning of cl.
(b) of the proviso.
Shah J., after considering the relevant authorities and the provisions of the Act, observed: "In our view, the business referred to in cl.
(b) of the proviso need not be business which is held for religious or charitable purposes, provided it is business carried on on behalf of a religious or charitable institution.
" Desai J., stated thus: with the scope of property consisting of business held under trust wholly for religious or charitable purposes.
It must of necessity mean that we have in clause (i) a very wide category of business which is trust property, and we have in proviso (b) a restricted and a lesser category of business which is carried on by or on behalf of a religious or charitable institution.
" A Division Bench of the Kerala High Court in Dharmodayam ,Co. vs Commissioner of Income tax, Kerala( ') expressed much to the same effect.
A Division Bench of the Madras !High Court, in Thiagesar Dharma Vanikam vs Commissioner (1) , 405 466, 410.
(2) (11962) 49 of Income tax, Madras( '), after considering the decisions of the various High Courts and the relevant provisions of the Act, observed: A "When the trustee acts, it is only the trust that acts, as the trustee fully represents the trust.
A business carried on on behalf of a trust rather indicates a business which is not held in trust, than a business of the trust run by the trustees.
" It concluded thus: "In our opinion proviso (b) to section 4 (3) (i) does not restrict the operation of the main provision in section 4(3)(i).
If a trust carried on business and the business itself is held in trust and the income from such business is applied or accumulated for application for the purpose of the trust.
which must of course be of a religious or a charitable character, the conditions prescribed in section 4(3) (i) are fulfilled and the income is exempt from taxation.
This exemption cannot be defeated even if the business were to be conducted by somebody else acting on behalf of the trust.
Proviso (b) to section 4(3) (i) has application only to businesses which are not held in trust, and the field of its operation is, therefore, distinct and separate from that covered by section 4(3)(i).
" Emphasis is laid upon the expression "such income" in the opening words of the proviso and a contention is raised that the income dealt with in the proviso is income derived from property held under trust.
To state it differently, the adjective "such" in the expression "such income" refers back to the income in the substantive clause.
There is some plausibility in the contention, but if the interpretation be accepted, we will be attributing an intention to the legislature to make a distinction between business and other property though both of them are held under trust.
There is no acceptable reason for this distinction.
That apart, the expression (1) , 807, 809.
51 section C. 4 50 "such" may as well refer to the "income" in the opening sentence of sub section
The said sub section says that the incomes mentioned thereunder shall not be included in the total income, but the proviso lifts the ban and says that such incomes shall be included in the total income if the conditions laid down are satisfied.
We think that the expression "such income" only means the income accruing or arising in favour of the trust.
The legal position may briefly be stated thus.
Clause (i) of section 4(3) of the Act takes in every property or a frac tional part of it held in trust wholly for religious or charitable purposes.
It also takes in such property held only in part for such purposes.
Business is also property within the meaning of the said clause.
Clause (b) of the proviso to section 4(3) (i) applies only to a business not held in trust but carried on on behalf of religious or charitable institutions.
For the foregoing reasons we hold that the High Court has correctly answered the question referred to it.
In the result, the appeals fail and are dismissed with costs.
One set of hearing fees.
Appeal dismissed.

summary:
A testator was carrying on business in Ayurvedic drugs under the name and style of Arya Vaidya Sala.
Under his will his properties, A including the business, were held under trust and the object of the trust was to utilise 60 per cent of the profits of the business for 20 years and 85 per cent thereafter for religious and charitable purposes.
The assessment years in question fell within 20 years from the death of the testator and the question was whether the 60 per cent of the income from the trust properties was exempt from assessment to income tax under section 4(3)(1) of the Indian Income tax Act, 1922.
The Income tax authorities rejected the claim for exemption and assesses.
the entire income from the said properties, on the ground that the substantive cl.
(i) of section 4(3) was not applicable to the case but only cl.
(b) of the proviso and that the conditions laid down thereunder were not complied with.
HELD: (i) The business run under the name and style of Arya Vaidya Sala was property within the meaning of section 4(3)(i) of the Indian Income tax Act, 1922, and as the entire business was held in trust for utilising a part of its profits for religious or charitable purposes, the said income was exempt from assessment to income tax under that section.
(ii) Cl.
(b) of the proviso to section 4(3)(i) was applicable only to a business not held in trust but carried on on behalf of a religious or charitable institution, (iii) A business held in trust wholly or in part for religious or charitable purposes was not a business carried on on behalf of a religious or charitable institution.
(iv) The dichotomy between the two expressions "wholly" and "in part" in section 4(3)(i) was not based upon the dedication of the whole or a fractional part of the property, but between the dedication of the said property the income from which was to be utilized wholly for religious or charitable purposes or in part for such purposes.
(v) The expression "such income" in the opening words of the proviso to section 4(3)(i) meant "income accruing or arising in favour of the trust".