judgement:
Appeal No. 104 of 1953.
Appeal from the Judgment and Order dated the 28th day of March, 1952, of the High Court of Judicature at Bombay in Income tax Reference No. 39 of 1951 arising out of the Order dated the 23rd day of April, 1951, of the Income tax Appellate Tribunal in Income tax Appeal No. 5228 of 1950 51. 112 878 Jamshedji Kanga, (R. J. Kolah, M. M. Jhaveri and Rajinder Narain, with him) for the appellant.
M.C. Setalvad, Attorney General.
for India, (G. N. Joshi, with him) for the respondent.
October 28.
The Judgment of the Court was delivered by GHULAM HASAN J.
This appeal raises an interesting point of law under the Indian Income tax Act.
The question referred by the Tribunal to the High Court of Judicature at Bombay was stated thus: " Whether 60% of the dividend amounting to Rs. 2,750 received by the assessee from the two Tea companies is agricultural income and as such exempt under section 4(3) (viii) of the Act." Chagla C.J. and Tendolkar J., who heard the reference, answered the question in the negative by two separate but concurring judgments dated March 28, 1952.
The facts lie within a narrow compass.
The appellant, Mrs. Bacha F. Guzdar, was, in the accounting year 1949 50, a shareholder in two Tea:companies, Patrakola Tea Company Ltd., and Bishnath Tea Company Ltd., and received from the aforesaid companies dividends aggregating to Rs. 2,750.
The two companies carried on business of growing and manu facturing tea.
By rule 21 of the Indian Income tax Rules, 1922, made in exercise of the powers conferred by section 59 of the Indian Income tax Act, it is provided that "income derived from the sale of tea grown and manufactured by the seller in the taxable territories shall be computed as if it were income derived from business and 40% of such income shall be deemed to be income, profits and gains, liable to tax.
" It is common ground that 40% of the income of the Tea companies was taxed as income from the manufacture and sale of tea and 60% of such income was exempt from tax as agricultural income.
According to the appellant, the dividend income received by her in respect of the shares held by her in the said Tea companies is to the extent of 60% agricultural income in her hands and therefore pro tanto exempt from tax while the Revenue contends that dividend income is 879 not agricultural income and therefore the whole of the income is liable to tax.
The Income tax Officer and on appeal, the Appellate Assistant Commissioner both concurred in holding the whole of the said income to be liable to tax.
The Income tax Appellate Tribunal confirmed the view that the dividend income could not be treated as agricultural income in the hands of the shareholder and decided in favour of the Revenue, but ' agreed that its order gave rise to a question of law and formulated the same as set out above and referred it to the High Court.
The High Court upheld the order of the Tribunal but granted leave to appeal to this Court.
The question, we comprehend, is capable of an easy solution and can best be answered by reference to the material provisions of the Income tax Act.
Under section 2(1) 'agricultural income ' means: (a) any rent or revenue derived from land which is used for agricultural purposes, and is either assessed to land revenue in the taxable territories or subject to a, local rate assessed and collected by officers of the Government as such; (b) (i). . . (ii). . . . . . (iii). . . . . . (c). . . . . . " Sub section (15) of section 2 defines " total income" as total amount of income, profits and gains, referred to in sub section (1) of section 4 computed in the manner laid down in this Act, Section 3 authorises income tax to be charged upon a person in respect of the total income of the previous year.
Section 4 lays down that the total income of any previous year of any person to be charged must include all income, profits and gains, from whatever source derived and defines the scope of its application for purposes of tax.
Sub section (3) of the same section enacts certain exemptions upon the chargeability of the income and clause (iii) includes agricultural income in the category of exemptions.
Section 6 mentions the various heads of income, profits and gains, chargeable.
to income, tax 880 including in that category clause (v) 'income from other sources.
' It is common ground that dividend falls under this category.
In order, however, that dividend may be held to be Agricultural income it will be incumbent upon the appellant to show that, within the terms of the definition, it is rent or revenue derived from land which is used for agricultural 'purposes.
Mr. Kolah, for the appellant, contends that it is revenue derived from land because 60% of the profits of the company out of which dividends are payable are referable to the pursuit of agricultural operations on the part of the company.
It is true that the agricultural process renders 60% of the profits exempt from tax in the hands of the company from land which is used for agricultural purposes but can it be said that when such company decides to distribute its profits to the shareholders and declares the dividends to be allocated to them , such dividends in the hands of the shareholders also partake of the character of revenue derived from land which is used for agricultural purposes ? Such a position if accepted would extend the scope of the vital words I revenue derived from land ' beyond its legitimate limits.
Agricultural income as defined in the Act is obviously intended to refer to the revenue received by direct association with the land which is used for agricultural purposes and not by indirectly extending it to cases where that revenue or part thereof changes hands either by way of distribution of dividends or otherwise.
In fact and truth dividend is derived from the investment made in the shares of the company and the foundation of it rests on the contractual relations between the company and the shareholder.
Dividend is not derived by a shareholder by his direct relationship with the land.
There can be no doubt that the I initial source which has produced the revenue is land used for agricultural purposes but to give to the words 'revenue derived from land the unrestricted meaning, apart from its direct association or relation with the land, would be quite unwarranted.
For example, the proposition that a creditor advancing money on interest to an agriculturist 881 and receiving interest out of the produce of the lands in the hands of the agriculturist can claim exemption of tax upon the ground that it is agricultural income within the meaning of section 4, sub section (3) (viii), is hardly statable.
The policy of the Act as gathered from the various sub clauses of section 2(1) appears to be to exempt agricultural income from the purview of Income tax Act.
The object appears to be not to subject to tax either the actual tiller of the soil or any other person getting land cultivated by others for deriving benefit therefrom, but to say that the benefit intended to be conferred upon this class of persons should extend to those into whosoever hands that revenue falls, however remote the receiver of such revenue may be, is hardly warranted.
It was argued by Mr. Kolah on the strength of an observation made by Lord Anderson in Commissioners of Inland Revenue vs Forrest(1), that an investor buys in the first place a share of the assets of the industrial concern proportionate to the number of shares he has purchased and also buys the right to participate in any profits which the company may make in the future.
That a shareholder acquires a right to participate in the profits of the company may be readily conceded but it is not possible to accept the contention that the shareholder acquires any interest in the assets of the company.
The use of the word 'assets ' in the passage quoted above cannot be exploited to warrant the inference that a shareholder, on investing money in the purchase of shares, becomes entitled to the assets of the company and has any share in the property of the company.
A shareholder has got no interest in the property of the company though he has undoubtedly a right to participate in the profits if and when the company decides to divide them.
The interest of a shareholder vis a vis the company was explained in the case of Chiranjitlal Chowdhuri vs The Union of India and Others(1).
That judgment negatives the position taken up on behalf of the appellant that a shareholder has got a right in the property of the company.
It is true that the shareholders of the company have (1) ,710., (2) ; , 904.
882 the, sole determining voice in administering the affairs of the company and are entitled, as provided by the Articles of Association to declare that dividends should be distributed out of the profits of the company to the shareholders but the interest of the shareholder either individually or collectively does not amount to more than a right to participate in the profits of the company.
The company is a juristic person and is distinct from the shareholders.
It is the company which owns the property and not the shareholders.
The dividend is a share of the profits declared by the company as liable to be distributed among the shareholders.
Reliance is placed on behalf of the appellant on a passage in Buckley 's Companies Act, 12th Ed., page 894, where the etymological meaning of dividend is given as dividendum, the total divisible sum but in its ordinary sense it means the sum paid and received as the quotient forming the share of the divisible sum payable to the recipient.
This statement does not justify the contention that shareholders are owners of a divisible sum or that they are owners of the property of the company.
The proper approach to the solution of the question is to concentrate on the plain words of the definition of agricultural income which connects in no uncertain language revenue with the land from which it directly springs and a stray observation in a case which has no bearing upon the present question does not advance the solution of the question.
There is nothing in the Indian law to warrant the assumption that a shareholder who buys shares buys any interest in the property of the company which is a juristic person entirely distinct from the shareholders.
The true position of a shareholder is that on buying shares an investor becomes entitled to participate in the profits of the company in which he holds the shares if and when the company declares, subject to the Articles of Association, that the profits or any portion thereof should be distributed by way of dividends among the shareholders.
He has undoubtedly a further right to participate in the assets of the company which would be left over after winding up, but not in the assets as a whole as Lord Anderson puts it.
883 The High Court expressed the view that until a dividend is declared there is no right in a shareholder to participate in the profits and according to them the declaration of dividend by the company is the effective source of the dividend which is subject to tax.
This statement of the law we are unable to accept.
Indeed the learned Attorney General conceded that he was not prepared to subscribe to that proposition.
The ' declaration of dividend is certainly not the source of the profit.
The right to participation in the profits exists independently of any declaration by the company with the only difference that the enjoyment of profits is postponed until dividends are declared.
It was argued that the position of shareholders in a company is analogous to that of partners inter se.
This analogy is wholly inaccurate.
Partnership is merely an association of persons for carrying on the business of partnership and in law the firm name is a compendious method of describing the partners.
Such is, however, not the case of a company which stands as a separate juristic entity distinct from the shareholders.
In Halsbury 's Laws of England, Volume 6 (3rd Ed.), page 234, the law regarding the attributes of shares is thus stated : " A share is a right to a specified amount of the share capital of a company carrying with it certain rights and liabilities while the company is a going concern and in its winding up.
The shares or other interest of any member in a company are personal estate transferable in the manner provided by its articles, and are not of the, nature of real estate.
" In Borland 's Trustee vs Steel Brothers &,Co. Ltd.(1), Farwell J. held that "a share in a company cannot properly be likened to a sum of money settled upon and subject to executory limitations to arise in the future ; it is rather to be regarded as the interest of the shareholder in the company, measured, for the purposes of liability and dividend, by a sum of money . . . . . ." It was suggested that the dividend arises out of the profits accruing from land and is impressed with the same character as the profits (1) 884 and that it does not change its character merely because of the incident that it reaches the hands of the shareholder.
This argument runs counter to.
the definition of agricultural income which emphasizes the necessity of the recipient of income having a direct and an immediate rather than an indirect and remote relation with land.
To accept this argument will be tantamount to saying that the creditor recovering interest on money debt due from the agriculturist who pays out of the produce of the land is equally entitled to the exemption.
In fairness to Mr. Kolah it must, however, be stated that the contention was not so broadly put but there is no reason why one should stop at a particular stage and not pursue the analogy to its logical limits.
English decisions resting upon the peculiarities of the English Income tax law can hardly be a safe guide ,in determining upon the language of the Indian Income tax Act the true meaning of the words 'agricultural income. ' A few cases of the Privy Council decided with reference to the provisions of the Indian Income tax Act, however, deserve notice.
The first case, viz., Commissioner of Income tax, Bihar and Orissa vs Raja Bahadur Kamakshya Narayan Singh and Others(1), dealt with the question whether interest on arrears of rent payable in respect of land used for agricultural purposes is agricultural income and therefore exempt from income tax.
It was held that it was neither rent nor revenue derived from land within the meaning of section 2(1) of the Income tax Act.
Lord Uthwatt who delivered the judgment of the Privy Council used the following piquant language in coming to that conclusion : "The word derived ' is not a term of article Its use in the definition indeed demands an enquiry into the genealogy of the product.
But the enquiry should stop as soon as the effective source is discovered.
In the genealogical tree of the interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of (1) 885 non payment.
And rent is not land within the meaning of the definition.
" The second case, viz., Premier Construction Co. Ltd. V. Commissioner of Income tax, Bombay City(1), dealt, with the nature of the commission of a managing agent of the company a part of whose income was agricultural income.
The assessee claimed exemption from tax on the ground that his remuneration at 10 per cent.
of the profits was calculated with reference to the income of the company part of which was agricultural income.
It was held that the assessee received no agricultural income as defined by the Act but that he received a remuneration under a contract for personal service calculated on the amount of profits earned by the employer, payable not in specie out of any item of such profits, but out of any moneys of the employer avail Able for the purpose, and that the remuneration therefore was not agricultural income and was not exempt from tax.
Sir John Beaumont in the above case observed : " In their Lordships ' view the principle to be derived from a consideration of the terms of the Income tax Act and the authorities referred to is that where an assessee receives income, not itself of a character to fall within the definition of agricultural income contained in the, Act, such income does not assume the character of agricultural income by reason of the source from which it is derived, or the method by which it is calculated. " In the third case, viz., Maharajkumar Gopal Saran Narain Singh vs Commissioner of Income tax, Bihar and Orissa(1), an annual payment for life to the assessee was not held to be agricultural income and therefore not exempt from tax where the annuity arose out of a transfer made by the assessee of a portion of his estate for discharging his debts and for obtaining an adequate income for his life it being held that it was not rent or revenue derived from land but.
money paid under a contract imposing personal liability on the covenantor the discharge of which was secured by a charge on (1) (2) 886 land.
But reliance was placed uponanother judgment of the Privy Council in the same volume at page 305 'in Commissioner of Income tax, Bihar and Orissa vs Sir Kameshwar Singh(1).
That was a case of a usufructuary mortgagee the profits received by whom were exempt from income tax on the ground that they were agricultural income in his hands.
Lord Macmillan, after referring to certain sections of the Act, observed that "the result of those sections is to exclude agricultural income altogether from the scope of the Act howsoever or by whomsoever it may be received.
" These observations must be held to be confined to the facts of that particular case which was a case of usufructuary mortgagee who had received profits directly from the land.
The obvious implication of the words used by Lord Macmillan was that whosoever receives profit from the land directly is entitled to the exemption.
Reference was also made to some English decisions but they have no bearing upon the present case as they were founded on the English Income tax law and the provisions of the particular statute.
The learned Attorney General also contended that the conclusion that dividend is not agricultural income also follows from the provisions of section 16, subsection (2) and the proviso to the Act.
According to him, this section compels the assessee to show in his return the whole dividend including the portion which is excluded on the ground of agricultural income.
We do not consider it necessary to express any opinion upon this contention as our conclusion reached as a result of the foregoing discussion is sufficient to dispose of the appeal.
We accordingly dismiss the appeal with costs.
Appeal dismissed.

summary:
Agricultural income as defined in a. 2(1) of the Indian Income.
tat Act, 1922, signifies income proximately derived from direct association with land by a person who actually tills the land or 877 gets it cultivated by others.
Agricultural income does not mean income which can be ultimately or indirectly traced to have connection with agricultural operations.
Even though a tea company growing and manufacturing top gets an exemption of 60 per cent.
of the profits as agricultural income in accordance with rule 24 framed under section 59 of the Act, it must be held that the dividend of such company is not derived by the shareholder owing to his direct connection with the land in which be% is grown and such dividend is not agricultural income within the meaning of section 2(1) of the Act and hence is not exempted from income tax under section 4(3)(viii) of the Act.
The dividend of a shareholder is the outcome of his right to participate in the profits of the company arising out of the contractual relation between the company and the shareholder and this right exists independently of any declaration of the dividend though until such declaration the enjoyment of the profits is postponed.
The shareholder by purchase of the share does not acquire any interst in the assets 'of the company till after the company is wound up.
The position of a shareholder of a company is altogether different from that of a partner of a firm.
A company is a juristic entity distinct from the shareholders but the firm is a collective name or an alias for all the partners.
Decisions based on the peculiarities of Income tax law of England are hardly safe guides for determining the true meaning of the term "agricultural income" Under the Indian Income tax Act, 1922.
Chiranjit Lal Chowdhuri vs The Union of India [1950] S.C.R. 869) followed.
Commissioners of Inland Revenue vs Forrest (1924) 8 T.C. 704, Borland 's Trustee vs Steel Brothers & Co. Ltd. L.R. , Commissioner of Income tax, Bihar and Orissa vs Baia Bahadur Kamakshya Narayan Singh and Others , Premier Construction Co. Ltd. vs Commissioner of lncome tax, Bombay City and Maharaj kumar Gopal Saran Narain Singh vs Commissioner of Income tax, Bihar and Orissa referred to.


judgement:
Appeals Nos. 2380 and 2381 of 1966.
Appeals from the judgment and order dated January 7, 1966 of the Calcutta, High Court in Income tax References Nos. 7 and 176 of 1961.
section Mitra, section K. Aiyar, R, N. Sachthey and B. D. Sharma, for the appellant (in both the appeals).
A. K. Sen, O. P. Khaitan and B. P. Maheshwari, for the respondent (in both the appeals).
The Judgment of the Court was delivered by Grover, J.
These appeals by certificate arise out of a common judgment of the Calcutta High Court in two Income tax References.
The assessee is a private limited company.
It carried on the business of banking and financing as also of managing agency.
Starch Products Ltd. was one of the various companies which was being managed by the assessee.
Starch Products had appointed the U.P. Sales Corporation Ltd. as its selling agent.
The assessee claimed to have stood guarantee for a loan of Rs. 6 lakhs which was advanced to the U.P. Sales Corporation Ltd. by the Gwalior Industrial Bank Ltd. The borrower failed to pay the loan which on August 2, 1948 stood at Rs. 5,60,199.
This amount was paid by the assessee pursuant to the guarantee.
Thereafter the assessee treated the U.P. Sales Corporation Ltd. as its debtor for the aforesaid amount.
That company went into liquidation and as the assessee could not recover anything from it a sum of Rs. 5,60,199 was written off in the books of the assessee company.
The claim was not entertained either by the Income tax Officer or the Appellate Assistant Commissioner.
Before the Income tax Officer the 359 said amount Was claimed as bad debt vide assessee 's letter dated September 12, 1957.
The Income tax Officer rejected the explanation furnished by the assessee for advancing such a large amount to a company whose financial position was far from satisfactory.
According to him the advance was not a bona fide money lending investment.
Subsequently it was sought to be established before the Income tax Officer, that an indemnity had been given to the Gwalior Industrial Bank Ltd. in the matter of the loan account of the U.P. Sales Corporation Ltd. and the payment had been made on its failure to clear the debt of the Bank.
According to the In come tax Officer the assessee was asked to produce evidence about the guarantee having been furnished but he was not satisfied that there was any directors ' resolution authorising the furnishing of a guarantee or that the document purporting to be a guarantee had been properly stamped or that there was other sufficient evidence to establish the transaction.
Before the Appellate Assistant Commissioner the only substantial ground taken was that the Income tax Officer had wrongly disallowed the claim &or bad debt amounting to Rs. 5,60,199.
The Appellate Assistant Commissioner considered the question of the aforesaid amount being an admissible deduction or allowance under section 10(2) (xi) of the Income tax Act 1922.
In his opinion the guaranteeing of a loan though made in the interest of the assessee 's business and is a matter of commercial expediency did not represent an advance made in the normal course of the assessee 's business.
Such an advance could have been made only if it had been made to the company managed by the assessee under a contractual obligation to guarantee the finances of the managed company.
According to him the claim for irrecoverable loan would have been also admissible if the assessee could establish that the loan represented an interest bearing advance made in the course of the assessee 's money lending business but that was not the case of the assessee.
And since the loan had been advanced to assist a concern having trade relations with one of the managed companies it could not be allowed as a permissible deduction.
The appellate tribunal did not agree with the finding of the Appellate Assistant Commissioner that the loss was not directly incidental to the assessee 's business.
This is what the tribunal stated in its order : "The Appellate Assistant Commissioner, in our opinion, failed to appreciate the special nature of the business carried on by the assessee.
This is not a case where any money was advanced by the assessee for the purpose of earning interest.
All that the assesses did was to stand surety for the money advanced by a Bank to the selling agent of one of its managed companies,.
If such a 3 60 guarantee was not given Messrs. Starch Products Ltd., one of the managed companies, would have had to give extended credit to the selling agent and this could be possible if the managed company in its turn was financed either by the managing agents or a third party.
It was to obviate the necessity of such borrowing by the managed company that the assessee company stood guarantee for the loan given by Gwalior Industrial Bank Ltd. to U.P. Sales Corporation Ltd. It was only on the failure on the part of the borrower, i.e. U.P. Sales Corporation Ltd., to fulfill its committment that the assessee as a guarantor came into the picture. ' There was, therefore, no question of earning of any interest on any money advanced.
It was in the larger interest of the assessee 's business that the guarantee was given.
The standing of surety for the sales Organisation of the managed company and the consequent loss arising therefrom was in our opinion germane to the assessee 's 'business.
It is now well established that a sum of money extended not of necessity and with a view to give a direct and immediate benefit to the trade but voluntarily and on the ground of commercial expediency and in order to indirectly facilitate the carrying on of the business, may yet be an allowable deduction in computing the profits and gains of the business.
" The Tribunal held that the assessee 's claim for the loss of Rs. 5,60,199 was an admissible deduction.
At the instance of the Commissioner of Income tax, the Tribunal referred the following question of law to the High Court: "Whether on the facts and in the circumstances of the case, the sum of Rs. 5,60,199 was an admissible deduction in computing the business profits of the assessee ?" Three other questions were referred to the High Court on an application made under section 66(2) of the Act.
It is unnecessary to refer to them as the real controversy has centred on the above question alone.
The High Court addressed itself to the question whether the amount in dispute fell within section 10(2) (xi) of the Act.
The finding of the Appellate Assistant Commissioner that the guarantee had in fact been furnished to the Bank was not disputed.
This is what the High Court said after referring to certain decided cases and the relevant portion of the Tribunal 's judgment : "We agree that it was in the larger interest of the assessee 's business that the guarantee was given and we 3 6 1 are of the opinion that the debt was incidental to the business of the assessee within the meaning of section 10(2)(xi) of the Act and such a debt was found to be irrecoverable in the relevant accounting year commencing on the 31st October 1951 and ending on the 18th October 1.952." While computing profits or gains of business under section 10 certain allowances have to be made under sub section
The allowance covered by clause (xi) thereof has to be made when the assessee 's accounts in respect of any part of his business, profession or vocation are not kept on the cash basis, of such sum, in respect of bad and doubtful debts, due to the assessee in respect of that part of his business, profession or vocation, ,and in the case of an assessee carrying on a banking or money lending business of such sum in respect of loans made in the ordinary course of such business as the Income tax Officer may estimate to be irrecoverable but not exceeding the amount actually written off as irrecoverable in the books of the assessee.
Now a bad debt means a debt which would have gone into the balance sheet as a trading debt in the business or trade.
It must arise in the course of and as a result of the assessee 's 'business.
The deduction claimed should not be too remote from the business carried on by the assessee.
In Madan Gopal Bagla vs Commissioner of Income tax West Bengal(1) the principle which was accepted was that the debt in order to fall within section 10(2) (xi) must be one which can properly be called a trading debt i.e. debt of the trade the profits of which are being computed.
It was observed that the assessee in that ease was not a person carrying on business of standing surety for other persons nor was he a money lender.
He was simply a timber merchant.
There was some evidence that he had from time to time obtained finances for his business by procuring loans on the joint security of himself and some other person.
But it was not established that he was in the habit of standing surety for other persons along with them for the purpose of securing loans for their use and benefit.
Even if such had been the case any loss suffered by reason of having to pay a debt borrowed for the benefit of another would have been a capital loss to him and not a business loss at all.
A businessman may have to stand surety for some one in order to get monies for his own business.
There may be a custom of the business by which that may be the only method whereby he could get money for the purpose of his own business.
If he is to discharge a surety debt and if any such custom is established it would be a business debt.
If the assessee has made a payment not voluntarily but to discharge a legal obligation which arises from his business.
he would be entitled to have the amount deducted as a bad debt under section 10(2)(xi); see Commissioner of Income tax Bombay vs (1) 362 Abdullabhai Abdulkadar(1).
In Essen Private Ltd. vs Commis sioner of Income tax(2) Madras, the appellant carried on business as a managing agent of several concerns.
Pursuant to the agreement with one of the companies managed by it, it advanced large sums of money to the managed company and also guaranteed a loan of Rs. 2 lakhs obtained by that company from a Bank.
The managed company failed in its business and upon the Bank pressing for payment the appellant in accordance with its guarantee made certain payments to that Bank.
The assessee had ultimately to write off certain sum in its books as bad debts and it claimed that allowance under section 10(1) (xi).
The Tribunal found that the advances to the managed company and the agreement guaranteeing the loan to the managed company were in pursuance its objects and were made in the course of its business and the claim was allowed.
That decision was finally affirmed by this Court.
In this case there was a cause in the memorandum of association by which the assessee was entitled to land monies and to guarantee the performance of contracts.
Similarly the managing agency agreement contained a clause about lending and advancing of money to the managed company.
It was found by the appellate tribunal that it was a part of the managing agency to provide funds to the managed company.
In the present case none of those facts have been found.
Neither the memorandum of association nor the managing agency agreement contained any such provision by which it could be said that the guaranteeing of the loan made by the Bank to the selling agents was done in the course of the managing agency business.
In our judgment the facts relied upon by the appellate tribunal and the High Court are barely sufficient for bringing the allowance claimed under section 10(2) (xi).
It may be mentioned that the case of the assessee was confined to that provision and no reliance was placed on any other provision under which such an allowance could be claimed.
There was no privity of contract or any legal relationship between the assessee and the selling agent.
Neither under customer nor under any statutory provision or any contractual obligation was the assessee bound to guarantee the loan advanced by the Bank to the selling agent.
It is difficult how it was in the interest of the assessee 's business that the guarantee was given.
There was even no material to establish that the managed company was under any legal obligation to, finance the selling agent or to guarantee any loans advanced to the selling agent by a third party.
It is incomprehensible in what manner the guaranteeing of the loan advanced to the selling agent indirectly facilitated the carrying on of the assessee 's business.
It is equally difficult to appreciate the observations of the High Court that it was in the larger interest of (1) (2) 363 the assessee 's business that the guarantee was given.
In our opinion the view of the appellate tribunal was based on a complete misapprehension of the true legal position.
The High Court also fell into the same error.
The allowance which was claimed did not fall within section 10(2) (xi).
No attempt was made nor indeed it could be usefully made to claim any allowance under section 10(2:) (xv)of the Act.
For the reasons given above the correct answer to the question referred should be in the negative and against the, assessee.
The appeals are thus allowed with costs and the judgment of the High Court is set aside.
One hearing fee.
G.C. Appeals allowed.

dataset_name: IN-Abs

summary:
The assessee was a Private Limited Company.
It carried on the business of banking and financing as also of managing agency.
Starch Products Ltd., was one of various companies which was being managed by the assessee.
Starch Products had appointed the U.P. Sales Corporation Ltd., as its selling agent.
The assessee claimed to have stood guarantee for a loan of Rs. 6 lacs which was advanced to U.P. Sales Corporation Ltd., by the Gwali Industrial Bank.
The borrower failed to pay the loan which on August 2, 1948 stood at Rs. 5,60,199.
This amount was paid by the assessee pursuant to the guarantee.
Thereafter the assessee treated the U.P. Sales Corporation as its debtor for the aforesaid amount.
That company went into liquidation and as the assessee could not recover anything from it, a sum of Rs. 5,60,199 was written off in the books of the assessee company.
Before the Income tax Officer the said amount was claimed as a bad debt under section 10(2) (xi) of the Income tax Act, 1922.
The Income tax Officer rejected the claim.
The assessee 's appeal before the Assistant Commissioner failed.
The Appellate Tribunal, however, held that the guarantee given by the assessee was of indirect benefit to the assesse 's business because if it had not guaranteed the loan in question the company managed by it would have had to give extended credit to its selling agent which it could not have done without borrowing money either from the assessee or some third party.
In reference, the High Court also held that the guarantee was in the larger interest of the assessee 's business.
The Commissioner of Income tax appealed to this Court by special leave.
HELD : (i) While computing profits or gains of business under section 10 certain allowances have to be made under sub section
The allowance covered by cl.
(xi) thereof has to be made, when the assessee 's accounts in respect of any part of his business, profession or vocation are not kept on a cash basis, of such sum, in respect of the bad and doubtful debts, due to the assessee in respect of that part of his business profession and vocation and in the case of an assessee carrying an a banking or money lending business of such sum in respect loans made in the ordinary course of such business as the Income tax Officer may estimate to be irrecoverable but not exceeding the amount actually written off as irrecoverable in the books of the assessee.
A bad debt means a debt which would have gone into the balance sheet as a trading debt in the business or trade.
It must arise in the course of and as a result of the assessee 's business.
The deductions claimed should not be too remote from the business carried on by the assessee.
[361 B E] 12 Sup.
C 1/70 9 358 In the present case, neither the memorandum of association nor the managing agency agreement contained any such provisions by which it could be said that he guarantee of the loan made by the bank to the selling agents was done in the course of the managing agency business.
There was no privity of contract or any legal relationship between the assessee and the selling agent.
Neither under custom nor under any statutory provision or any contractual obligation was the assessee bound to guarantee the loan advanced by the bank to the selling agent. 'The guarantee could not be said to be indirectly in the interest of the assessee 's business, or as held by the High Court, in its larger interest.
The Tribunal and the High Court were, therefore, in error in holding that the sum in question was allowable as a deduction under section 10 (2) (xi).
[362 D E, F H] Madan Gopal Bagla vs Commissioner of Income tax, West Bengal, and Commissioner of Income tax, Bombay vs Abdullabhai Abdulkadar, , applied.
Essen Private Ltd. vs Commissioner of Income tax, 65 I.T.R. 625, distinguished.


judgement:
Civil, Appeal No. 2272 of 1966, Appeal from the judgment and order dated January 6, 1966 of Calcutta High Court in Income tax Reference No. 211 of 1961.
section Mitra, A. section Nambiar, R. N. Sachthey and B. D. Sharma, for the appellant.
M. C. Chagla and P. K. Chatterjee, for the respondents 309 The Judgment of the Court was delivered by Hegde, J.
This is, an appeal by certificate, granted by the High Court of Calcutta under section 66A(2) of the Indian Income Tax Act, 1922 (to be hereinafter referred to as the Act) against the decision of that Court in a reference under section 66 (1) of that Act.
The two questions of law referred to the High Court by the tribunal are : (1) Whether section 16(3) of the Act was ultra vires the Central Legislature and (2) Whether on the facts and in the circumstances of the case, the income arising to the three minor sons of the assessee by virtue of their admission to the benefits of the partnership of Messrs. Ajitmal Kanhaiyalal was rightly included in the total income of the assessee under section 16 (3) (a) (iv) of the Act.
The assessee at whose instance those question were referred did not press for an answer in respect of question No. 1.
Therefore that question was not dealt with by the High Court.
Hence we need not go into that question.
The High Court answered the second question in favour of the assessee.
The facts necessary for the purpose of deciding the point in dispute as set out in the statement of the case submitted by the tribunal are as follows : The assessee Shri Ajitmal Parekh was a partner of the firma M/s. Ajitmal Kanhaiyalal having annas share therein.
He continued to be a partner of that firm till July 1, 1954 which was the last date of the accounting year of the firm, relevant for the, assessment year 1955 56.
On July 1, 1954, the assessee retired from the firm.
Thereafter he gifted to each of his four sons Rs., 75,000/ .
Out of his four sons, three were minors at that time.
There was a reconstitution of the firm with effect from July 2, 19.54 as evidenced by the partnership deed dated July 5, 1954.
The major son of the assessee became a partner of the reconstituted firm and his minor sons were admitted to the benefits of that partnership in the reconstituted firm.
The major son had 2 annas share.
His three minor brothers were admitted to the benefits of the partnership, each one of them having 2 annas share.
In the assessment year 1956 57, the Income tax Officer held that the income arising to the minors by virtue of their admission to the benefits of the partnership came within the purview of section 16(3) (a) (iv) of the Act.
He included that income in the total income of the assessee for that year.
In appeal the Appellate Assistant Commissioner substantially upheld the order of assessment made by the Income tax Officer but he held that the 2Supe Cl/7C 6 310 minors were entitled to only 1 9 pies share in the firm.
The assessee took up the matter in appeal to the Income tax Appellate 'Tribunal.
The tribunal upheld the decision of the Appellate Assistant Commissioner.
On the facts found by the tribunal, the High Court came to the conclusion that answer to question No. 2 should be in the negative and in favour of the assessee.
The tribunal found that the capital invested by the minors in the firm came from the gift made in their favour by their father, the assessee.
That finding was not open to question before the High Court nor did the High Court depart from that finding.
But on an interpretation of section 16(3) (a) (iv) the High Court opined that the answer to the question must be in favour of the assessee.
Section 16(3) (a) (iv) reads "In computing the total income of any individual for the purpose of assessment, there shall be included (a) so much of the income of a wife or minor child of such individual as arises directly or indirectly.
(iv) from assets transferred directly or indirectly to the minor child, not being a married daughter by such individual otherwise than for adequate consideration.
" Before any income of a minor child can be brought within the scope of section 16(3) (iv), it must be established that the said income arose directly or indirectly from assets transferred directly or indirectly by its father.
There is no dispute that the assessee had transferred to each of his minor sons, a sum of Rs. 75,000,/ .
It may also be that the amount contributed by those minors as their share in the firm came from those amounts.
But the question still remains whether it can be said that the income with which we are concerned in this case arises directly or indirectly from the assets transferred by the assessee to those minors.
The connection between the gifts mentioned earlier and the income in question is a remote one.
The income of the minors arose as a result of their admission to the benefits of the partnership.
It is true that they were admitted to the benefits of the partnership because of he contribution made by them.
But there is no nexus between the transfer of the assets and the income in question.
it cannot be said that that income arose directly or indirectly from the transfer of the assets referred to earlier.
Section 16(3) of the Act created an artificial income.
That section must receive strict construction as observed by this Court in Commissioner of Income Tax, Gujarat vs Keshavlal Lallubhai Patel(1).
In our (1) 311 judgment before an income can be held to come within the ambit of section 16(3), it must be proved to have arisen directly or indirectly from a transfer of assets made by the assessee in favour of his wife or minor children.
The connection between the transfer of assets and the income must be proximate.
The income in question must arise as a result of the transfer and not in some manner connected with it.
V.P.S. Appeal dismissed.

summary:
The assessee was a partner in a firm.
On the last day of the accounting year of the firm, namely, 1st July 1954 he retired from the firm and gifted 'to each of his four sons Rs. 75,000.
The firm was reconstituted and the first son, who was a major, became a partner in the firm.
The other sons who were minors, became entitled to the benefits of the partnership because, they invested in the firm the amounts received by them as gifts from their father.
In the assessment year 1956 57 the Income tax Officer held that the income arising to the minors by virtue of their admission to the benefits of the partnership, came within the purview of section 16(3) (a) (iv) of the Income tax Act, 1922, and included that income in the total income of the assessee.
The order was confirmed by the Appellate Assistant Commissioner and the Tribunal, but the High Court on a reference, held in favour of the assessee.
In appeal to this Court, HELD : The section creates an artificial income and must be construed strictly, that is.
before an income can be held to come within the ambit of section 16(3) it must be proved to have arisen directly or indirectly from a transfer of assets made by the assessee in favour of the minor children.
The connection between the transfer and the income must be proximate.
It must arise as a result of the transfer and not in some manner connected with it.
[310 H; 311 A E] In the present case, the income of the minors arose as a result of their admission to the benefits, of partnershiip and there is no proximate nexus between the transfer and the income.
[310 G] C.I.T., Gujarat vs Keshavlal Lallubhai Patel, followed.


judgement:
Appeals Nos.
23 5 and 236 of 1967.
Appeals from the judgment and order dated March 21, 1966 of the Mysore High Court in Income tax Referred Case No. 19 of 1964.
Jagadish Swarup, Solicitor General, G. C. Sharma and B. D. Sharma, for the appellant (in both the appeals).
R. Gopalakrishnan, for the respondent (in both the appeals).
353 The Judgment of the court was delivered by Grover, J.
These appeals by certificate arise out of a common judgment of the Mysore High Court in references made with regard to the assessments relating to the assessment years 1953 54 and 1954 55.
For the assessment year 1953 54 the assessee was served with a notice under section 22(2) of the Income tax Act 1922, hereinafter called the "Act", on March 5, 1954.
A similar notice was served in respect of the assessment year 1954 55 on June 5,.1954.
The assessee failed to file any return in compliance with the notices.
Thereupon he was served with notices under section 22(4) for both the assessment years and was required to produce accounts on specified dates.
None appeared on any one of those dates but applications were submitted praying for adjournment on certain grounds.
The Income tax Officer was not satisfied with the reasons given for seeking adjournments and he proceeded to make the assessment under section 23 (4) of the Act.
The assessee moved the Income Tax Officer under section 27 to reopen the assessments on the grounds given in the applications filed in that behalf.
The Income Tax ' Officer appeared to be satisfied that there was sufficient cause for noncompliance with the notices issued under section 22(4) of the Act but he was of the view that the assessee had been a habitual defaulter inasmuch as he had not submitted the return under section 22 (2) even for several preceding years for which the assessments had to be completed under section 23(4) of the Act.
He declined to reopen the assessment under section 27.
Appeals to the Appellate Assistant Commissioner were filed.
According to the Appellate Assistant Commissioner sufficient cause for non compliance with one of the statutory notices i.e. the notice under section 22(4) could not constitute 'sufficient cause for non compliance with any other statutory notice (in this case the notice under section 22(2)).
The appellate tribunal dismissed the appeals filed by the assessee upholding the view of the departmental authorities.
On the tribunal having declined to refer the questions of law which were sought to be referred the High Court directed the Tribunal to state a case and refer the following questions of law "Whether the Income Tax Officer having recorded a finding that there was sufficient cause for non compliance with the notice issued under Section 22(4), was not bound to cancel the assessment made under Sec.
23(4) and to proceed to make a fresh assessment even though there was no sufficient cause for non compliance with the notice under Sec.
22(2) ?" 354 The High Court answered the question in favour of the assessee.
Section 27 of the Act is in the following terms : section 27.
"Cancellation of assessment when cause is shown.
Where an assessee within one month from the service of a notice of demand issued as hereinafter provided, satisfies the Income Tax Officer that he was prevented by sufficient cause from making the return re quired by section 22, or that he did not receive the notice issued under sub section (4) of section 22, or sub section (2) of section 23, or that he had not a reasonable opportunity to comply, or was prevented by sufficient cause from complying with the terms of the last mentioned notices, the Income Tax Officer shall cancel the assessment and proceed to make a fresh assessment in accor dance with the provisions of section 23.
" Section 22 provides for return of income.
Sub section ( 1 ) relates to a general notice to be given each year by the Income Tax Officer by publication in the press or in the prescribed manner.
Subsection (2) relates to an individual notice.
According to sub section
(4) the Income Tax Officer may serve on any person who has made a return under sub section
(1) or upon whom a notice has been served under sub section
(2) a notice requiring him on a date to be specified to produce or cause to be produced such account or documents as the Income Tax Officer may require or to furnish in writing and verified in the prescribed manner in such form and on such points or matters as may be required for the purpose of the section including, with the previous approval of the Commissioner, a statement of assets and liabilities not included in the accounts.
Under section 23 if the Income tax Officer is satisfied without requiring the presence of the assessee or the production by him of any evidence that a return made under section 22 is correct and complete he has to assess the total income of the assessee on the basis of the return filed by him [sub. section (1)].
If he is not so satisfied he must serve a notice requiring the person who has made the return to attend at his office or to produce or cause to be produced any evidence on which such person may rely in support of his return [sub. section (2)].
Under sub section
(3) the Income tax Officer after hearing such evidence as may be produced by the person making the return in response to the notice issued under sub section
(2) or such other evidence as the Income tax Officer may require to be produced on specified points has to assess the total income of the assessee.
It is provided by sub section
(4) "If any person fails to make the return required by any notice given under sub section (2) of section 22 and 355 has not made a return or a revised return under subsection (3) of the same Election or falls to comply with all the terms of a notice issued under sub section (4) of the same section or, having made a return, fails to comply with all the terms of a notice issued under sub section (2) of this section, the Income Tax Officer shall make the assessment to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment. .
The High Court considered that the provisions of section 27 were not cumulative but disjunctive and so the assessee could claim cancellation of the assessment on one of the grounds on which such cancellation could be sought under the section.
According to the High Court it followed that even if there was no sufficient cause for noncompliance with a notice issued under section 22(2) so long as there was sufficient reason for non compliance with the notice issued under section 22(4) the assessee could ask for the cancellation of the assessment.
In our judgment the view of the High Court cannot be sustained.
The clear import of section 23(4) is that on committing any one of the defaults mentioned therein the Income tax Officer is bound to make the assessment to the best of his judgment.
In other words if a person fails to make the return, required by a notice under section 22(2) and he has further not made return or a revised return under sub 5.
(3) of the same section the Income tax Officer must make an assessment under section, 23(4).
Similarly if that person fails to comply with all the terms of the notice issued under section 22(4) or if he fails to comply with all the terms of the notice issued under section 23(3) the Income tax Officer must proceed to make an assessment to the best of his judgment.
Section 27 empowers the Income tax Officer to cancel the assessment when sufficient cause is shown but such causer has to be shown for each default.
For the sake of illustration, if an assessee makes a default under section 22(2) by not filing a return, pursuant to a notice received under that section and he also does not comply with the notice under section 22(4) he must show sufficient cause for non compliance with both the provisions and he cannot get the assessment cancelled merely by showing good cause for one of the two defaults.
Although the word "or" which is disjunc tive is used in section 27 it has to be read in a reasonable and harmonious way and in conjunction with section 23(4).
It is inconceivable that the legislature could ever intended that in case of ' multiple defaults for each one of which an ex parte best judgment.
assessment has to be made the assessee can ask for cancellation of ' the assessment by merely showing cause for one of such defaults.
In our opinion the Bombay High Court in Chiranjilal Tibrewala vs 356 The Commissioner of Income tax, Bombay City II(1) was right in holding that in circumstances similar to the present case the assessee cannot ask for cancellation under section 27 of an assessment made under section 23 (4).
In this view of the matter the judgment of the High Court has to be set aside, and the question has to be answered against the assessee and in favour of the appellant.
The appeals are accordingly allowed with costs One hearing fee.
V.P.S. Appeals allowed.

summary:
Notices under section 22(2) of the Income tax Act, 1922, were not complied with by the respondent (assessee) and the Income tax Officer issued notices under section 22(4).
Since they were also not complied with the Income tax Officer made a best judgment assessment under section 23(4).
Thereupon, the assessee applied under section 27 for reopening the assessment.
The Income tax Officer found that there was sufficient cause for noncompliance with the notices under section 22(4), but, as there was no sufficient cause for non compliance with the notices under section 22(2), he declined to reopen the assessment.
The order was confirmed in ' appeal and by the Tribunal.
But the High Court held in favour of the assessee.
In appeal to this Court, HELD : Under section 23(4) on the assessee committing any of the defaults mentioned therein, namely, failure to make a return as required by a notice under section 22(2) or a revised return under section 22(3) or noncompliance with the terms of a notice under section 22(4) or failure to comply with the terms of a notice under section 23(2), the Income tax Officer is bound to make a best judgment assessment.
Section 27 empowers, the Income tax OfFicer to cancel the assessment when sufficient cause is shown; but, such cause has to be shown for each default.
Therefore, if the assessee makes default by not filing a return pursuant to a notice under section 22(2) and also does not comply with a notice under section 22(4) he must show sufficient cause for non compliance with both the provisions.
The Legislature could not have intended that in case of multiple defaults, for each one of which an ex parts best judgment assessment has to be made, the assessee can ask for cancellation of the assessment by merely showing cause for one of such defaults.
[355 D H] Chiranjilal Tibrewala vs Commissioner of Income tax, Bombay City H, , approved.


judgement:
Appeals Nos.
2269 and 2270 of 1966.
Appeals by special leave from the judgment and order dated ' May 17, 1966 of the Commissioner of Wealth Tax, Andhra.
Pradesh in J. No. Wt.
3(4) and 3(5) of 1959 60.
A. K. Sen, B. P. Maheshwari and N. R. Kaitan, for the appellant (in both the appeals).
section Mitra, G. Das, R. N. Sachthey and B. D. Sharma, for the respondent (in both the appeals).
The Judgement of the Court was delivered by Shah, J.
In proceedings for determination of wealth tax for the assesment years 1957 58 and 1958 59 the appellant Com pany claimed depreciation allowance on plant, building and machinery at the rates prescribed under the Income Tax Act and the Rules framed thereunder.
The Wealth Tax Officer adopted the method prescribed by section 7 sub section
(2) of the Wealth Tax Act and ' admitted the value of the assets as shown in the certified balance sheets on the respective valuation dates.
In appeal, the Appellate Assistant Commissioner of Wealth Tax confirmed the order passed by the Wealth Tax Officer.
The, Company then moved revision applications before the Commissioner of Wealth Tax under section 25 of the Wealth Tax Act.
Against the order passed by the Commissioner of Wealth Tax rejecting the applications, the.
Company has filed these appeals under article 136 of the Constitution.
Against the orders of the Appellate Assistant Commissioner appeals lay to the Income tax Appellate Tribunal, but the Company preferred revision applications before the Commissioner.
We do not ordinarily encourage an aggrieved party to appeal directly to this Court against the order of a Tribunal exercising judicial functions under a taxing statute, and thereby to bypass the normal procedure of appeal and reference to the High Court, but in the present case, it appears to us that a question of principle of great importance arises.
We have entertained these appeals because in our judgment the, Commissioner of Wealth Tax has surrendered his authority and judgment to the Board of Revenue in deciding the questions which were sought to be raised by the Company in its revision applications.
Section 25 of the Wealth Tax Act provides insofar as it is, material "(1) The Commissioner may, either of his own ,notion or on application made by an assessee in this 306 behalf, call for the record of any proceeding under this Act in which an order has been passed by any authority subordinate to him, and may make such inquiry, or cause such inquiry to be made, and, subject to the provi sions of this Act, pass such order thereon, not being order prejudicial to the assessee, as the Commissioner thinks fit The power conferred by section 25 is not administrative it is quasi_judicial.
The expression "may make such inquiry and pass such order thereon" does not confer any absolute discretion on the Commissioner.
In exercise of the power the Commissioner must bring to bear an unbiased mind, consider impartially the objections raised by the aggrieved party, and decide the dispute according to procedure consistent with the principles of natural justice : he cannot permit his judgment to be influenced by matters not disclosed to the assessee, nor by dictation of another authority.
Section 13 of the Wealth Tax Act provides that all officers and other persons employed in the execution of this Act shall observe and follow the orders, instructions and directions of the Board.
These instructions may control the exercise of the power of the officers of the Department in matters administrative but not quasi judicial.
The proviso to section 13 is somewhat obscure in its import.
It enacts that no orders, instructions or directions shall be given by the Board so as to interfere with the discretion of the Appellate Assistant Commissioner of Wealth Tax in the exercise of his appellate functions.
It does not, however, imply that the Board may give any directions or instructions to the Wealth Tax Officer or to the Commissioner in exercise of his quasi judicial function.
Such an interpretation would be plainly contrary to the scheme of the Act and the nature of the power conferred upon the authorities 'invested with quasi judicial power.
The Commissioner appears, in our judgment, ' to have wholly misapprehended the true character of the jurisdiction with which he is by the Act entrusted and has surrendered his judgment to the directions of the Board of Revenue.
The order sheet of the Commissioner (at pp.
10 36 of the printed Paper Book) bears,eloquent testimony to the manner in which the Commissioner has merely carried out the directions of the Board of Revenue, instead of deciding the case according to his own judgment.
In entry dated December 31, 1959, there is a reference to the instructions contained in the Board 's Circular No. 7 D (WT) of 59 dated November 12, 1959 received on November 30, 1959.
Under entry dated April 28, 1960 there is again a reference to the Board 's Circular No. 7 D of 1959 suggesting the manner in 307 which depreciation has to be worked out for the purpose of determining wealth tax.
Again in the entry dated June 17, 1960 under item No. 4 it is stated that the Board 's instructions were, "specific on the point that no adjustment to depreciation relating to the period prior to March 31, 1957 should be made while determining the total wealth of an assessee on the basis of global valuation '.
Under entry dated August 7, 1963, recorded by the Inspector, it is stated that "upon reference to the Board for instructions, it was recommended that the petitions be kept pending decision of the matter till" it was decided by the High Court in which the same question was raised.
When on January 27, 1966, the Company requested that the applications be kept pending till the disposal of the reference application by the High Court for the assessment year 1959 60 in which a similar point was involved, the Commissioner was of the view that ' the application need not be kept pending, but still directed "write to the Board '.
A letter was written to the Board and the Commissioner acted according to the directions of the Board, There is another entry dated March 14, 1966 which refers to the letter of the Board agreeing that the revision applications for the two years may be rejected, It is unnecessary to refer to any more entries made in the case sheet maintained by the Commissioner of Wealth Tax.
From the inception of the proceedings the Commissioner of Wealth Tax put himself in communication with the Board of Central Revenue and sought instructions from that authority as to how the revision applications filed before him should be decided.
He exercised no independent judgment.
The Commissioner also recorded that the case did not require a personal hearing but since the Director of the Company had made a personal request for an interview it was "thought desirable" from "the point of view of public relations to give an interview.
" Here also the Commissioner misconceived the nature and extent of his jurisdiction.
Counsel appearing on behalf of the Commissioner of Wealth Tax in these appeals has not attempted to support the order under appeal.
We set aside the order passed by the Commissioner and direct that the revision applications be heard and disposed of according to law and uninfluenced by any instructions or directions given by the Board of Revenue.
The Company will get its costs in this Court.
One hearing fee.
R.K.P.S. Appeal allowed.

summary:
The Appellate Assistant Commissioner of Wealth Tax confirmed an orde Passed by the Wealth Tax Officer as regards the method adopted by the latter in dealing with a claim for depreciation allowance made by the appellant company in the course of its assessment to wealth tax.
The appellant company thereafter moved revision applications before the Com, missioner under section 25 of the Wealth Tax Act and the Commissioner rejected these applications on the basis of certain directions issued by the Board of Revenue.
On appeal to this Court by special Leave, HELD : The order passed by the Commissioner must be, set aside and 'the revision applications must be heard and disposed of according to law and uninfluenced by any instructions or directions given by the Board of Revenue.
[307 G H] It Was clear, on the facts, that from the inception of the proceedings, the Commissioner put himself in communication with the Board of Central Revenue and sought instructions from that authority 'as to bow the, revision applications filed before him should be decided.
He had exercised no independent judgment.
The Commissioner appeared to have misapprehended the true character of the jurisdiction with which he is by the Act entrusted and surrendered his judgment to the directions of the Board of Revenue.
[306 F G; 307 E G] The power conferred by section 25 is not administrative : it is quasi judicial.
In exercise of this power the Commissioner must bring to bear an unbiased mind.
consider impartially the objections raised by the aggrieved party.
and decide the dispute according to procedure consistent with the principles of natural justice; he cannot permit his judgement to be influenced by matters not disclosed to the assesseee, nor by dictation of another authority.
Any orders or instructions given by the Board and required to be followed under section 13 by officers employed in the, execution of the Act may control the exercise of their power in matters administralive but not quasi judicial.
Although the proviso to section 13, which.
is somewhat obscure in its import, enacts that no orders shall be given by the Board so as to interfere with the discretion of the Appellate Assistant Commissioner in the exercise of his appellate functions, it does not thereby imply that the Board may give such orders to the Wealth Tax Officer or to the Commissioner in exercise of his quasi judicial function, Such an interpretation would be plainly contrary to the scheme of the Act and the nature of the power conferred upon the authorities invested with quasijudicial power.
[306 B F] 305


judgement:
l Appeals Nos. 1277 to 1279 and 1280 to 1282 of 1966.
Appeals by special leave from, the judgment and order dated ,October 14, 1966 of the Punjab High Court in Income tax Refer ence No. 16 of 1962.
B. Sen, section K. Aiyar, B. D. Sharma and R. N. Sachthey, for the appellant (in C.As.
1277 to 1279 of 1966) and the respondent (in C.As.
Nos. 1280 to 1282 of 1966).
Bishan Narain and A. N. Goyal, for the respondents (in C.As.
1277 to 1279 of 1966) and the appellants (in C.As.
Nos. 1280 to 1282 of 1966).
The Judgment of the Court was delivered by Shah, J.
Balkishan Das, Debi Prasad and Jai Ram Das were partners in a trading venture, conducted in the name of the 12 Sup.
C 1/70 11 390 Ambala Flour Mills, Ambala.
On April 29, 1948, Jai Ram Das commenced an action for dissolution and for account of the partnership business.
The Trial Court decreed the suit.
In appeal to the District Court, the decree was reversed.
On appeal under the Letters Patent from the judgment of a single Judge, the High Court of Punjab by order dated September 26, 1951 restored the decree of the Trial Court and declared that the partnership stood dissolved on April 29, 1948.
The High Court observed: ". notwithstanding the dissolution of 'the firm Debi, Parshad and Balkishan Dass carried on the business of the firm with the property of the firm.
On these facts, Jairarn Dass plaintiff is entitled at the option of himself to such share of the profits made since he ceased to be a Partner as may be attributable to the use of his share of the property of the firm or interest at the rate of six per cent per annum on the amount of his share in the property of the firm.
" During the pendency of the suit Balkishan Dass severed his connection with the business and the business was carried on thereafter by Debi Parshad alone.
In the assessment year 1950 51, Debi Parshad filed three returns of income (i) on 4 10 1950 in the status of a firm, (ii) on 14 4 1951 in the status of an individual and (iii) on 1 7 1951 in the status of firm consisting of Jai Ram Das and Debi Parshad, partners.
For the assessment year 1951 52, Debi Parshad filed a return in the status of an unregistered firm.
For the assessment year 1952 53 Debi Parshad submitted a return in the status of a Hindu Undivided Family.
The Income tax Officer assessed the Ambala Flour Mills in the three years of assessment in the status of "an association of persons".
In appeals by Debi Parshad, the Appellate Assistant Commissioner, "annulled" the , orders of ' assessment of the assessee in the status of association of persons be set aside and that the case be remanded to the Income tax Officer to assess the income as "the income of the family of Debi Parshad".
In appeals by Debi Parshad, the Income tax Appellate Tribunal confirmed the orders of the Appellate Assistant Commissioner annulling the assessment made by the Income tax Officer and directed that the direction for assessing the income in the hands of Debi Parshad be deleted.
The Tribunal referred the following three questions at the instance of the Commissioner of Income tax.
1 "Whether L. Debi Parshad was a stranger in respect of the income tax proceedings against Ambala Flour Mills ? 391 2.
Whether the Appellate Assistant Commissioner could give a direction in the case of Ambala Flour Mills to the effect that the income should be assessed in the hands of L. Debi Parshad after annulling the assessment in the case of Ambala Flour Mills 3.
Whether on the facts and in the circumstances of the case the appeals.
filed by Shri Debi Parshad were maintainable in law The High Court answered the first question in the negative; the second in the affirmative with the rider that the assessment against Debi Parshad "could only be in individual capacity"; and the third question in the affirmative.
Debi Parshad was competent to maintain the appeals filed by him to the Tribunal because by the order of the A appellate Assistant Commissioner, it was directed that he may be personally assessed by the Income tax Officer in respect of the Income of the Ambala Flour Mills.
Counsel for Debvi Parshad, however, contended that Debi Parshad was a stranger to the assessment proceedings and the, Appellate Assistant Commissioner had no jurisdiction to direct after setting aside the order of assessment that Debi Parshad be assessed personally in respect of the income of the Ambala Flour Mills.
The relevant provisions of the Income Tax Act may be: noticed.
The relevant provisions of section 31 of the Income Tax Act, 1922, are these : "In disposing of an appeal, the Appellate Assistant Commissioner may, in the case of an order of assessment : (a) confirm, reduce, enhance or annual the assessment; (b) set aside the assessment and direct the Income tax 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, and the Income tax Officer shall thereupon proceed of make such fresh assessment. . (4) "Where as the result of an appeal, any change in, the assessment of a firm or association of ' persons or new assessment of a firm or associa 392 tion 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 '.
All the returns have been filed by Debi Parshad but in dif ferent capacities.
The Income tax Officer was of the view that the business was carried on by an association of persons and the income from the business was liable to be brought to tax on that footing.
The Appellate Assistant Commissioner was of the view that the income belonged to Debi Parshad and he was liable to be assessed personally in respect of the income.
Evidently the Income tax Officer held that Debi Parsbad was a member of an association of persons.
Since the Appellate Assistant Commissioner set aside the ' order assessing the income in ' the status of " association of individuals", he had to give directions with regard to the assessment of the income, provided the assessment was not barred by the law of Limitation.
Section 34 subsection 3 prescribes for the period in which assessment proceedings shall be completed.
The section at the date of assessment by the Income tax Officer read as follows: "No order of assessment or re assessment, other than an order of assessment under section 23 to which clause (c) of sub section (1) of section 28 applies or an order of assessment or reassessment in cases falling within clause (a) of sub section (1) or sub section (IA) of this Section shall be made after the expiry of four years from the end of the year in which the income, profits or gains were first assessable: Provided further that nothing contained in this section limiting the time within which any action may be taken.
or any order, assessment or re assessment may be made, shall apply to a re assessment made under section 27 or to an assessment or re assessment made on the assessee or any person in consequence of or to give effect to any finding or direction contained in an order under section 31, section 33, section 33A, section 33B, section 66 or section 66A".
The assessment of tax had according to the law at the rele vant time.
in force, ordinarily, to be completed by the Income tax Officer within four years from the last date of the year of assessment in which the income, was first assessable.
But to this 393 rule there were several exceptions.
If the assessment had to be made on the assessee or any person 'm consequence of or to give effect to any findings or direction contained in an order of the Appellate Assistant Commissioner or of the Appellate Tribunal or of the Commissioner in revision or of an order made in a reference, the assessment could be made even after the expiry of the four years.
The exception applied to an assessment made against the assessee or any person in consequence of, or to give effect to any finding or direction contained in the order of any superior tribunal, or 'the High Court or this Court.
This Court in section C. Prashar and another vs Vasantsen Dwarkadas and others(1) held that the second proviso to section 34(3) of the Incometax Act, 1922, insofar as it authorised the assessment or reassessment of any person other than the assessee after the expiry of the period of limitation specified in section 34 in consequence of or to give effect to a finding or direction given in an appeal, revision or reference arising out of the proceeding in relation to the assessee violated the provisions of article 14 of the Constitution and was invalid to that extent.
In a later case Income tax Officer, Award, Sitapur vs Murli dhar Bhagwan Das(1) this Court explained the connotation of the expression "any person" as used in section 34 sub section
(3) proviso 2 at p. 346 : "Theexpression 'any person ' in its widest connotation may take in any person, whether connected or not with theassessee, whose income for any year has escaped assessment, but this construction cannot be accepted, for the said expression is necessarily circum scribed by the scope of the subject matter of the appeal or revision as the case may be.
That is to say, that person must be one who would be liable to be assessed for the whole or a part of the income that went into the assessment of the year under appeal or revision.
If so construed, we must turn to section 31 to ascertain who is that person other than the appealing assessee who can be liable to be assessed for the income of the said assessment years.
A combined reading, of section 30(1) and section 31(3) of the Act indicates the cases where persons other than the appealing assessee might be affected by orders passed by the Appellate Commissioner.
Modification or setting aside 'of assessment made on a firm, joint Hindu family, association of persons, for a particular year may affect the assessment for the said year on a partner or partners of the firm, member or members of the Hindu Undivided family (1) ; (1) 394 or the individual, as the case may be.
In such cases,.
though the latter are not eo nomine parties to the appeal, their assessments depend upon the assessment of the former.
The said instances are only illustrative.
It is not necessary to pursue the matter further.
We would, therefore, hold that the expression 'any person ' in the setting in which it appears must be confined to a person intimately connected in the aforesaid sense with the assessments of the year under appeal.
" In Commissioner off Income tax, U.P. vs Kanpur Coal Syndi cate(1) this Court held that where the income tax Officer assessed the income of an association of persons under section 31(3).(b) the Appellate Assistant Commissioner was competent to set aside the assessment and to direct the Income tax Officer to assess the members individually.
The Court observed that the Appellate Assistant Commissioner bad under the Act plenary powers in disposing of an appeal, the scope of his powers being conterminous with that of the Income tax Officer: he can do what the Income tax Officer can do and can also direct the Income tax Officer to do what he has failed to do.
Debi Parshad had submitted the returns, and Debi Parshad, appealed against the order of assessment.
He could, in the circumstances of the case, not be called a stranger to the assessment.
The income earned by the assessee was assessed to tax as income of an association of persons, of which on the finding ,of the Income tax Officer, Debi Parshad was a member.
In making a direction against Debi Parshad the Tribunal did not exercise his powers qua a stranger to the assessment proceeding.
,Civil Appeal Nos. 1280 1282 of 1966 must therefore fail.
The Appellate Assistant Commissioner had directed that the income in the three assessment years be assessed in the hands of the family of Debi Parshad, apparently on the view that Debi, Parshad represented the Hindu Undivided family of Which he was a member.
The Tribunal set aside the direction to assess the income of the Ambala Flour Mills in the hands of Debi Parshad.
personally.
for in their view Debi Parshad was a stanger to the proceeding for assessment.
The High Court held, that the ,order of the Appellate Assistant Commissioner directing assessment of "the family of Debi Parshad" was "clearly unwarranted and could relate only ot Debi Parshad in his individual capacity".
Appeals Nos. 1277 to 1279 of 1966 were filed against that part of the order of the High Court by which they sought to ,modify the order of the Appellate Assistant Commissioner.
The (1) 395 High Court exercising advisory jurisdiction was incompetent to amend the order of the Appellate Assistant Commissioner.
But on the question referred to the High Court, no inquiry into the power of the Appellate Assistant Commissioner to make the impugned direction was competent.
The second question only related to the assessment of the income in the hands of Debi Parshad after annulling the assessment of the Ambala Flour Mills.
It was not contended before the Tribunal that the income of the Ambala Flour Mills could not be assessed in the hands of the family of Debi Parshad.
The competence of the Appellate Assistant Commissioner to make the direction was not and could not be referred to the High Court.
Appeals Nos. 1277 to 1279 of 1966 filed by the Commissioner therefore fail.
There will be no order as to costs in all the appeals.
G.C. Appeals dismissed.

summary:
D. B and J were partners in a firm which carried on the business entitled the Ambala Flour Mills.
On April 29, 1948 J filed a suit for the dissolution of the firm.
The litigation ended with the judgment of the Panjab High Court delivered on September 25, 1951.
According to the judgment the partnership stood dissolved with, effect from the date of the filing of the suit, but since the firm had continued to use J 's share in the property of the firm after that date he was held entitled to a corresponding shares in the profits of the firm after that date, or at his option, to interest at six per cent on the value of his share in the property of the firm.
During the pendency of the suit B also served his connection with the business which was thereafter carried on by D alone.
In the assessment year 1950 51 D filed three returns of income : (i) on 4 10 50 in the status of a firm; (ii) on 14 4 51 in the status of an individual; and (iii) on 1 7 51 in the status of a firm consisting of J and D partners.
For the assessment year 1951 52 D filed a return in the status of an unregistered firm.
For the assessment year 1952 53 D submitted a return in the status of a Hindu Undivided Family.
The income tax Officer assessed the Ambala Flour Mills in the three years of assessment in the status of an association of persons.
In appeals by D the Appellate Assistant Commissioner annulled the orders of assessment and remanded the case to the Income tax Officer with a direction that the income be assessed as the income of the family of D.
In appeals by D the Income tax Appellate Tribunal confirmed the order of annulment but ordered that the direction to assess the income in the hands of D be deleted.
The Tribunal 's order was based on the view that D was a stranger to the assessment proceedings.
At the instance of the Commissioner of Income tax the following questions were referred to the High Court : (i) Whether D was a stranger in respect of the income tax proceedings against Ambala Flour Mills ? (ii) Whether the Appellate Assistant Commissioner could give a direction in the case of Ambala Flour Mills to the effect that the income should be assessed in the hands of D after annulling the assessment in the case of the Ambala Flour Mills ? (iii) Whether on the facts and in the circumstances of the case the appeals filed by D were maintainable in law? 'Me High Court answered the first question in the negative, the second in the affirmative with the rider that the assessment against D 'could only be in his individual capacity '; and the third question in the affirmative.
Appeals were filed in this Court by both the parties.
In this appeal the Commissioner of Income tax questioned the order of the High Court by which they sought to modify the order of the Appellate Assistant Commissioner.
389 HELD : (i) The first and third of the questions referred to it were correctly answered by the High Court.
(a) D was competent to maintain the appeals filed by him to the Tribunal because by the order of the Appellate Assistant Commissioner it was directed that he may be personally assessed by the Income tax Officer in respect of the income of the Ambala Flour Mills.
[391 C D] (b) In making a direction against 'D ' the Appellate Assistant Commissioner did not exercise his powers qua a stranger to the assessment proceeding.
D had submitted returns and had also appealed against the orders of the assessment.
The income earned by the assessee was assessed to tax as income of an association of persons of which on finding of the Income tax Officer 'D ' was a member.
:Since the Appellate Assistant Commissioner set aside the order assessing the income in the status of association of individuals, he had to give directions with regard to the assessment of the income.
He was competent to give the directions in view of the provisions of section 31 read with section 34(3) of the Income tax Act, 1922 and the interpretation placed on the litter section by this Court in the cases of Murlidhar Bhagwan Das and Kanpur Coal Syndicate.
[392 G E; 394 D F] Commissioner of Income tax, U.P. vs Kanpur Coal Syndicate, and Income tax Officer, 'A Ward, Sitapur vs Murlidhar Bhagwan 'Das, , applied.
section C. Prashar and another vs Vasantsen Dwarkadas and others, , referred to.
(ii) The High Court exercising advisory, jurisdiction was incompetent to amend the order of the Appellate Assistant Commissioner.
On the question referred to the High Court, no inquiry into the power of the Appellate Assistant Commissioner to make the impugned direction was competent.
The second question only related to the assessment of the income in the hands of D after annulling the assessment of the Ambala Flour Mills.
it was not contended before the Tribunal that the income of the Ambala Flour Mills could not be assessed in the hands of the family of 'D The competence of the Appellate Assistant Commissioner to make the direction could not be and was not referred to the High Court.
[395 ,k C]


judgement:
Appeals Nos. 2538 and 2539 of 1966.
Appeals by special leave from the judgment and order dated March 26, 1965 of the Calcutta High Court in Income tax Reference No. 120 oF 1961.
D. Pal, T. A. Ramachandran and D. N. Gupta, for the appel lant (in both the appeals).
B. Sen, section K. Aiyar and B. D. Sharma, for the respondent (in both the appeals).
The Judgment of the Court was delivered by Shah,, J.
The appellant is a public limited company doing business as a dealer in diverse commodities, and also in stocks and shares.
The Company maintains ' its accounts according to the calendar year.
In the year of account 1949 the Company suffered a loss of Rs. 3,71,700 in the sale of share of public limited companies.
In proceedings for assessment of income tax for the assessment year 1950 51, the lncome tax Officer disallowed the claim to set off loss against the profits from transactions in other commodities in that year.
The appeal filed before the Appellate Assistant Commissioner was unsuccessful.
But the Appellate Tribunal upheld the claim of the Company.
In the meanwhile assessment for the year 1951 52 was com pleted, and the income of the Company was computed at Rs. 1,00,777.
In proceedings for assessment of income for the assessment year 1952 53 the Income tax Officer computed the income of the Company from its business at Rs. 3,39,899 and declined to take into account the loss suffered by the Company in the share transactions.
In the view of the Income tax Officer, even if the loss be treated as a trading loss it could not be set off against the business income of the Company, because the loss resulted from transactions in shares which constituted a business distinct from the business in other commodities.
384 In appeal against the order to the Appellate Assistant Com missioner, the order of the Income tax Officer was confirmed.
The Appellate Assistant Commissioner held that the business in shares and the business in other commodities were not the "same business" within the meaning of section 24(2) of the Income tax Act, 1922, as then in force.
He observed that a common capital, a common set of employees and a common set of accounts and common business premises are not the deciding factors in determining whether the various activities carried on by the assessee constituted one business or separate businesses :" it is the nature of the business which is "the main factor" and where separate profits or loss was ascertainable and the nature of the business was different, the activities could not be held to form one and single unit for the purposes of section 24(2) of the Indian Income tax Act.
The Tribunal disagreed with the Appellate Assistant Commis sioner.
The Tribunal observed that there was complete unity of control and shares were one of a number of commodities in which the Company dealt in the ordinary course of business.
There was, in the view of the Tribunal "no element of diversity or distinction or separateness about the transactions in shares".
Accordingly, the Tribunal upheld the claim of the appellant Company and directed that the loss be set off under section 24 (2) of the Indian Income tax Act then in force.
The Tribunal referred the following question to the High Court of Calcutta : "Whether on the facts and in the circumstances of the case, the business activities of the company to wit, dealings in shares and its dealings in other commodities and selling agency on commission basis constituted the same business within the meaning of section 24 (2) of the Indian Income tax Act ?" The High Court held, following their judgment in Shree Ramesh Cotton Mills Ltd. vs Commissioner of Income tax(1) that the "essential matters to be considered in determining whether the two businesses carried on by the assessee constitute the same business, is about the nature of the two commodities, the manner in which (1) 385 they are conducted being a secondary consideration".
They observed that "unity of control or management, the employment of the same or common finance, the user of the same business premises and the record of the transactions in the same set of books of accounts are matters to be considered only when it is found that two businesses of the same nature.
Merely because the transactions in shares consist of sales and purchase as to dealings in other commodities like sugar, molasses etc.
the two activities cannot be held to form one unit of business", and that the Tribunal erred in holding that because there was complete unity of control and shares formed a part of number of commodities in which the assessee dealt with, the whole trading activity formed one business.
Section 24(2) of the Indian Income tax Act, 1922, as in force in the relevant years, read as follows "Where any assessee sustains a loss of profits or gains, in any year, being a previous year not earlier than the previous year for the assessment for the year ending on the 31st day of March, 1940, under the head "Profits and gains of business, profession or vocation" and the loss cannot be wholly set off under sub section (1), the portion not so set off shall be carried forward to the following year and set off against the profits and gains, if any, of the assessee from the same business, profession or vocation for that year, and if it cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following year, and so on; The section contemplated that the loss which could not be wholly set off against the other income under sub section
(1) could be Carried forward to the following year and set off only against the profits and gains, if 'any, from the same business.
There was difference of opinion among the High Courts as to the meaning of the words "same business".
It is unnecessary to refer to those authorities.
This Court in Commissioner of Income tax Madras vs 386 Prithvi Insurance Company Ltd.(1) set of the test for determining whether two lines of business constitute "same business" within the meaning of section 24(2) at the relevant time.
It was observed at p. 636 "A fairly adequate test for determining whether the two constitute the same business is furnished by what Rowlatt, J., said in Scales vs George Thompson & Co. Ltd. (1927) 13 Tax Cases 831 'Was there any inter connection, any interlacing, any inter dependence, and unity at all embracing those two businesses ? ' "That inter connection, inter lacing, inter dependence and unity are furnished in this case by the existence of common management, common business organisation, common administration, common fund and a common place of business.
" Applying that test in the present case there is no doubt that there is a common management of the share and stock business and other lines of business, unity of trading organization, common employees, common administration, a common fund and a common place of business.
We need not consider whether the ultimate decision of the High Court in Shree Ramesh Cotton Mills Ltd. 's case(2) on which reliance was placed is correct, but we are unable to agree with the High Court that the decisive test for determining whether the two lines of business constitute the same business is the nature of the two businesses.
In our judgment, the Tribunal was right in holding that the share business and other businesses carried on by the appellant Company constituted the same business within the meaning of section 24(2) as that section stood before it was amended in 1955.
Counsel for the Commissioner contended that the Commissioner had applied under section 66(2) to the High Court for calling (1) (2) 387 for a statement of the case from the Tribunal on the following question : "Whether there was any evidence in support of the Tribunal 's finding that there was complete unity of control and that shares formed a part of the commodities in which the assessee company deals regularly from year to year in the ordinary course of its business?" The High Court declined to make an order on that application calling for the statement of the case on the ground that the first ,question was "sufficiently comprehensive" and included inquiry into the question proposed.
In our judgment the decision of the Tribunal is amply supported by the evidence which is referred to in the order of the Tribunal.
Even if the question had been raised and statement of the case had been called for, it could not affect the ultimate result.
The answer to the question referred will be in the affirmative.
The appeals are allowed.
The Commissioner of Income tax to pay the costs of ' the Company in this Court and the High Court.
One hearing fee.
Y.P. Appeals allowed.

summary:
The assessee was a public limited company doing business as a dealer in diverse commodities and also in stocks and shares.
In the year of account 1949 the company suffered loss in the sale of shares of public limited companies.
In proceedings for assessment for the year 1950 51 the Income tax Officer declined to take into account the loss suffered.
In his view if the loss be taken as a trading loss it could not be set off against the business income of the assessee because the loss resulted from transactions in shares which constituted a business distinct from the business in other commodities.
On the question whether the loss could be taken into account and the set off given under section 24(2) of the Indian Income tax Act, 1922 in force in the year of assessment; this Court, HELD : The assessee was entitled to the set off.
Section 24(2) of the Indian Income tax Act, 1922 in force in the relevant year of assessment, contemplated that the loss which could not be wholly set off against the other income under sub section
(1) could be carried forward to the following year and set off only against the profits and gains, if any, from the same business.
A fairly adequate test for deter mining whether the two constitute the same business is 'was there any inter connection, any interlacing, any inter dependence, any unity ' at all embracing those two business ? ' [385 H, 386 A D] Applying this test in the present case there was no doubt that there was a common management of the share and stock business and other lines of business, unity of trading Organisation, common employees, common administration, common fund and a common place of business.
[386 E F] Commissioner of Income tax, Madras vs Prithvi Insurance Company Ltd., followed.
Scales vs George Thompson & Co. (1927) 13 Tax Cases 83 applied.
383 Shree Ramesh Cotton Mills Ltd. vs Commissioner of Income tax doubted.