judgement:
Appeal No. 1593 of 1968.
Appeal from the judgment and order dated, September 20, 1963 of the Calcutta High Court in Income tax Reference ' No. 23 of 1960.
Sachin Chaudhari, T. A. Ramachandran and D. N. Gupta, for the appellant.
D.Narsaraju, R. N. Sachthey and B. D. Sharma, for the respondent.
763 The appellant (hereinafter referred to as the assessee was carrying on the business of crushing sugar cane and gur refining.
M/s. Andrew Yule & Co. were acting as the managing agents of the assessee.
In a letter dated 5th February, 1946 addressed to the share holders of the assessee the managing agents referred, to the alarming increase of Government interference in the affairs of the sugar industry in Bihar and the increase of wages of the workers, as well as the levy of a cess of Government and deterioration in the cane crops.
In view of this state of affairs, the managing agents apprehended a loss and suggested that the company 's affairs should be put on a "less discouraging basis" by accepting the offer of a lease of the company as a running concern from the Standard Refinery & Distillery Ltd. At an extra ordinary general meeting of the share holders of the assessee company held on 5th March, 1946 it was decided to authorise the directors to enter into a lease with the said Standard Refinery & Distillery Ltd. By an indenture of 15th March, 1948 the lease was executed to come into effect retrospectively from 1st June, 1945.
The term of the lease was originally for 5 years commencing from 1st June 1945 with an option to the lessee to continue for further five years and thereafter two further options to the lessee, each for five years, on the same terms and conditions, but subject to the payment of higher rates of royalties and also subject to the option on the part of the assessee company to terminate the lease by a resolution of the shareholders of the company to be held before 30th November in any year after the first two years.
This option of termination of the lease was not exercised by the assessee company.
The consideration of the lease as described in clause 7 of the indenture was royalty payable on the manufacture of sugar and molasses.
The royalty on sugar was to be at the rate of Rs. 75 per hundred maunds of sugar manufactured for the first and second term of five years, at the rate of Rs. 82.50 per hundred maunds of sugar manufactured for the third five year period and at Rs. 90 for the fourth five year period.
The royalty on molasses was to be calculated at 3 pies per maund on all molasses sold during each year of the original period or the renewed period of the lease.
The computation of the royalty was subject to a minimum payment of Rs. 65,000 per annum.
For the assessment year 1955 56 the relevant accounting year of the assessee ended on 31st May, 1954.
In the assessment proceedings for 1955 56 the assessee 's main contention was that the lease granted under the indenture of 15th March, 1948 was a lease of a commercial asset and therefore the income arising from the lease should be assessed under section 10 of the Income Tax Act and the assessee should be allowed depreciation and development rebate in accordance with clause (vi a) and clause (vi b) of sub section (2) of section 10 of the Income 764 Tax Act.
The Income Tax Officer assessed the income under section 12 of the Act as being income under the head "other sources" and held that no additional depreciation or development rebate could be allowed as claimed by the assessee.
According to the assessee, the, income derived from the lease of the sugar factory was income from business because the factory was leased as a going concern and the rent of the building, machinery, plant and spare parts was fixed at a certain rate per maund of sugar produced, and at a certain rate per maund of molasses sold.
On appeal, the Appellate Assistant Commissioner found that it was a simple lease of the building and machinery in a sugar factory, and as such the method of payment based on production could not affect the character and nature of the income derived under the said lease.
In further appeal the Appellate Tribunal came to the conclusion that on the facts stated the case fell under section 12 and not under section 10 and that since sub section (3) of section 12 did not include clauses (vi a) and (vi b) of section 10(2) the claim of additional depreciation and development rebate could not be allowed.
At the instance of the assessee the Appellate Tribunal stated a case to the High Court on the following questions of law under section 66(1) of the Income Tax Act, 1922 (hereinafter referred to as the Act) : "(1) Whether on the facts and in the circumstances of the case, the income of the assessee company was liable to be assessed under section 12 of the Indian Income Tax Act and not under section 10 of the said Act ? (2)Whether on the facts and in the circumstances of the case, additional depreciation and development rebate can be allowed as a deduction ?" The High Court answered both the, questions against the assessee holding that the income was liable to be assessed under section 12 and that no additional depreciation and development rebate could be allowed.
Section 10 of the Act stood as follows at the material time "10.
(1) The tax shall be payable by an assessee under the head 'profit sand gains of business, profession or vocation ' in respect of the profit or gain of any business, profession or vocation carried on by him.
(2)Such profits or gains shall be computed after making the following allowances, namely (vi)in respect of depreciation of such buildings, machinery, plant or furniture being the property of the assessee, a sum equivalent, where the assets are ships 765 other than ships ordinarily plying on inland waters, to such percentage on the original cost thereof to the assessee as may in any case or class of cases be prescribed and in any other case, to such percentage on the written down value thereof as may in any case or class of cases be prescribed : and where the buildings have been newly erected, of the machinery or plant being new, not being machinery or plant entitled to the development rebate under, clause (vi b), has been installed, after the 31st day of March, 1945, a further sum (which shall however not be deductible in determining the written down value for the purposes of this clause) in respect of the year of erection or installation equivalent (a) in the case of buildings the erection of which is begun and completed between the 1st day of April 1946 and the 31st day of March 1956 (both days inclusive), to fifteen per cent of the cost thereof to the assessee; (b) in the case of other buildings, to ten per cent of the cost thereof to the.
assessee; (c) in the case of machinery or plant, to twenty per cent of the cost thereof to the assessee; Provided that 765 (c)the aggregate of all allowances in respect of depreciation made under this clause and clause (vi a) or under any Act repealed hereby, or under the Indian Income Tax Act, 1886 (II of 1886), shall, in no case, exceed the original cost to the assessee of the buildings, machinery, plant or furniture, as the case may be; (vi a) in respect of depreciation of buildings newly erected, or of machinery or plant being new which has been installed, after the 31st day of March, 1948, a further sum (which shall be deductible in determining the written down value) equal to the amount admissible under clause (vi) (exclusive of the extra allowance for double or multiple shift working of the machinery or plant and the initial depreciation allowance admissible under that clause for the first year of erection of the building or the installation of the machinery or Plant) in not more than five successive assessments for the financial years next following the previous year Sup/69 14 766 in which such buildings are erected and such machinery and plant installed and falling within the period commencing on the 1st day of April 1949 and ending on the 31st day of March, 1959; (vi b) in respect of machinery or plant being new, which has been installed after the 31st day of March, 1954, and which is wholly used for the purposes of the business carried on by the assessee, a sum by way of development rebate in respect of the year of installation equivalent to twenty five per cent of the actual cost of such machinery or plant to the assessee; Provided that no allowance under this clause shall be made unless the particulars prescribed for the purpose of clause (vi) have been furnished by the assessee in respect of such machinery or plant; Section 12 was to the following effect 12.
The tax shall be payable by an assessee under the head 'Income from other sources ' in respect of income, profits and gains of every kind which may be included in his total income (if not included under any of the preceding heads).
(2)Such income, profits and gains shall be computed after making allowance for any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains.
(3)Where an assessee lets on hire machinery, plant or furniture belonging to him, he shall be entitled to allowances in accordance with the provisions of clauses (iv), (v), (vi) and (vii) of sub section (2) of section 10.
(4)Where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, he shall be entitled to allowances in accordance with the 767 provisions of clauses (iv), (v), (vi) and (vii) of subsection (2) of section 10 in respect of such buildings".
The main contention of the assessee was that the lease as contemplated in the indenture dated 15th March, 1948 was a lease of a commercial asset, and, therefore, the income arising from the lease should be assessed under section 10(1) of the Act and not under section 12(1).
In order to examine the validity of this argument it is necessary to set out the relevant clauses of the indenture of lease.
Clause ( 1) of the lease provided that the lease was for a term of five years commencing from 1st June 1945 with an option to continue for a further term of five years and thereafter two further options of five years in each case on the same terms and conditions subject to higher payment of rates of royalties.
Clause 2: The lessee shall be entitled to run the said sugar factory and all other machinery annexed to the same and use all the tools and implements, buildings and premises, offices, and erections and utensils and all other things which are now in or upon the said premises and which may be added from time to time thereto provided always that the lessees shall not at any time remove the plant and/or machinery etc.
hereby demised or any part thereof from the said premises elsewhere for the purpose of or in connection with the lessees ' other interests.
Clause 3 : The lessees shall at the time of taking over possession of the factory from the lessors be entitled free of payment to the goods already manufactured during the current crushing season, i.e. 1945 46 or in the process of manufacture and/or to be hereafter manufactured by the lessees and the lessees shall have absolute discretion to sell and deal with the same in such manner as they think fit and proper.
Clause 5: The lessees shall also be entitled to erect, construct and maintain any other machinery as the lessees may think fit and proper.
All machinery brought in and erected by the lessees would remain the lessees ' property and after the termination of the lease the lessees shall be entitled to remove the same provided always that the lessees shall forthwith repair and make good all damage caused to the demised premises by such removal of the lessees ' machinery.
768 Clause 7 Clause 7 provides for the payment of royalty.
The royalty on sugar was to be computed at the rate of Rupees Seventy five per 100 maunds of sugar manufactured for the first five years as well as next five years then at the rate of Rupees eighty two and annas eight per 100 maunds of sugar manufactured for the third five years and Rs. 90/ for the fourth five years.
The royalty on molasses was computed at three pies per maund on all molasses sold during each year of the original lease period and any renewals thereof subject to the payment of a minimum royalty of Rs. 6,500/per annum.
Clause 8 : This clause provides that the lessee shall in addition to the royalty reserved be responsible for all the running expenses of the factory including salaries and wages and all factory staff and labour and shall pay all sugar excise duty etc.
excepting the ground rents payable to the landlords and taxes on income chargeable to the lessors and shall fully reimburse the lessors in respect of such expenses which have already been incurred by the lessors since the first day of One thou sand nine hundred and forty five and property tax.
Clause 17 : (a)The lessors will keep the demised premises insured to the full value thereof and shall pay all expenses which will be incurred for insuring the demised premises.
(b)The lessors shall pay all expenses of running the lessors ' company e.g. Directors fees, Audit fees, Ground rents etc.
but not the running expenses of the factory and premises hereby demised and shall also pay for all the expenditure for additions, alterations breakdown and/or renewals and replacement of capital nature (i.e. dubitable to block account) to buildings and machineries etc.
and other similar expenses of a capital nature on the demised premises.
It appears from clauses 2 and 5 that the existing machinery which was.
owned by the lessor could not be removed and that the lessee would be entitled to set up additional machinery without interference from the lessor and that on the termination of the lease the lessee would be entitled to remove the same without causing any damage to the property demised.
Clause 3 con 769 templates that if during the period 1945 46 the lessors sell the commodity manufactured the price thereof should go back, to the lessee.
Mr. Choudhury referred to clause 6 which entitled the lessee to use the railway siding during the period of the lease.
But the right of use of railway siding by the lessee under this clause cannot in any way be construed as the exercise of control over the business of the assessee.
The provision for minimum royalty of Rs. 65,000/ per annum indicates that the assessee had no direct interest in the production of the factory.
The cumulative effect of clauses 11, 12, 13 and 14 is that the lessor will have no concern with the production of the factory which is the principal part of the business, previously carried on by the lessor.
The provisions in clause 17 are that the lessors shall keep the demised premises insured to the full value and to repair and replace the machines which are of capital nature.
On a scrutiny of all the clauses of the indenture of lease, our conclusion is that the intention of the assessee was to part with the entire machinery of the factory and the premises with the obvious purpose of earning rental income.
It was not the intention of the assessee to treat the factory and machinery etc.
as a commercial concern during the subsistence of the lease.
The primary condition for the application of section 10 of the Act is that the tax is payable by an assessee under the head "profits and gains of business" in respect of business carried on by him.
When an assessee does not carry on business at all, section 10 cannot be applicable and the income that he receives cannot bear the character of profits of business.
As we have already shown there is no direct nexus between the income of the assessee and the production of the factory.
The royalty payable to the assessee was not paid under clause 7 of the indenture of lease for the production in the factory.
The production was only a measure of the royalty to be paid and, in any event, the measure of payment had nothing to do with the character of the payment as a receipt from business or from other sources.
It follows that in the circumstances of this case the income of the assessee cannot be characterised as income from the activity of the assessee carrying on any business.
The High Court was therefore right in holding that the income of the assessee was liable to be assessed under section 12 and not under section 1 0 of the Act.
On behalf of the assessee reference was made to the decision of this Court in Commissioner of Excess Profit Tax, Bombay City vs Shri Lakshmi Silk Mills Ltd.(1) in which the respondent company which was formed for the purpose of manufacturing silk cloth installed a plant for dying silk yarn as a part of its business during the relevant charging accounting period.
Owing to the difficulty in obtaining silk yam on account of the war it (1) 770 could not make use of this plant which had remained idle for some time.
In August, 1943, the plant was let out to another company on a monthly rent.
The question arose whether the income received by the, respondent company in the chargeable accounting period by way of rent was income from business and assessable to excess profit tax.
It was held by this Court that a part of the assets did not cease to be commercial assets of that business merely because it was temporarily put to a different use or let out to another and accordingly the income from the assets would be profits of the business irrespective of the manner in which the assets were exploited by the company.
But this Court clearly indicated that no general principle could be laid down which would be applicable to all cases and that each case must be decided on its own circumstances according to ordinary commonsense principles.
The material facts of Lakshmi Silk Mills Ltd. (1) are that only a part of the machinery was Let out on lease and the rest of the machinery was worked by the assessee.
The letting out of the machinery was for a short period of five months.
There was also no letting out of the premises of the factory by the assessee.
The ratio of the decision in Lakshmi Silk Mills Ltd.(1) is therefore not applicable to the present case.
Reference was made on behalf of the assessee to the decision in Narain Swadeshi Weaving Mills vs Commissioner of Excess Profits Tax(2) in which the assessee firm carrying on a manufacturing business consisted of three partners, N and his two sons R & G.
In April, 1940, a public limited company was incorporated with the object of taking over the business of the assessee firm.
This company was director controlled and the directors were N, his three sons R, G & S and a brother in law of G.
The company purchased only the building and leasehold rights from the assessee firm but took over from it on lease at an annual rent the plant and machinery.
The assessee firm did not thereafter manufacture anything and it bad accordingly no further trading or commercial activity.
In the circumstances, it was held that letting out of the plant and the machinery by the assessee to the company could not fall within the definition of "business" under section 2(5) and as the assessee firm had, no business during the relevant period to which the Act applied, section 10A could not be invoked by the Excess Profit Tax Authorities.
It was however pointed out that whether a particular activity amounts to any trade, commerce or manufacture or any adventure in the nature of trade, commerce, or manufacture is always a difficult question to answer and no general principle ran be laid down which would be applicable to all cases and each case must be decided in the setting and background 'of its own facts.
It is evident that the material facts in the present case are somewhat different from those of Narain Swadeshi (1) (2) 771 Weaving Mills ' case(1) for there is no out right sale of the building of the factory but only a lease of the factory premises together with the machinery for a long period of years.
For the reasons already expressed our conclusion is that the intention of the assessee was not to treat the factory etc.
as a commercial asset during the subsistence of the lease.
In other words, the intention of the assessee was to go out of the business altogether so far as the factory and the machinery was concerned with effect from 1st June, 1945 and the intention was to use the income arising from the royalty in its capacity as the owner of the factory.
it follows therefore that the first question was rightly answered by the High Court in favour of the Commissioner of Income Tax.
As regards the second question the argument was stressed by Mr. Choudhury that clauses (vi a) and (vi b) of section 10(2) are ancillary to clause (vi) and should be taken to be included within clause.
(vi) as mentioned in sub section (3) of section 12.
It appears that clause (vi a) was inserted by section 11 of the Taxation Laws (Extension to Merged States and Amendment Act, 1949).
Clause (vi b) was inserted by section 8 of the Finance Act, 1955 with effect from 1st April, 1955.
At the time of making the amendment under the said Acts, no amendment was made to section 12(3) of the Act.
It was argued by Mr. Choudhury that although this was not done specifically it followed by implication that additional depreciation allowance in respect of new assets and development rebate would cornsern within the ambit of section 12(3).
It appears to us that clauses (vi a) and (vi b) are not ancillary to clause (vi) because the scheme of clauses (vi a) and (vi b) is somewhat different.
Clause (vi a) which was inserted in 1949 gives additional depreciation allowance over and above the initial allowance which was formerly available under 'the second paragraph of clause (vi) in respect of buildings newly erected and new machinery and plant but not furniture installed after the 31st March, 1948.
The additional allowance under this clause is confined to not more than five successive assessments falling within the period from 1st April 1949 and 31st March 1959.
Further it is deductible in deter mining the written down value, unlike the initial allowance granted under the second paragraph of clause (vi).
Clause (vi b) was inserted by the Finance Act, 1955.
It grants development rebate in respect of machinery and plant provided that the machinery or plant is new and has been installed after the 31st March, 1954; and provided further that it is used wholly for the purpose of the assessee 's business and the particulars prescribed for the purpose of clause (vi) have been furnished.
It is manifest that clauses (vi a) and (vi b) introduce a new scheme (1)26 I.T.R. 765.
772 and cannot be treated as an integral part of clause (vi) by implication.
Apart from this consideration it appears to us that these clauses were not specifically engrafted by Parliament in section 12(3) and section 12(4) while amending section 10(2) of the Act.
It is therefore not permissible for the Court to read these same clauses by implication in section 12(3) and section 12(4) of the Act.
The duty of the Court is to interpret the words that Parliament has used, it cannot supply the gap disclosed in an Act or to make up the deficiencies.
"If", said Lord Brougham, in Gwynne vs Burnell,(1) "we depart from the plain and obvious meaning on account of such views (as those pressed in argument on 43.
Geo. 3, c. 99) we do not in truth construe the Act, but alter it.
We add words to it or vary the words in which its provisions are couched.
We supply a defect which the legislature could easily have supplied, and are making the law, not interpreting it" (Cf.
Kumar Kamalaranian Roy vs Secretary of State(2).
Accordingly, we are of opinion that the assessee is not entitled to additional depreciation and development rebate and the second question was rightly answered by the High Court in the negative.
For these reasons we hold that the judgment of the High Court dated 20th September, 1963 is correct and this appeal must be dismissed with costs.
V.P.S. Appeal dismissed.

summary:
The assessee company, carrying on the business of crushing sugar cane and gur refining, apprehending loss, entered into a lease with another company.
Under cl.
(7) of the indentures the consideration of the lease.
was royalty payable on the manufacture of sugar and molasses and was, subject to a minimum payment of Rs. 65,000 per annum.
The lease was.
for a term of 5 years commencing from 1st June 1945 with an option to continue for a further term of 5 years and thereafter with two further options of 5 years on the same terms and conditions subject to payment of higher rates of royalty.
Clauses 2 to 5 provided that the existing machinery which was owned by the lessor could not be removed and that the lessee would be entitled to set up additional machinery without interference from the lessor and that on the termination of the lease the lessee would be entitled to remove the same without causing any damage to the property demised.
The effect of cls.
11 to 14 was that the lessor would have no concern with the production of the factory which was the principal part of the business previously carried on by the lessor.
In assessment proceedings for the assessment year 1955 56, the assessee contended that the lease was a lease of a commercial asset and therefore the income arising from it should be assessed under section 10 of the Income tax Act, 1922, and hence, the assessee should be allowed depreciation and development rebate in accordance with cls.
(vi a) and (vi b) of section 10(2).
The department and the High Court rejected the assessee 's contention and held that the income was liable to be assessed under section 12 as 'income from other sources ' and that no additional depreciation and development rebate could be allowed.
In appeal to this Court it was contended that : (1) the income of the assessee was liable to be assessed under section 10 of the Income tax Act and, not under section 12; and (2) Since the benefit under cl.
(vi) of section 10(2) is allowed to the assessee under section 12(3), the assessee should be held to be entitled to additional depreciation and development rebate under cls.
(vi a) and (vi b) even if the assessment was under section 12, on the ground that those two clauses are ancillary to cl.
(vi) and should be taken to have been included in section 12(3) along with cl.
HELD : (1) The income of the assessee could not be characterised ' as income from the activity of the assessee carrying on any business and ' was therefore, liable to be assessed under section 12 and not under section 10 of the, income tax Act.
[769 F G] The primary condition for the application of section 10 is that the tax is payable by an assessee under the head 'profits and gains of business ' in respect of business carried on by him.
When an assessee does not carry on business at all, section 10 cannot be applicable and the income that he receives cannot bear the character of profits of business.
[769 D E] 762 In the present case, a scrutiny of all the clauses of the indenture of lease, shows that the intention of the assessee was to go out of the business altogether, so far as the factory and machinery were concerned with effect from 1st June 1945, to part with the entire machinery of the factory and the premises with the purpose of earning rental income, and to use the income arising from the royalty in its capacity as owner of the factory.
It was not the intention of the assessee to treat the factory and machinery as a commercial concern or asset during the subsistence of the lease.
The provision for payment of minimum royalty indicates that the assessee had no direct interest in the production of the factory.
The royalty was not paid for the production in the factory.
There was no direct nexus between the income of the assessee and the production of the factory.
The production was only a measure of the royalty to be paid and had nothing to do with the character of the payment as a receipt from business or from other sources.
[769 C D, E F] Commissioner of Excess Profit Tax, Bombay City vs Shri Lakshmi Silk Mills Ltd. and Narain Swadeshi Weaving Mills vs Commissioner of Excess Profits Tax, , distinguished.
(2)Clause (vi a), which was inserted in the Act in 1949, gives additional depreciation allowance over and above the initial allowance which was previously available under cl.
(vi) in respect of buildings newly erected and new machinery and plant but not furniture installed after 31st March 1948.
The additional allowance is confined to not more than 5 successive assessments falling within the period from 1st April 1949 and 31st March 1959.
It is deductible in determining the written down value, unlike the initial allowance granted under cl.
Clause (vi b) was inserted by the Finance Act, 1955.
It grants development rebate in respect of machinery and plant provided that the machinery or plant is new and has been installed after 31st March 1954, and provided further that it is used wholly for the purpose of the assessee 's business and the particulars prescribed for the purpose of cl.
(vi) have been furnished.
Clauses (Vi a) and (vi b) thus introduce a new scheme and cannot be treated as an integral part of cl.
(vi) by implication.
Further, it is not permissible for the Court to read the clauses by implication into section 12(3) and (4), because, the clauses were not specifically engrafted by Parliament into section 12 while amending section 10(2).
[771 E H; 772 A B] Kumar Kamalaranjan Roy vs Secretary of State, L.R. 66 I.A. 110, referred to.


judgement:
Appeals Nos. 1594 and 1595 of 1968.
Appeals from the judgment and order dated August 29, 1963 of the Calcutta High Court in Income Tax Reference No. 38 of 1960.
Sachin Chaudhuri, T. A. Ramachandran and D. N. Gupta, the appellant (in both the appeals).
D. Narsaraju, section K. Aiyar, R. N. Sachthey and B. D. Sharma for the respondent (in both the appeals).
The Judgment of the Court was delivered by Shah, J.
In respect of assessment years 1949 50 and 1950 51 the Income tax Appellate Tribunal referred five questions to the High Court of Calcutta under section 66(1) of the Indian Income tax Act, 1922.
Three of those questions which are canvassed in these appeals need be set out : Assessment year 1949 50 "(1) Whether on the facts and in the circumstances of the case, the sum of Rs. 51,550/ was A profit in the nature of revenue and therefore liable to tax under the Indian Income tax Act ?" Assessment year 1950 51 "(3) Whether, on the facts and in the circumstances of the case, the sum of Rs. 8,756/ was a profit 798 in the nature of revenue 'and was subject to tax under the Indian Income tax Act ? (4) Whether, on the facts and in the circumstances of the case, the loss of Rs. 34,891/ was allowable as a deduction against the business income of the assessee for the assessment year 1950 51?" The appellant a limited Company incorporated under the Indian Companies Act, 1913 carries on business as managing agents, dealers in shares and stocks, stores and spare parts of machinery and acts as insurance agents and manufacturers of carbon dioxide.
It also works certain coal mines.
The Company obtained a prospecting licence from the State of Korea for the Chirimiri Colliery in 1944 and after prospecting for coal sold the colliery, and thereby earned a profit of Rs. 51,550 in the account year 1948 49 and Rs. 8,756 in the account year 1949 50.
The Income tax Officer brought the profits arising out of the sale of the colliery to tax as business profits.
The order was confirmed in appeal by the Appellate Assistant Commissioner and the Income tax Appellate Tribunal.
The Company conducted a Dry Ice Factory at Lahore.
The factory was sold in September 1948 to the Indo Pakistan Corporation Ltd. The purchaser took over the factory on October 1, 1948, but the price was finally settled in December, 1949.
By the sale the Company suffered a loss of Rs. 34,891.
The Company claimed to deduct this loss from its income assessable to tax in the assessment year 1950 51.
The Income tax Officer disallowed, the claim.
The Appellate Assistant Commissioner agreed with that view, and the Tribunal confirmed the order.
In answering questions (1) & (3) the High Court observed "The Chirimiri Colliery was sold after prospecting and proving coal.
The sale in such 'a case was a part of the trading activities of the assessee and such activity could be gathered from the surrounding circum stances as also from the manner in which it was sold, that is, within a very short time after its acquisition and after it was made fit for obtaining a reasonably higher price at the sale. .
The profit thus acquired can not be treated as a capital asset.
" In answering question (4) the High Court observed "The loss of Rs. 34,891 sustained by the assessee after the sale of Dry Ice Factory at Lahore in September 1948 cannot be treated as a loss of the business of sale, inasmuch as the Tribunal found as a fact that the loss not having occurred in the relevant accounting 799 year, was referable to the transaction of business during a period when the business completely ceased before the commencement of the accounting year.
Counsel for the Company urges that prospecting for coal under a licence obtained from the State of Korea was not, part of the business operations of the Company and that by selling the rights in the mine, the Company disposed of its assets and made gains of a capital nature.
In any event, it was urged, this was a single transaction and in the absence of evidence that the Company carried on the business of obtaining prospecting licences and of selling the mines if "coal was proved", the profit arising out of sale of the mine which was a capital asset acquired by that transaction was not taxable.
Where a person disposes of a part or the whole of his assets the general rule is that the mere change or realisation of an investment does not attract liability to income tax but where such a realisation is an act which in itself is a trading transaction, profit earned by sale or conversion is taxable : Commissioner of Taxes vs Melbourne Trust Ltd.(1) The cases which illustrate this distinction fall broadly into two categories those where the sales formed part of trading activity, and, those in which the sale or realisation was not an act of trading.
As observed in Californian Copper Syndicate (Limited and Reduced) vs Harris (Surveyor of Taxes) (2) the test is Is the sum of gain that has been made a mere enhancement of value by realising a security, or, is it a gain made in an operation of business in carrying out a scheme for profit making ?" In determining whether the gain is realization of mere en hancement of value or is a gain made in an operation of business in carrying out a scheme for profit making, do uniform rule ran be evolved.
It was observed by this Court in Janki Ram Bahadur Ram vs Commissioner of Income tax(3) : ". . no single fact has decisive significance, and the question whether a transaction is an adventure in the nature of trade must depend upon the collective effect of all the relevant materials brought on the record.
But general criteria indicating that certain facts have dominant significance in the context of other facts have been adopted in the decided cases.
if, for instance, a transaction is related to the business which is normally carried on by the assessee, though not directly part of it, an intention to launch upon an, adventure in the nature of trade may readily be inferred.
(1) , 1010 (P.C.) (2) ,166.
(3) , 25.
800 A similar inference would arise where a commodity is purchased and sub divided, altered, treated or repaired and sold, or is converted into a different commodity and then sold.
Magnitude of the transaction of pur chase, the nature of the commodity, subsequent dealings and the manner of disposal may be such that the transaction may be stamped with the character of a trading venture: .
" A transaction of sale may in a given case be isolated : in another it may be intimately related to the normal business of the tax payer.
In the latter class profit arising from the transaction will probably arise out of the tax payer 's business and will be assessable as business profits.
An instructive case of this class is Imperial Tobacco Co. (of Great Britain and Ireland) Ltd. vs Kelly(1).
In that case the Company carried on the business of tobacco manufacture, for which large quantities of tobacco leaf were purchased in the United States, where the Company maintained a large buying Organisation.
To finance the purchases and the expenses of this Organisation the Company bought dollars in the United Kingdom through its bankers who remitted them to the banking accounts of the Company in the United States, and it was the practice of the Company to accumulate a large holding of dollars each year before the leaf season commenced.
The Company never bought dollars for the purpose of resale as a speculation.
On the outbreak of war, in September 1939.
the appellant Company, at the request of the Treasury, stopped all further purchases of tobacco leaf in the United States, and, as a result, the Company had on hand, a holding of dollars accumulated between January and August, 1939.
On September 30, 1939, the Company was ordered under the Defence (Finance) Regulations, 1939, to sell its surplus dollars to the Treasury, and, owing to the rise in the rate of exchange, the sale resulted in a profit to the Company.
It was held by the Court of Appeal that the profit was liable to be included as profits of its trade under Sch.
D Case 1.
The tax payer was not carrying on business in dollars, but the transactions in dollars were intimately related to their principal business and the profits earned by sale of dollars were treated as profits taxable as business profits.
In T. Beynon & Co. Limited V. Ogg (Surveyor of TaxeS(2) the tax payer carrying on business as Coal Merchants, Ship and Insurance Brokers, and as sole selling agent for various Colliery Companies, in which latter capacity it was part of its duty to purchase wagons on behalf of its clients, bought a large number of wagons on his own account with the intention of reselling them (1) (2) 801 at profit.
The contention of the tax payer that the transaction being an isolated one, the profit was in the nature of a capital profit on the realisation of an investment was negatived.
The profits realised in this transaction were held to result from the operation of the Company 's business and properly includable in the computation of the Company 's profits for assessment under Sch.
D. In Gloucester Railway Carriage and Wagon Co. Ltd. vs The Commissioners of Inland Revenue(1) the tax payer carried on the business of manufacturing wagons for sale or hire.
The tax payer sold some of the wagons which were formerly hired out.
The tax payer contended that the profit realized by sale was an isolated transaction resulting in a capital profit.
The House of Lords held that the "business was all one ', namely, to make profit out of wagons and on that account the profits realized by sale of wagons were taxable.
The Tribunal in the present case recorded the following findings : "It is no doubt true that this was a single transaction ' But we were told by the assessee 's counsel that the assessee obtained prospecting licence in the colliery, developed the colliery and then sold out.
What was the purpose of obtaining the prospecting licence has not been told to us.
The assessee was carrying on business of coal mining.
The prospecting of coal is a part of the coal mining business.
Therefore, in our opinion, the transaction of prospecting, developing and selling the colliery is a transaction in the nature of a business.
Therefore, the profit arising from the sale is a profit in the nature of revenue and has been rightly brought to tax.
" Our task would have been lightened if the Tribunal had stated the findings in greater detail.
Nevertheless the Tribunal has found that the Company was carrying on the business, of coal mining and prospecting of coal was a part of the coal mining business and on that account the transaction of prospecting, developing and selling the colliery was a transaction in the nature of a business.
On the findings recorded by the Tribunal it follows that the prospecting for, coal being a part of the coal mining business, the income was properly regarded as taxable.
The answer recorded by the High Court on questions (1) & (3) must be upheld.
Turning to the fourth question : the sale transaction of the Dry Ice Factory, was completed on October 1, 1948, but the price was finally settled in December 1949.
In the settlement, the Company suffered a loss of Rs. 34,891.
The loss was suffered in the (1) 802 business transaction and the only dispute raised before the Tribunal related to the year in which the loss was liable to be taken into account.
The Tribunal disallowed the loss in the assessment of income for the year 1950 51.
The Tribunal held that the business of the Dry Ice Factory was not carried on in the year of account April 1, 1949 to March 31, 1950, and on that account the loss was hot admissible as a permissible deduction in computing the taxable income of the Company for the assessment year 1950 51.
The High Court agreed with the Tribunal.
In our judgment, the High Court was in error in holding that the loss was not a permissible deduction.
Section 24 of the Income tax Act, 1922, in the relevant year of assessment read as follows : "(1) Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in section 6, he shall be entitled to have the amount of the loss set off against as income, profits or gains under any other head in that year Provided that (2) 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 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 or gains, if any, of the assessee from the same business, profession or vocation for that year Provided that By sub section
( 1 ) the loss or profits or gains suffered under any head in any year was liable to be set off against the income, profits or gains under any other head, and by sub section
(2) where the loss suffered in any business, profession or vocation could not be wholly set off under sub section
( 1 ) the loss not so set off had to be carried forward to the following year and set off against the profits and gains of the same business in the subsequent years.
The Tribunal and the High Court applied sub section
(2) of section 24 in computing the taxable income of the Company for the assessment year 1950 51.
But in so proceeding, in our judgment, they were in error.
The business of Dry Ice Factory was sold in October, 1948.
We will assume that the Dry Ice Factory was 'a separate business of the Company and was not a part of the other business carried on by the Company.
But the price for which the business was sold was settled in December 1949.
Until the price was 803 settled, loss did not accrue or arise to the Company.
The loss was suffered in the account year 1949 50 and could be allowed against the income of that year under section 24(1).
The assumption that the loss was suffered in the previous year i.e., 1948 49 was, in our judgment, not warranted.
The case was plainly governed by sub section
(1) of section 24.
The answer to the fourth question recorded by the High Court must be discharged.
The answers to questions (1) & (3) recorded by the High Court are affirmed.
Question (4) Will be answered in the affirmative and in favour of the Company.
In view of the divided success, there will be no order as to costs in this Court.
The order as to costs in the High Court is maintained.
V.P.S. Appeals allowed in part.

dataset_name: IN-Abs

summary:
The assessee company was carrying on the business of coal mining and of a Dry Ice Factory, in addition to various other kinds of business.
It obtained a prospecting licence, and after prospecting for coal sold it within a short time of its acquisition and thereby earned profits in the accoun ting years 1948 49 and 1949 50.
It sold the Ice Factory in 1948.
Though the purchaser took possession of the ice factory in 1948, the price was finally settled in December 1949.
By that sale the assessee company suffered a loss.
The assessee claimed (1) that the 'profits were gains of a capital nature and hence not liable to tax; and (2) that the loss was deductible from its income in the assessment year 1950 51.
(1) The department, Tribunal and High Court held that the profits from the sale of colliery were in the nature of revenue and were liable to tax under the Income Tax Act, in the two corresponding assessment years, namely, 1949 50 and 1950 51; and (2) It was held that loss in the ice factory transaction was suffered in the accounting year 1948 49 and assessee 's claim could be sustained only under section 24(2), of the Income tax Act, 1922, but that the subsection was not applicable, because, the business ceased completely before the commencement of the following accounting year 1949 50 (assessment year 1950 51).
In appeal to this Court, HELD : (1) Where a person disposes of a part or the whole of his assets the general 'rule is that the mere change or realization of an investment does not attract liability to income tax, but, where such a realisation is an act which in itself is a trading transaction, profit earned by sale or conversion is taxable.
In determining whether the gain is realization of a mere enhancement of value (capital gain) or is again made in an operation of business in carrying out a scheme for profit making (revenue) no uniform rule can be evolved.
Though a transaction is an isolated one, it may be intimately related to the normal business of the tax payer.
in such a case, the profit arising from the transaction will be out of the tax payer 's business and will be assessable as business profits.
[799 C D. F) 800 B C] Prospecting of coal was a part of the mining business which the assessee was carrying on.
Therefore, the transaction of prospecting, developing and selling the colliery was one in the nature of business.
797 Hence, the profit arising from the sale, though it was an isolated transaction, was in the nature of revenue and liable to tax.
[801 F H] Janki Ram Bahadur Ram vs Commissioner of Income tax, , 25(S.C.), followed.
Commissioner of Taxes vs Melbourne Trust Ltd. [1914] A.C. 1001, 1010 (P.C.), Californian Copper Syndicate (Limited and Reduced) V. Harris (Surveyor of Taxes) , 166, Imperial Tobacco Co. vs Kelly, , Beynon & Co. Ltd. vs Ogg (Surveyor of Taxes) and Gloucester Railway Carriage and Wagon Co. Ltd. vs Commissioners of inland Revenue, , referred to.
(2) By section 24(1) the loss or profits or gains suffered under any head in any year was liable to be set off in that year against the income, profits or gains under any other head; but by section 24(2) where the loss suffered in any business, profession or vocation could not be wholly set off under sub section
(1) the loss not so set off has to be carried forward to the following year and set off against the profits and gains of the same business in the subsequent year.
L802 F G] In the present case, loss was suffered in the accounting year 1949 50 when the price was settled and not in 1948 49 when the sale took place.
Therefore, under section 24(1) the loss was allowable against the business income of the assessee for the accounting year 1949 50, that is, in proceedings for the assessment year 1950 51.
[803 A B]


judgement:
l Appeals Nos.
1549 to 1552 of 1968.
Appeals from the judgment and order dated September 28, 1964 of the Calcutta High Court in Income tax Reference No. 18 1961.
Sukumar Mitra, section K. Aiyar, R. H. Dhebar, R. N. Sachthey and B. D. Sharma, for the appellant (in all the appeals).
806 M. C. Chagla, T. A. Ramachandran and D. N. Gupta, for the respondent (in all the appeals).
The Judgment of the Court was delivered by Ramaswami, J.
These appeals are brought by certificate from the judgment of the Calcutta High Court dated 28th September, 1964 in Income Tax Reference No. 18 of 1961.
The respondent (hereinafter called the assessee) is a private limited company incorporated in India and is a subsidiary of the Imperial Chemical Industries, London, which holds the entire share capital of the assessee.
The business of the assessee consists mainly of acting as selling agents in India for a large variety of goods such as chemicals, dyes, explosives etc.
, manufactured or purchased by its London principals and sold in India.
The Imperial Chemical Industries (Export) Glasgow [hereinafter referred to as the I.C.I. (Export) Ltd.] is another subsidiary of I.C.I. London which holds the entire share capital of I.C.I. (Export) Ltd. The I.C.I. (Export) Ltd. had appointed as their selling agents in India four companies, viz., (1) Gillanders Arbuthnot & Co. Ltd., Calcutta, (2) Best & Co. Ltd., Madras, (3) Anglo Thai Co. Ltd. Bombay and (4) Shaw Wallace & Co. Ltd. With effect from 1st April, 1948, the I.C.I. (Export) Ltd. terminated the services of the aforesaid selling agents and appointed the assessee as its sole selling agent.
The I.C.I. (Export) Ltd. had agreed to pay to the former selling agents compensation at the rate of two fifth, two fifth and one and two fifths of the commission earned by the assessee for the three years from 1st April, 1948.
The compensation was paid to the four companies through the accounts of the assessee.
For this purpose the modus operandi adopted was as follows : The compensation payable to the former agents was spread over a period of three years and on the assumption that the turnover was constant, the compensation payable to the selling agents was on an average, an amount equal to the 11/15th of the commission earned by the assessee at the normal rates.
In order to arrive at the amount of commission to be credited to the assessee 's profit and loss account each year the assessee in the first place credited the commission account and debited the I.C.I. (Export) Ltd. account with the full amount of compensation earned by it at normal rates on sales effected during the year.
Next, the assessee transferred from the commission account to a special reserve account called the 'Explosives Ex Agents Compensation Reserve Account ', the proportion payable to the ex agents as compensation, namely, 11/15th (2/5+2/5+7/5= 11/5 X 1/3 = 11/15) (leaving 4/15th towards commission account) so that funds might be accumulated for payment to the four companies from time to time.
807 The year of account of the assessee is from 1st October to 30th September every year.
As a result of the above method of accounting, the following figures appeared in the assessee 's books of accounts Gross Transfer toNet Commission Reserve forCommission compensa tion Rs. Rs. Rs. 1st April 1948 to 30th September 1948 2,91,396 2,03,503 87,893 Year ending 30th September 1949 7,67,294 5,41,526 2,25,768 Year ending 30th september 1950 7,52,204 5,29,284 2,22,920 year ending 30 th september 1951 10,20,922 4,00,052 6,20,870 TOTAL 28,31,816 16,74,365 11,57,451 For the assessment years 1949 50, 1950 51, 1951 52 and 1952 53 the assessee showed the net amounts of commission earned on the selling agencies by the I.C.I. (Export) Ltd. adding a foot note that the amounts were arrived at after deducting the amount of compensation payable to the out going agents.
By his order dated 28th January, 1957 for the assessment year 1951 52 the Income Tax Officer held that the deductions were not permissible.
In an appeal preferred by the.
assessee the Appellate Assistant Commissioner confirmed the assessment by his order dated 25th November, 1957.
The assessee took the matter in further appeal to the Appellate Tribunal which dismissed the appeal.
The Appellate Tribunal held that there was no justification for the absence of a written agreement between the I.C.I. (Export) Ltd. and the assessee when the former selling agencies were terminated and the assessee was appointed as the sole selling agent.
It was observed that the assessee was not collecting any commission on behalf of the outgoing agents and it was not their legal obligation to pay compensation to the out going agents.
If the assessee was not entitled to more than 3/5th of commission during the first two years, it should have credited that amount whereas the assessee had actually credited four fifteenth on a notional basis which was not in consonance with the arrangement.
The conclusion reached by the Appellate Tribunal was that "there was no agreement between the assessee and the I.C.I. (Export) Ltd. and if there was one it was not acted upon".
It was held by the Appellate Tribunal that the payment of compensation was not because of an overriding title created either by the act of the parties or by operation of law.
At the instance of the assessee the following question of law was referred to the High Court under section 66(1) of the Income Tax Act, 1922 (hereinafter called the Act): 808 "Whether the inclusion by the Income Tax officer.
of Rs. 2,03,503, Rs. 5,411,526, Rs. 5,29,284 and 4,00,052 in the assessment for the years 1949 50, 1950 51, 1951 52 and 1952 53, for relevant accounting years ending the 30th Sept. 1948, 1949, 1950 and 1951 respectively in the computation of the total income of the assessee is justified and correct ?" The High Court answered the question in the negative in favour of the assessee holding that the inclusion of the amount of compensation in the total income of the assessee for the relevant assessment years was not justified.
On behalf of the appellant it was contended that the High Court had no legal Justification for interfering with the finding of the Appellate Tribunal that there was no proof of the agreement between the assessee and the I.C.I. (Export) Ltd. with regard to the quantum of commission to be paid to the assessee for the period between 1st April, 1948 and 31st March, 1951.
On this point reference was made by Mr. Chagla to (a) the letter dated 11th March, 1947 from the I.C.I. (Export) Ltd. to M/s. Gillanders Arbuthnot & Co., (b) the affidavits of Mr. W. A.Bell and Mr. J. W. Donaldson and (c) the letter dated 3rd January, 1958 of M/s. Lovelocke and Lewes, Chartered Accountants, Calcutta.
It was argued that these documents established that there was an agreement between the I.C I. (Export) Ltd. and the assessee, that for the period 1st April 1948 to 31st March, 1951 the assessee was entitled to receive as its commission only the amounts representing the, difference between the normal rates of commission and the compensation payable to the former agents during that period.
The Appellate Tribunal had considered all these documents and reached the conclusion that there was no agreement between the I.C.I. (Export) Ltd. and the assessee and 'if there was one it was not acted upon '.
The Appellate Tribunal remarked that the letter dated 11th March, 1947 from the I.C.I. (Export) Ltd. set forth only the terms and conditions subject to which the selling agencies of the out going agents were terminated.
It was silent on the crucial question of commission to be paid to the assessee during the three years from the date of its appointment as sole selling agent.
The affidavits of Mr. Bell and Mr. Donaldson were produced for the first time before the Appellate Assistant Commissioner.
The affidavits were made many years 'after the crucial date of the appointment of the assesee as the sole selling agent of the I.C.I. (Export) Ltd. The affidavits did not mention the amount of commission to be paid to the out going agents and the affidavits were also not consistent with the entries in the books of accounts of the assessee.
The letter of M/s Lovelocke and Lewes was produced at a very late stage during the hearing of the appeal before the Tribunal and even, otherwise the 809 letter merely explains the method of accounting adopted by the assessee and did not carry the matter any further in the circumstances, the Appellate Tribunal held that there was no agreement between the assessee and the I.C.I. (Export) Ltd. and if there was any such agreement it was not acted upon.
It is manifest that the finding of the Appellate Tribunal on this question is a finding on question of fact and the High Court was not entitled to interfere with this finding.
It is well established that the High Court is not a Court of Appeal in a reference under section 66(1) of the Act and it is not open to the High Court in such a reference to embark upon a reappraisal of the evidence and to arrive at findings of fact contrary to those of the Appellate Tribunal.
It is the, duty of the High Court while hearing the reference to confine itself to the facts as found by the Appellate Tribunal and to answer the question of law in the context of those facts.
It is true that the finding of fact will be defective in law if there is no evidence, to support it or if the finding is perverse.
But in the hearing of a reference under section 66(1) of the Act it is not open to the assessee to challenge such a finding of fact unless he has, applied for the reference of the specific question under s.66(1).
In India Cements Ltd. vs Commissioner of Income Tax( ') it was held by this Court that in a reference the High Court must accept the findings of fact reached by the Appellate Tribunal and it is for the party who applied for a reference to challenge those findings of fact, first, by an application under section 66(1).
If the party concerned has failed to file an application under section 66(1) expressly raising the question about the validity of the finding of fact, he is not entitled to urge before the High Court that the finding is vitiated for any reason.
The same view has been expressed by this Court in Commissioner of Income Tax vs Sri Meenakshi Mills Ltd.(2) and Commissioner of Income Tax, Bombay City I vs Greaves Cotton & Co. Ltd.(3).In the present case the assessee has in his application under s.66(1) expressly raised the question about the validity of the finding of the Appellate Tribunal as regards the agreement but the question was not referred by the Appellate Tribunal to the High Court and the contention of the assessee with regard to the question must be deemed to have been rejected.
The assessee did not thereafter move the High Court under section 66(2) of the Act requiring it to call for a statement of the case on that specific question.
We are therefore of opinion that the High Court was in error in embarking upon a reappraisal of the evidence before the Appellate Tribunal and setting aside the finding of the Appellate Tribunal that "there was no agreement as alleged in the affidavits of Mr. W. A. Bell and Mr. J. W. Donaldson and "if there was such an agreement it was not acted upon".
(1) (2) (3) 810 It was argued by Mr. Chagla that even if the agreement was not established,, the amount, Paid by the assessee as compensation to the ex agents was an expenditure laid out wholly and exclusively for the purpose of the business such is allowable under s.10(2) (xv) of the Act.
The contrary view point was urged on behalf of the appellant,.
It was pointed out that the assessee was acting as the agent of the I.C.I. (Export) Ltd. for the payment of compensation of the ex agents and the payment was made not in the character of a trader but in the character of the agent of its Principal.
The contention of the appellant was that the assessee got the right to sell goods after 1st April 1948 and for getting that right the assessee parted with a portion of its commission for the first two years after 1st April 1948 and paid very much more than the commission earned in the third year.
This position was borne out by the accounts of the respondent which show that the assessee received the commission at full rates and out of it created a reserve account of which these compensations were made to the ex agents.
We have already referred to the finding of the Appellate Tribunal that no agreement between the assessee and the I.C.I. (Export) Ltd. has been proved.
In the absence of proof of the exact terms and conditions of the 'agreement it is not possible to accept the argument of the assessee that the amount paid as compensation to the ex agents was an "expenditure laid out wholly and exclusively for the purpose of the business" under section 10(2) (xv) of the Act.
It was finaly contended on behalf of the respondent that by virtue of an overriding title the income was diverted before it reached the assessee, and so, the amount of compensation paid to the ex agents did not form part of the income of the assessee.
In other words, the contention was that the compensation payable to the ex agents was diverted from the income of the assessee by ,an overriding title arising under the agreement between the assessee and the I.C.I. (Export) Ltd. The argument was stressed that the commission payable as compensation to the ex agents did not form part of the income of the assessee.
We are unable to accept this argument as correct.
We have already pointed out that the finding of the Appellate Tribunal is that the precise terms of the agreement between the assessee and the I.C.I EXPORT Ltd. have not been established.
In any event, even on basis of the affidavits of Mr. Bell and Mr. Donaldson the payment of compensation to the " agents was apparently made by the assessee for and on behalf of the I.C.I. (Export) Ltd. The assessee 's documents suggest that the payment of compensation was the exclusive liability of the I.C.I. (Export) Ltd. and the assessee was not under a legal obligation to pay the amount of compensation to the out .going agents.
It is not established that the payment of compensation ,was by an overriding title ,created either by the act of the parties 811 or by the operation of law.
An obligation to apply the income in a particular way before it is received by the assessee or before it has accrued or arisen to the assesses results in the diversion of income.
An obligation to apply income accrued, arisen or received amounts merely to the apportionment of income and the income so applied is not deductible.
The true test for the application of the rule of diversion of income by an overriding title is whether the amount sought to be deducted 'in truth never reached the assessee as his income.
The leading case on the subject is Raja Bejoy Singh Dudhuria vs Commissioner of Income Tax(1) where the step mother of the Raja had brought a suit for maintenance and a compromise decree was passed in which the step mother was to be paid Rs. 1,100 per month, which amount was declared a charge upon the properties in the hands of the Raja by the Court.
The Raja sought to,deduct this amount from his assessable income, which was disallowed by the High Court at Calcutta.
On appeal to the Judicial Committee Lord Macmillan observed as follows "But their Lordships do not agree with the learned Chief Justice in his rejection of the view that the sums paid by the appellant to his step mother were not 'income ' of the appellant at all.
This in their Lordships ' opinion is the true view of the matter.
When the Act by section 3 subjects to charge 'all income ' of the individual, it is what reaches the individual as income which it is intended to charge.
In the present case the decree of the court by charging the appellant 's whole resources with a specific payment to his step mother has to that extent diverted his income from him and has directed it to his step mother; to that extent what he receives for her is not his income.
It is not a case of the application by the appellant of part of his income in a particular way, it is rather the allocation of a sum out of his revenue before it becomes income in his hands".
Another case of the Judicial Committee is reported in P. C. Mullick vs Commisisoner of Income Tax(2), where, a testator appointed the appellants as executors and directed them to pay Rs. 1,00,000 out of the income on the occasion of his addya sradh.
The executors paid Rs. 5,537 for such expenses, and sought to deduct the amount from the assessable income.
The Judicial Committee confirmed the decision of the Calcutta High Court disallowing the deduction and observed that the payments were made out of the income of the estate coming to the hands of the executors and in pursuance of an obligation imposed upon them by the testator.
The Judicial Committee observed that it was not a case in which (1) (2) 812 a portion of the income had been diverted by an overriding title from the person who would have received it otherwise and distinguished Bejoy Singh Dudhuria 's case(1).
In Commissioner of Income Tax Bombay City II vs Sitaldas Tirathdas(2), Hidayatullah, J., speaking for the Court observed as follows "There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee.
Where by the obligation income is diverted before it reaches the assessee, if is deductible; but where the income is required to 'be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow.
It is the first kind of payment which can truly be excused and not the second.
The second payment is merely an obligation to pay another a portion of one 's income, which has been received and is since applied.
The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable".
In view of the principle laid down in these authorities we are of ,opinion that the payment of compensation by the assessee to the ex agents was not by an overriding title created either by act of the parties or by operation of law.
We accordingly reject the argument of Mr. Chagla on this aspect of the case.
For the reasons expressed we hold that the judgment of the Calcutta High Court dated 28th September, 1964 should be set aside and the question referred by the Appellate Tribunal should be answered in the affirmative and against the assessee.
The appeals are accordingly allowed with costs.
One hearing fee.
G.C. Appeals allowed.

summary:
The Imperial Chemical Industries (Export) Glasgow was a subsidiary of Imperial Chemical Industries London.
With effect from 1st April 1948 the former terminated the services of four selling agents in India and in their place appointed the respondent company (another subsidiary of the Imperial Chemical Industries, London) as their sole selling agents.
The four former selling agents were to be paid compensation for the termination of their services and this was done through the accounts of the respondent.
In its income returns for the years 1949 50, 1950 51, 1951 52 and 1952 53 the respondent showed as its income the net amount of commission arrived at after deducting from the gross commission the compensation paid to the former selling agents.
The Income tax Officer in his order for the year 1951 52 held that the said deductions were not permissible.
His order was confirmed by the Appellate Assistant Commissioned and the Income tax Appellate Tribunal.
The Tribunal held that there was no agreement between the Imperial Chemical Industries (Export) Glasgow and the respondent company casting on the latter the liability to pay the compensation to the former selling agents out of the commission earned by it; the Tribunal further said that even if there was an agreement it was not acted upon.
In reference under section 66(1) of the Indian Income tax Act, 1922 the High Court took the opposite view and held that the claim made by the respondent company was allowable.
The revenue appealed to this Court.
The questions that fell for consideration were : (i) whether the High Court was justified in interfering with the Tribunal 's finding of fact on a question not referred to it; (ii) whether the compensation amounts paid by the respondent to the former selling agents were expenditure laid out wholly and exclusively for 'the purpose of business; (ii) whether the income in question was diverted before it reached the respondent by virtue of an overriding title.
HELD : (i) It is well established that the High Court is not a Court of Appeal in a reference under section 66(1) of the Act and it is not open to the High Court in such a reference to embark upon a reappraisal the evidence and to arrive at findings of fact contrary to those of the Appellate: Tribunal.
It is the duty of the High Court while hearing the reference to confine itself to the facts as found by the Appellate Tribunal and to answer the question of law in the context of those facts.
It true that the finding of fact will be defective in law if there is no evidence 805 to support it or if the finding is perverse.
But in the hearing of a reference under section 66(1) of the Act it is not open to the assessee to challenge such a finding of fact unless he has applied for the reference of the specific question under section 66(1).
[809 B D] In the present ease the assessee had in its applications under section 66(1) expressly raised the question about the validity of the finding of the Appellate Tribunal as regards the agreement but the question was not referred by the Appellate Tribunal to the High Court and the contention of the assessee with regard to the question must be deemed to have been rejected.
The assessee did not thereafter move the High Court under section 66(2) of the Act requiring it to call for a statement of the case on that specific question.
The High Court was therefore in error in embarking upon a reappraisal of the evidence before the Appellate Tribunal and setting aside the finding of the Appellate Tribunal that there was no agreement as claimed by the assessee for the payment of compensation to the former selling agents out of its own commission and.
that if there was such an agreement it was not acted upon.
[809 F H] India Cements Ltd. vs Commissioner of Income tax, 60 I.T.R. 52, Commissioner of Income tax vs Sri Meenakshi Mills Ltd., and Commissioner of Income tax, Bombay City I vs Greaves Cotton & Co. Ltd., , applied.
(ii) In the absence of proof of the exact terms and conditions of the agreement it was not possible to accept the argument that the amount paid as compensation to the ex agents was an 'expenditure laid out wholly and exclusively for the purpose of the business ' under section 10(2)(xv) of the Act.
[810 D] (iii) The assessee 's documents suggested that the payment of compensation was the exclusive liability of the I.C.I. (Exports) Ltd. and the assessee was not under a legal obligation to pay the amount of compensation to the outgoing agents.
It was not established that the payment of compensation was by an overriding title created either by the Act of the parties or by the operation of law.
An obligation to apply the income in a particular way before it is received by the assessee or before it has accrued or arisen to the assessee results in the diversion of income.
An obligation to apply income accrued, arisen or received amounts merely to the apportionment of income and the income so applied is not deductible.
The true test for the application of the rule of diversion of income by an overriding title is whether the amount sought to be deducted in truth never reached the assessee as his income.
[810 H 811 H] Raja Bejoy Singh Dudhuria vs Commissioner of Income tax, , P. C. Mullick vs Commissioner of Income tax, and Commissioner of Income tax, Bombay City II vs Sitaldas Tirathdas, , applied.


judgement:
Appeals Nos. 701 and 702 of 1968.
Appeals from the judgments and orders dated December 17, 1963 and April 6, 1965 of the Calcutta High Court in Income tax References Nos. 87 of 1960 and 30 of 1962 respectively.
S.T. Desai, section C. Manchanda and B. D. Sharma, for the appellants (in both the appeals).
Sachin Chaudhuri, Sukumar Mitra and D. N. Mukherjee,.
for the respondent (in both the appeals).
The Judgment of the Court was delivered by Shah, J.
The Allahabad Bank Ltd. is a public limited com pany.
The paid up share capital of the Company other than capital entitled to a dividend at a fixed rate was at the relevant time Rs. 30,50,000 The Company had issued before January 1, 1954, shares at premium and the premium received in cash aggregated to Rs. 45,50,000.
In each of the account years 1955 and 1956 the Company distributed Rs. 5,49,000 as dividend.
In proceedings for assessment for each of the assessment years 1956 57 and 1957 58 the Income tax Officer reduced by Rs. 61,000 the rebate in super tax admissible under the Finance Acts 1956 on the view that the Company had distributed dividend exceeding 6% of its paid up capital.
In reducing the rebate the Income tax Officer did not take into consideration share premium amounting to Rs. 45,50,000 received by the Company.
The Appellate Assistant Commissioner held that the Company 's share premium was liable to be added to the capital of Rs. 30,50,000 in computing the reduction in the rebate in super tax, and directed modification of the order of assessment.
The Appellate Tribunal agreed with the Appellate Assistant Commissioner.
The Tribunal then submitted a statement of the case and sub mitted the following question in respect of the year 1956 57 to the High Court of Calcutta : "Whether on the facts and in the circumstances of the case, the amount of Rs. 45,50,000 should be added to the paid up capital of the assessee as on 1st January, 1955, for the purpose of allowing rebate to the ass under Paragraph D of Part III of the First Schedule to the Indian Finance Act, 1956.
" A similar question relating to the assessment year 1957 58 was, also referred by the Tribunal.
The High Court of Calcutta agreed 724 with the Tribunal and held that in determining the reduction in rebate in super tax admissible to the Company the share premium maintained by the Company within the reserves was liable to be included in the paid up capital.
The Finance Act, 1956 prescribed the rate of super tax in Part H. Paragraph D (in so far as it is relevant) enacted: "In the case of every company Rate On the whole of total income Six annas and nine pies in the rupee.
Provided that (i) a rebate at the rate of five annas per rupee of the total income shall be allowed in the case of any company which (a) in respect of its profits liable to tax under the Income tax Act for the year ending on the 31st day of March, 1957, has made the prescribed arrangements for the declaration and payment within the territory of India of the dividends payable out of such profits and for the deduction of supertax from dividends in accordance with the provisions of subsection (3D) of section 18 of that Act, and (b) (ii) a rebate at the rate of four annas per rupee of the total income shall be allowed in the case of any Company which satisfied condition (a.) but not condition (b) of the preceding clause; Provided further that (i) the amount of the rebate under clause (i) or the preceding proviso shall be reduced by the sum, if any, equal to the amount or the aggregate of the amounts as the case may be, computed as hereunder (a) (b) in addition, in the case of a company referred to in clause (ii) of the preceding proviso which has distributed to its share holders during the previous year "dividends in excess of six per cent of its paid up 725 capital, not being dividends payable at a fixed rate on that part of the said dividends which exceeds 6 per cent but does not exceed 10 per cent of the paid up capital; at the rate of two annas per rupee on that part of the said dividends which exceeds 10 per cent of the paid up capital; at the rate of three annas per rupee; (ii) Provided further that Explanation : For the Purposes of Paragraph D of this Part (i) the expression "paid up capital" means the paid up capital (other than capital entitled to a dividend at a fixed rate) of the Company as on first day of the previous year relevant to the assessment for the year ending on 31st day of March, 1957, increased by any premiums received in cash by the company on the issue of its shares, standing to the credit of the share premium account as on the first day of the previous year. . " In the Finance Act of 1957 also a similar scheme of granting rebate of super tax and reduction therein in the conditions set out in the Act, was adopted.
The reduction in rebate in super tax depended upon the proportion which the dividend distributed bore to the paid up capital.
If the Company distributed dividends exceeding 6% of its paid up capital as defined in the explanation, the rebate was liable to be reduced to the extent provided in the second proviso.
In the relevant years of account, the share premium formed an identifiable part of the reserves of the Company but was not shown in a separate share premium account apart from the reserves.
The Commissioner contends (1) that the expression "share premium account" in the definition of "paid up capital" in the Explanation to Paragraph D of Part 11 of the Finance Acts 1956 and 1957 means an account apart from the reserves main tained by the Company; and (2) that in any event since the enactment of the "share premium" not maintainable as a separate account cannot be taken into consideration 726 in dealing with the claim for rebate in the payment of super tax and reduction in the rate thereof.
Counsel for the Commissioner relied upon section 78(3) read with section 78(1) of the 1 of 1956, and submitted that the Company was bound to maintain a separate share premium account outside the reserves and transfer into that account the share premium and since the Company failed to do so, in determining the paid up capital within the meaning of the Explanation to Paragraph D of the Finance Acts 1956 and 1957 the share premium within the reserve could not be taken into account.
The relevant clauses of section 78 of the 1 of 1956 provide : "(1) Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount or value of the premiums on those shares shall be transferred to an account, to be called "the share premium account"; and the provisions of this Act relating to the reduction of the share capital of a company shall, except as provided in this section, apply as if the share premium account were paid up share capital of the Company.
(2) (3) Where a company has passed a resolution authorising the issue of any shares at a premium, this section shall apply as if the, shares had been issued after the commencement of this Act : Provided that any part of the premiums which has been so applied that it does not at the commencement of this Act form an identifiable part of the company 's reserves within the meaning of Schedule VI, shall be disregarded in determining the sum to be included in the share premium account.
" Clause (1) is in terms prospective : it requires a Company to transfer premiums received in cash or otherwise on shares to the share premium ' account.
By clause (3) any premium received prior to the coming into force of the less 'that part of the premium which had been so applied so that it did not, at the commencement of the Act, form an identifiable part of the Company 's reserves, had also to be transferred to the .hare premium account as if the shares had been issued after the commencement of the Act.
Section 78 was apparently borrowed from section 56 of the English Companies 1948 (11 & 12 Geo.
38.) Before the of 1956 there was provision in the Indian Com 727 panies Act 1913 which required a Company to maintain a separate share premium account.
After the coming into force of the 1 of 1956 a share premium account had to be maintained and the share premium could not be used otherwise than for the specific purposes mentioned in section 78 (2).
The plea raised by the Commissioner that the Company failed to comply with the statutory injunction contained in Cl.
(1) of section 78 and on that account the premium received were not "standing to the credit of the share premium accounts within the meaning of the Explanation to Paragraph D in the Finance Act 1956 may be rejected on a simple ground.
In the assessment year 1956 57 the Company was being asses sed to tax in respect of the previous year of the Company ending on December 31, 1955.
In the calendar year 1955, the company was governed by the Indian 7 of 1913 which contained no provision analogous to section 78 of the 1 of 1956.
The was before the Parliament during the year 1955, but the Company was on that account not obliged to transfer to a separate share premium account independent of the reserve the premiums received prior to January 1, 1955.
The came into force on April 1, 1956 : it had no retrospective operation.
Since there was no obligation upon the Company to maintain a separate share premium account in the previous year corresponding to the assessment year 1956 57 the share premium account maintained as an identifiable account within the reserves qualified for being included in the paid up capital within the meaning of this expression in the Explanation to Paragraph D of the Finance Act, 1956.
For the assessment year 1956 57, therefore rebate in uper tax was liable to be reduced, if the Company had distributed dividend exceeding six per cent of the paid up capital inclusive of share premiums maintained as an identifiable account.
The contention raised by the Commissioner must therefore fail in respect of the assessment year 1956 57.
Counsel for the Commissioner contends that in any event in the Finance Act 2 of 1957 the expression "share premium account has only the meaning ascribed thereto in the , and in respect of the assessment year 1957 58, reduction in the rebate must be computed without taking into account the share premium which was maintained by the Company in the year of account 1956 within the reserve.
Under the Finance Act 2 of 1957 rebate in super tax is liable to be reduced in the case of Companies which have, inter alia, distributed to the shareholders in the previous year dividends in excess of 6 per cent of the paid up capital not being dividend payable at 728 a fixed rate.
The expression "paid up capital" is also defined in substantially the same terms as under the Finance Act, 1956.
For the assessment year 1957 58 the Tribunal found that the share premium was liable to be included in the paid up capital, because it was an identifiable part of the reserves.
In our judgment the Tribunal was right in so holding.
The Explanation to Paragraph D Part H of the Finance Act, 1957, does not require that the share premium account must be maintained as an account outside the reserves.
Under the 1 of 1956 there was an express provision that the share premium account shall be maintained in a separate account.
It is true that in the balance sheet in Sch.
VI of the Act the share premium has to be shown under the head "Liabilities" as part of the share capital and not of reserves.
But it cannot be assumed on that account that if the share premium is maintained as a separate account within the reserves, reduction in the rebate in super tax is liable to be computed after excluding share premium.
The Explanation requires that in determining the paid up capital for the purpose of rebate in super tax, share premium standing to the credit of a share premium account shall be excluded it does not make maintenance of an account outside the reserve acondition of its inclusion in the paid up capital.
Again if under the Finance Act, 1956, the expression "standing to the credit of the share premium account" did not mean that the share premiums shall be maintained in a separate account apart from the reserve, is there any reason why, under an identical scheme of reducing rebate in super tax in the year 1957 58, it should have a different meaning ? In the absence of any compelling grounds, we would not be justified in holding that the Parliament attributed to the expression "standing to the credit of the share premium account" as used in the Explanation to Paragraph D Part 11 of the Finance Act 2 of 1957, a meaning different from the one which it had under the Finance Act, 1956.
The object of the Parliament in enacting Paragraph D of the Finance Act was that profits earned by a Company should be available for being ploughed back into the business and should not be distributed to the shareholders by way of dividend in excess of the rate prescribed.
To secure that object the Parliament gave an incentive to 'the Company of substantial rebate in payment of super tax which would be liable to be forfeited, if part of dividend exceeding 6 per cent was distributed to the share holders.
Share premium account is accordingly liable to be included in the paid up capital for the purpose of computing rebate if it is maintained as a separate account.
The Explanation does not contemplate that the account must be kept apart from the reserves.
If within the reserves it is an identifiable separate account, the 729 share premium will qualify for inclusion in the paid up capital.
in computing the reduction in rebate of super tax.
The appeals fail and are dismissed with costs.
One hearing fee.

summary:
In proceedings for assessment to tax for each of the assessment years 1956 57 and 1957 58, the Income Tax Officer reduced the rebate in supertax admissible to the respondent under the Finance Acts of 1956 and 1957 on the view that the respondent bank, which was a public limited company, had distributed dividends exceeding 6% of its paid up capital.
In reducing the rebate the Income Tax Officer excluded an amount representing share premium received by the company.
The Appellate Assistant Commissioner held that the company 's share premium was liable to be added to its capital in computing the reduction in the rebate in super tax and directed modification of the order of assessment.
The Appellate Tribunal in appeal, as well as the High Court, on a reference, agreed with this view.
In the appeal to this Court, it was contended on behalf of the appellant that the amount representing share premium was not to be added to the share capital because (1) the expression "share premium account" in the definition of "paid up capital" in the Explanation to Paragraph D of Part II of the Finance Acts of 1956 and 1957 means an account apart from the reserves maintained by the company; and (2) in view of the provisions of section 78 (3) read with section 78(1) of the , the respondent company was bound to maintain a separate share premium account outside the reserves and to transfer the share premium into that account which the respondent company had failed to do.
HELD : A share premium account is liable to be included in the paid up capital for the purpose of computing rebate if it is maintained as a separate account.
But the Explanation to paragraph D of of the Finance Acts of 1956 and 1957 does not contemplate that the account must be kept apart from the reserves.
if within the reserves it is an identifiable separate account, the share premium will qualify for inclusion in the paid up capital.
[728 H] Although under the 1 of 1956 there was an express provision that the share premium account shall be maintained in a separate account and by virtue of Sch.
VI of the Act the share premium has to be shown in the balance sheet under the head "Liabilities" as part of the share capital and not of reserves, on that account it cannot be assumed that if the share premium is maintained as a separate account within the reserves, reduction in the rebate in super tax is liable to be computed after excluding share premium.
[728 C] In any event with respect to the assessment year 1956 57 the company was being assessed to tax for the previous year of the company ending on 723 December, 1955, when the of 1956 was not in force.
During that period the company was governed by Act 7 of 1913 which contained no provision analogous to section 78 of the C D]