judgement:
Civil Appeals Nos. 622 & 623 of 1971.
Appeals by special leave from the judgment and order dated the 20 1 1970 of the Punjab and Haryana High Court at Chandigarh in I.T. Reference No. 2 of 1965.
B. B. Ahuja and section P. Nayar, for the appellants.
A. N. Goyal, for the respondent The Judgment of the Court was delivered by FAZAL ALI, J.
These are appeals by the Revenue by special leave against the order of the High Court of Punjab & Haryana dated 189 January 20, 1970 answering the questions referred to the High Court by the Tribunal in favour of the assessees/respondents and against the Revenue.
The appeal arises in the following circumstances.
M/s. Panipat Woollen & General Mills Co. Ltd. hereafter referred to as 'the assessee Company ' had two Departments (1) for spinning of yarn from raw and waste wool and (2) for spinning of yarn from imported wool tops.
The second Department which carried on the operations of spinning of yarn from imported wool tops was started some time in the year 1952.
Weaving operations were, how ever carried on in both these Departments.
One of the Departments was known as M/s. PaniPat Woollen Mills, Kharar while the other one was known as M/s. Navin Woollen Mills.
It is said that the assessee Company was running at a constant loss as a result of which in 1952 the assessee Company decided to instal a plant for manufacture of worsted yarn from imported wool tops by raising a loan of Rs. 7 lakhs from the Industrial Finance Corporation.
The plant went into production in September 1952.
The assessee Company appointed M/s. Murlidhar Chiranjilal as the sole selling agents for the worsted yarn on payment of 2% commission.
Subsequently on December 15, 1953 the assessee Company entered into an agreement with Mis Saligram Premnath under which the latter were appointed as the sole selling agents on certain specified conditions, the important of which being that the agents were to finance the assessee Company to the extent of Rs. 2,50,000/ and the assessee Company agreed to pay 6% interest on the advances to be made by the agents and further agreed to pay 2% commission on the net proceeds of sales of goods in India.
Before expiry of this agreement, another agreement was entered into by the assessee Company with the agents on October 20, 1955 under which the agents were to get 6% interest on all the advances made by them, 1% commission on net sales and 50% commission on net sales of the worsted plant. ' What is more was that the agents agreed to a deduction of 50% of the loss incurred by the assessee Company from their remuneration.
There were a number of other conditions with which we shall deal later.
The selling agents M/s. Saligram Premnath advanced a sum of Rs. 6,26,847/ and Rs. 8,71,873/ and received Rs. 37,157/ and Rs. 73,787/ as 50% commission on the net profits of the worsted plant in the course of two years, namely, assessment years 195 57 ending on March 31, 1956 and 1957 58 ending on March, 31, 1957.
The assessee Company accordingly in its return for the year 1956 57 claimed the amount of Rs. 37,157/ and Rs. 73,787/ for the assessment year 1957 58 as a deduction under the provisions of section 10(2) (xv) of the Income tax Act, 1922.
The case of the assessee was that the two amounts mentioned above being in the nature of commission paid to the selling agents would be deemed expenses incurred by the Company in order to earn profits and would, therefore, fall within the ambit of section 10(2) (xv) of the Income tax Act, 1922 hereafter referred to as 'the Act '.
The Income tax officer, however, disallowed the deduction and held that the deduction claimed was actually a division of profits after the profits had come into existence and had been ascertained, and therefore could not he claimed as a valid deduction under the provisions of the Act.
190 The assessee Company went up in appeal to the Appellate Assistant Commissioner who accepted the plea of the assessee Company and held that the payment was a permissible deduction as it was incurred for the purpose of the assessee 's trade in order to facilitate the business ' of the assessee.
The Revenue then went up in appeal before the Tribunal which after considering the facts and the law on the subject upheld the contention of the Revenue and held that the sums in question were not legal deductions as contemplated under section 10(2)(xv) of the Act but amounted to application of profits after they were earned.
The Tribunal further held that the agreement dated October 20, 1955 amounted to a joint venture for the distribution of profit, between the assessee Company and the selling agents after the profits were ascertained.
The assessee Company then approached the Tribunal for making a reference to the High Court and the Tribunal accordingly referred the following two questions to the High Court for its opinion: "1.
Whether on the facts and in the circumstances of the case, the Tribunal rightly held that the sums of Rs. 37,157/ and Rs. 73,787/ were chargeable to tax in the hands of the assessee Company in the assessment years 1956 57 and 1957 58 respectively? 2.
Whether on the facts and in the circumstances of the case, the Tribunal rightly disallowed the assessee Company`s claim for deduction of the payment of Rs. 37,157/ and Rs. 73,787/ , under sec.
10(l) and Sec.
10(2)(xv) of the Income tax Act, 1922, in the assessment years 1956 57 and 1957 58 respectively?" The High Court by its judgment dated January 20, 1970, answered both the questions in favour of the assessee Company and held that the payments in question amounted to a legitimate deduction under i. 10(2)(xv) of the Act, and the Tribunal was wrong in disallowing the same.
Thereafter the appellant moved the High Court for grant of leave to appeal to the Supreme Court which having been rejected the appellant filed a petition for special leave.
The special leave having been granted, the appeal is now before us.
The High Court in reversing the order of the Tribunal mainly relied on what it described as the surrounding circumstances under which the alleged payments were made to the selling agents by the assessee Company as spelt out from the agreement entered into by the assessee Company with the selling agents.
The main point which was argued before the Tribunal as also before the High Court was that the cumulative effect of the interpretation of the various clauses of the agreement dated October 20, 1955 unmistakably revealed that in the garb of an agency the parties entered into a joint venture for distributing the net profits, after being ascertained between themselves and that is why there was an express provision in the agreement by which the agents agreed to share the losses to the extent of 50% which were to be deducted from the remuneration payable to the agents.
The Tribunal held that the agreement amounted to a joint venture resulting in division of net profits and therefore the amount paid to the agents could not be claimed by the assessee Company as a deduction under 191 section 10(2)(xv) of the Act, as it was not incurred for the purpose of the business or for earning profits.
The High Court held that the mere fact that the agents agreed to share the profits and the losses would not take the case of the assessee beyond the ambit of section 10(2)(xv) of the Act in order to show that the payments made to the agents were not expenses incurred for the purpose of the business.
The High Court laid special emphasis on the fact that the Revenue could not examine the question of the commercial expediency of the businessman to incur expenses or earn profits in a particular manner.
The High Court accordingly found that the agreement per se was a contract of agency and not a joint venture and accordingly the High Court accepted the plea of the assessee Company.
In support of the appeal Mr. Ahuja, the learned standing counsel for the Revenue submitted the following two points before us: C (1) In the first place it was submitted that there being an express provision in the agreement dated October 20, 1955 by which the agents agreed to share losses which was a provision peculiar to the present transaction and was not at all covered by any authority cited before the Tribunal or the High Court, that itself was proof positive of the fact that the transaction amounted to a joint venture with a view to division of profits; and (2) It was argued that the High Court had exceeded its jurisdiction in travelling beyond the agreed statement of the case framed by the Tribunal and had relied on certain materials which were not at all found by the Tribunal in its order nor were those materials mentioned in the statement of the case.
Mr. A. N. Goyal counsel for the assessee Company has, however.
submitted that the view taken by the High Court is absolutely correct and the facts of the present case are clearly covered by the decision of this Court in Dharamvir Dhir vs Commissioner of Income tax Bihar & Orissa(1).
A number of other cases have also been cited at the Bar and we shall refer to the same after marshalling the facts found in the present case.
Before coming to the facts it may be necessary to mention that there can be no dispute with respect to the two important propositions: (1) that in order to fall within section 10(2)(xv) of the Act the deduction claimed must amount to an expenditure which was laid out or expended wholly and exclusively for the purpose of the business, profession or vocation.
This will naturally depend upon the facts of each case.
(2) that in order to determine the question of reason ableness of the expenditure, the test of commercial expediency would have to be adjudged from the point of view of the businessman and not of the Income tax Depart (1)42 I.T.R.7.
192 ment.
With this preface we now proceed to deal with the facts of the present case on the basis of which the questions of law referred to the High Court and answered in favour of the assessee Company arise.
To begin with, it is conceded by the learned standing counsel for the Revenue that the assessee Company was running at a loss as a result of which it had to raise a lorn of several lakhs of rupees from.
the Industrial Finance Corporation.
It was perhaps for this reason that the assessee Company entered into an agreement with the new selling agents M/s Saligram Premnath who were prepared to.
give to the assessee Company better and more profitable terms.
The main question to be determined is as to whether or not the agreement dated October 20, 1955 read as a whole amounts to a joint venture for the purpose of division of profits.
In order to decide this question it may be necessary to refer to some important portions of the second agreement which alone is relevant for the purpose of deciding this point.
We might mention, however, that so far as the first agreement is concerned the terms thereof do not make out a case of joint venture but appear to be in consonance with the agreement being one of an agency simpliciter.
It is the second agreement that in our opinion appears to change the entire complexion of the case.
This agreement is set out at p. 17 of the Paper Book and consists of ten main clauses.
The agreement was to enure for a period of two years to commence from January 1, 1956 or the date on which manufacturing actually starts under the agreement whichever is later.
This is provided in clause 2 of the agreement.
It was further provided that the period of the agency could be extended further by mutual consent.
Clause 3(ii) runs thus: "Program for the manufacture of goods will be made from time to time by the Company in consultation and with the consent of the Agents.
" It may be noticed that this clause requires not only consultation with the agents for the programme of manufacture of goods but a tacit consent of the agents.
In other words, if the agents withheld their consent, they could veto the programme of manufacture.
Such a limitation placed on the power of the assessee Company does not appear to us to be in consonance with a pure and simple contract of agency.
Clause 6 which deals with financial arrangements may be extracted thus: "(i) The Agents shall invest full amount for the working of the Worsted Plant to the full possible capacity beginning from the purchase of tops to the completion of the yarn sales including wages, power, stores, and repairs and maintenance etc.
Such investments and expenses incurred on tops, manufacturing, bank charges, transport, insurance and octroi will be debited to the account of the Company.
193 (ii) Before the beginning of the arrangements under this Agreement, the Machinery of the Worsted Plant will be overhauled and similarly before this arrangement ends the Machinery will be overhauled.
x x x x x (viii) In case of any loss or damage to the tops or goods in transit or in godowns, the same will be debited to the account of the Worsted Plant.
(ix) The accounts of the Worsted Plant will be maintained separately in an office situated near the Worsted Plant and the Agents will have free access to the account books.
x x x x x Sub clause (i) clearly contemplates that the agents would have to make full and complete investment for the working of the worsted plant to the fullest possible capacity including wages, power, stores, repairs and maintenance etc.
This provision appears to be more in consonance with the terms of a person who is a partner in a venture rather than one who is a mere agent.
Further more, sub clause (ii) provides that before the agreement starts the machinery of the worsted plant would be overhauled and would be again overhauled before the agreement ends.
This provision also has its own importance and appears to be beyond the role of the selling agents simpliciter.
Sub clauses (viii) and (ix) extracted above clearly show that the damage to the tops or goods in transit would have to be debited to the account of the worsted plant and such accounts would have to be maintained separately.
The obvious object is that the agents should be in a position to ascertain tile net profits and control the working of the worsted plant.
Clause 7 is the most important clause of this agreement, which, in our opinion, clearly shows that the agreement in essence and in purport is a sort of a partnership or a joint venture rather than a contract of agency.
Sub clause (i) of clause 7 p runs thus: "7.
Commission (i) The Agents shall be allowed a commission at 1 1/4% (one and a quarter per cent) on the net proceeds of sales of all goods.
Such commission shall be chargeable upon money actually credited to the Company, and not on out standing debts, if any.
Besides, Agents will get 50% (fifty per cent) commission on the net profits of the Worsted Plant.
The net profits will be ascertained after deducting all the manufacturing expenses, interest, insurance, depreciation and selling commission etc.
For allowing annual depreciation in the value of the machinery and buildings and interest on the value of machinery, buildings and commencing from the date on which manufacturing actually starts under this Agreement, a lump sum of Rs. 50,000/ has been agreed to be deducted for determining the net profits or loss 194 position.
In case of net loss, if any, there will be a deduction of 50% (fifty per cent) of such loss from the Agent 's Account.
" Analysing the terms of this sub clause it would appear that the agents have been able to secure most liberal and profitable terms.
To begin with they were to get a commission at the rate of one and a quarter per cent on the net proceeds of sales of all goods There can be no objection to this.
Secondly, the agents will get 50% commission on the net profits of the worsted plant.
The net profits would have to be ascertained after deducing all the manufacturing costs, interest, insurance etc.
The conduct of the agents in sharing half of the net profits does not appear to us to be consistent with the payments made to the agents for services rendered.
It is difficult to lay down any rule of universal application as to what percentage of profit would be consistent with the payment in lieu of services but taking the totality of the provisions of the agreement it seems to us that the percentage of profits and the manner in which it is to be determined is more consistent with the position of a partner than that of an Agent.
Finally the provision for sharing the loss incurred by the Company and for a lump sum deduction of Rs. 50,000/ is totally inconsistent with a contract of agency.
Further more, sub clause (iv) of clause 7 provides as under: "(iv) The commission account will be maintained separately by the Agents and the commission will be payable to the Agents by the Company every six months.
In the same way, the amount of Rs. 25,000/ for six months as provided in sub clause (i) above, will be paid to the Company every half year within ten days.
The profit and loss account of the Worsted Plant will be made every six months within ten days and the adjustments will be made accordingly by actual payments, as the case may be, within ten days.
" The above sub clause clearly provides for a separate commission ac count to be maintained by the agents and the commission to be paid every six months.
Consequently the agents agreed to pay a sum of Rs. 25,000/ for six months every half year within ten days.
We might further mention here that the provision in the agreement regarding sharing of the loss is absolutely peculiar to this particular agreement and there is not a single authority, which has, in spite of such a provision, held that the transaction does not amount to a joint venture or a division of profits.
The provision regarding the consent of the agents to the sales and the programme of manufacture is also pertinent in order to determine whether the transaction amount ted to a joint venture in the garb of a contract of agency.
It is well settled that the Court in order to construe an agreement has to look to the substance or the essence of it rather than to its form.
A party cannot escape the consequences of law merely by describing an agreement in a particular form though in essence and in substance IT H may be a different transaction.
In these circumstances, therefore, if we construe the agreement as a sort of a joint venture or a transaction like a partnership which has been given the form and appearance of a contract of agency, the law must have its course.
195 Our attention has been drawn by the learned counsel for the Re venue to a decision in British Sugar Manufacturers Ltd. vs Harris (Inspector of Taxes)(1), where Greene, M. R. clearly observed that where a person contributes to some sort of joint adventure which ultimately results in division of profits, it could not be construed as.
a remuneration for services.
In this connection, Greene, M. R. Ob served as follows: "It is not cash that passes in exchange for these profits, it is services; and the badge of such a contract is remuneration for services, and therefore the first thing that this remuneration would certainly not be is a share of profits purchased by the employee.
x x x I can conceive of a case where a person contributes to some sort of joint adventure services, while others contribute perhaps capital, land, plant, and goods, arranging between themselves (it may be something short of a partnership) that nobody shall get anything until the pool of profits is ascertained, and then they shall divide it up between them in specified proportions.
That, it seems to me would be a real agreement for division of profits, because there would be D ' one profit fund only.
There would not be two 'profit ' funds to be ascertained for different purposes.
" These observations seem to us to cover the facts of the instant case.
Having regard to the terms and conditions of the agreement detailed and analysed above, there can be no doubt that the agents by contributing to the investments and by sharing the profits as also the E. losses have actually contributed to a joint venture and ultimate division of the profits with the principals and the agreement must be construed as an agreement for division of the profits in specified pro portions as mentioned therein.
It is true that in the aforesaid case on the facts found the Court held that the transaction did not amount to a joint venture but it was clearly pointed out in the judgment that there is a very thin line of distinction between a contract for payment of a share of profits simpliciter and a payment of remuneration which is deductible in truth from the profits divisible.
We, therefore, find ourselves in complete agreement with the observations made by Greene, M. R., which aptly apply to the facts of the present case on the basis of the various clauses of the agreement dated October 20, 1955.
The High Court, however, appears to have relied upon the decision in Dharamvir Dhir 's case (supra).
The facts of that case appear to be clearly distinguishable from those of the present case.
What had happened in Dharamvir Dhir 's case was that the assessee was an employee of the firm earning a particular salary.
The employee entered into a coal raising contract with a coal company and as he did not have the necessary funds he persuaded a public charitable trust to advance to him sums upto 1 1/2 lakhs on payment of (1) 7 I.T.R.101.
196 interest at 6 per cent.
and share 11/16ths of the profits of the business.
The assessee agreed that the coal raising contract would be carried on in accordance with the policy settled between him and the trust and the trust could withdraw its money at any time.
It is, there fore, clear that in the first place the agent, namely, the trust, agreed to finance the assessee by giving him a loan of Rs. 1 1/2 lakhs at 6 percent interest.
This was undoubtedly permissible.
The trust was also b to get 11/16th of the profits of the business.
It was, however, not agreed between the parties that the profits would be ascertained after .
" deducting the net expenses as mentioned in the agreement before us.
It is true that the contract was to be carried on in accordance with the policy settled between the assessee and the trust but that did not give any veto power to the trust to tarpedo the contract.
In the instant case the agreement clearly provided for the consent of the agents not only at the beginning of the manufacture of the yarn by the plant to be installed by the assessee Company but at every stage in the pro gramme of manufacture.
Even at the stage of the sale of the products the consent of the agents was necessary.
In other words the agents were given a complete controlling power so far as the manufacture and sale of the products of the assessee Company were concerned.
No such stipulation is to be found in Dharamvir Dhir 's case (supra).
Finally, not only there was no provision in Dharamvir Dhir 's case under which the trust was to share the losses but there was an ex press provision to the contrary, namely, that the trust was not liable for any loss.
Thus the mere payment of interest at the rate of 6 per cent.
On the loan advanced to the assessee and a percentage in the profits of the business would be quite consistent with a remuneration in lieu of services lent and would certainly amount to an expenditure incurred by the assessee wholly and exclusively for the purpose of the business which was conducted by the assessee.
The same, however, " cannot be said of the present case.
It was on the peculiar facts of the Dharamvir Dhir 's case that this Court observed as follows: r "on the facts proved in the present case the trust agreed to finance the business of the appellant on the terms set out in the agreement and there is nothing to show that he could have made any better arrangements or would not have last the contract if he had failed to enter into the agreement, i.e. the agreement to pay the amounts in dispute.
There fore, in a commercial sense, the payments were an expenditure wholly and exclusively laid out for the purpose of the " business.
" It may be mentioned that this Court had considered the decision in the British Sugar Manufactures Ltd. 's case (supra) and had approved of the same.
Great stress was laid by counsel for the assessee Company on the fact that this Court could not go behind the commercial expediency which had to be determined from the point of view of a businessman.
Even so whatever be the commercial considerations, it is difficult to hold that the commercial expediency dictated the assessee Company to allow itself to be completely overshadowed by its selling agents so as to pay them not only for the services rendered but also allow them 197 to share profits, control the manufacture of the goods and the programme thereof and also to share the losses.
The test of commercial expediency cannot be reduced in the shape of a ritualistic formula, nor can it be put in a water tight compartment so as to be confined in a strait jacket.
The test merely means that the Court will place itself in the position of a businessman and find out whether the expenses incurred could be said to have been laid out for the purpose of the business or the transaction was merely a subterfuge for the ' purpose of sharing or dividing the profits ascertained in a particular manner.
It seems to us that in ultimate analysis the matter would .
depend on the intention of the parties as spelt out from the terms of the agreement or the surrounding circumstances, the nature or character of the trade or venture, the purpose for which the expenses are incurred and the object which is sought to be achieved for incurring those expenses.
If the expenses incurred amount to a profit of an enduring nature they may be treated as capital expenditure, whereas if the expenses merely serve to promote or increase the commercial activity they may amount to an expenditure which is incurred for the purpose of the business.
Reliance was also placed by counsel for the assessee Company on the decision in J. K. Woollen Manufacturers vs Commissioner of Income Tax, U.P.(1), where this Court observed as follows: "The question as to whether an amount claimed as expenditure was laid out or expended wholly or exclusively for the purpose of business, profession or vocation as required under Section 10(2) (xv) of the Income Tax Act .
has to be decided on the facts and in the light of the circumstances of each particular case.
x x x x In our opinion, neither the High Court nor the Appellate Tribunal has applied the proper legal test in this case.
As pointed out by this Court in C.I.T. Bombay vs Walchand and Co. Private Ltd., 1967 65 ITR 381= (AIR 1967 SC 1435) in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of r view of the businessman and not of the Income Tax Department.
It is, of course, open to the Appellate Tribunal to come to a conclusion either that the alleged payment is not real or that it is not incurred by the assessee in the character of trader or it is not laid out wholly and exclusively for the purpose of the business of the assessee and to disallow it.
But it is not the function of the Tribunal to determine the remuneration which in their view should be paid to an employee of the assessee.
" It would appear that in the aforesaid case the only question was regarding the quantum of remuneration to be given to the General , Manager and this Court observed that the businessman must be given complete freedom to fix the terms of his employees after taking an (1) ; 198 overall view of the situation.
This was not at all a case where an agreement like the present one was entered into between the assessee Company and its agents.
On the other hand in Commissioner of Income tax, Kerala vs Travancore Sugars and Chemicals Ltd.(l), this Court added` a word of caution that the test of commercial expediency should not be applied in a mechanical manner and observed as follows: "In considering the nature of the expenditure incurred in the discharge of an obligation under a contract or a statute or a decree or some similar binding covenant, one must avoid r being caught in the maze of judicial decisions rendered on different facts and which always present distinguishing features for a comparison with the facts and circumstances of the case in hand.
Nor would it be conducive for clarity or for reaching a logical result if we were to concentrate on the facts of the decided cases with a view to match the colour of that case with that of the case which requires determination.
The surer way of arriving at a just conclusion would be to first ascertain by reference to the document under which the obligation for incurring the expenditure is created and thereafter to apply the principle embalmed in the decisions of those facts.
Judicial statements on the facts of a particular case can never assist courts in the construction , of an agreement or a statute which was not considered in i those judgments or to ascertain what the intention of the legislature was.
What we must look at is the contract or the statute or the decree, in relation to its terms, the obligation imposed and the purpose for which the transaction was , entered into.
" The learned counsel for the assessee Company relied on the aforesaid case because the question whether the transaction amounted to a joint venture appears to have been raised but it appears that this point had been given up when the case was sent on remand and was therefore not decided.
In these circumstances, the decision in the aforesaid case does not appear to be of any assistance to the assessee Company.
The Tribunal had interpreted the agreement keeping into account J the tests of commercial expediency and we find ourselves in complete agreement with the view taken by the Tribunal.
The High Court on the other hand relied upon what it called the surrounding circumstances that the assessee Company was a losing concern from its inception and had to get rid of the previous selling agents M/s Murlidhar Chiranjilal because they caused considerable embarrassment to the assessee Company.
While the standing counsel for the Revenue has admitted that the Company was running at some loss there was no evidence that the Company was in such a bad shape that it had to get rid of the first selling agents because the selling agents were l causing embarrassment to it.
The High Court then relied on the fact that the first agency which was entered into with M/s Murlidhar (1)881.T.R.1,10.
199 Chiranjilal in 1953 also resulted in loss as a result of which the A second agreement dated October 20, 1955 was entered into.
This does not appear to be of much consequence.
The High Court then relied on the fact that the agents had no other connection with the assessee Company except that of the business connection.
The High Court further found that the promoter of the assessee Company Mr. Desh Bandhu Gupta had a stature which enabled him to borrow loans from the Banks on personal security and as he died in an air crash the credit of the Company went down and it was not abl to raise money from the Banks.
There is absolutely no warrant for these facts referred to by the High Court which are neither mentioned in the agreed statement of the case submitted by the Tribunal to the High Court nor in the order of the Tribunal.
It is well settled that the High Court is not entitled to go behind the statement of the case.
In Commissioner of Income tax, Poona vs Manna Ramji and Company(1) this Court observed as follows: "In this respect we are of the view that the Tribunal is the final fact Finding authority.
It is for the Tribunal to find facts and it is for the High Court and this Court to lay down the law applicable to the facts found.
Neither the High Court nor this Court has jurisdiction to go behind or to question the statement of facts made by the Tribunal.
The statement of case is binding on the parties and they are Dot entitled to go behind the facts of the Tribunal in the statement.
When the question referred to the High Court speaks of 'on the facts and circumstances of the case ', it means on the facts and circumstances found by the Tribunal and not on the facts and circumstances as may be found by the High Court." In Commissioner of Income tax, Bombay vs Poona Electric Supply Co. Ltd.(2) the Bombay High Court observed as follows: "It is true that the Electricity act exercises control on the business of the licensee, but the control that is exercised by reason of the aforesaid proviso is to compel the assessee to distribute part of its clear profits if it is found that 'clear profits ' are in excess of the reasonable return as contemplated under the Act.
That, in our opinion, would only amount to apportionment or distribution of the profits after they have been earned.
It cannot, therefore, be said that the amount set apart for the purpose of distribution amongst the consumers is not chargeable to tax on the ground that it represents over charge.
" This case however was decided on its own facts and has no application to the facts in the instant case.
Reliance was also placed by counsel for the assessee Company on a Division Bench decision of the Patna High Court in Jamshedpur (1)86I.T.R.29, 37.
(2)49 I.T.R.913 924.
14 L390SCI/76 200 Motor Accessories Stores vs Commissioner of Income tax, Bihar & Orissa(1) where Untwalia, C.J., as he then was, observed as follows: "That position being accepted the matter as to what amount was payable to Parikh ought to have been adjudged from the assessee 's point of view and not from the department or Tribunal 's point of view.
It has to he emphasised that unless there is, a limitation put by the law on the amount , of expenditure a lesser amount than the amount expended cannot be allowed merely because the assessing authority c thinks that the assessee could have managed by paying a 201 application of the profits In this connection the Privy Council observed as follows.
"It is claimed for the company that when it makes over to the Colonial Government their half of the net profits it is making an expenditure incurred solely for the purpose of " earning its own profits.
The Court below has unanimously negatived this contention and in their Lordships ' opinion has rightly done so.
A payment out of profits and conditional on profits being, earned cannot accurately be described as a payment made to earn profits.
It assumes that profits have first come into existence.
But profits on their coming into existence attract tax at that point and the revenue is not concerned with the subsequent application of the profits.
* * * But the principle laid down by Lord Chancellor Halsbury in Gresham Life Assurance Society vs Styles p. 315, is of general application unaffected by the specialities of the English tax system: '.
But when once an individual or a company has in that proper sense ascertained what are the profits of his business or his trade, the destination of those profits or the charge which has been made on those profits by previous agreement or otherwise is perfectly immaterial.
The tax is payable upon the profits realised and the meaning to my mind is rendered plain by the words payable out of profits '.
Thus in short by controlling the manufacturing programme, sharing to the extent of 50% in the net profits ascertained in the manner stipulated in the agreement and above all for sharing 50% of the losses which are to be deducted from the commission of the agents the agents become completely equated with the proprietors of the firm itself and therefore the contract of agency is really a sort of a partner ship and has been given the cloak and colour of an agency to conceal the real intent and purpose the commercial venture.
In view of the decisions referred to above and the peculiar facts of the present case we are satisfied that the view taken by the Tribunal that the payments in question were not legally deductible under section 10(2)(xv) of the Act was correct.
The view taken by the High Court that the amounts in question were deductible under section 10(2) (xv) appears to be legally erroneous cannot be upheld.
For the reasons given above, the appeals are allowed and the : judgment of the High Court is set aside and that of the Tribunal is restored and the two questions referred to the High Court are answer ed against the assessee Company and in favour of the Revenue.
In view of the peculiar acts af the present case, we leave the parties to bear their own costs in this Court.
V.P.S. Appeals allowed.

summary:
In 1952, the assessee company installed a new plant by raising a loan from the Industrial Finance Corporation, and appointed a sole selling agent of its product.
ln 1953, the assessee changed the selling agent, and entered into an agreement with another selling agent.
Under the agreement, the agent was to make advances and finance the assessee.
Under cl.
7(1 ) of the agreement, the agent was to get a commission at the rate of 11% on the net proceeds of the sales of all its goods and 50% commission on the net profits of the new plant (the net profits being ascertained after deducting all the manufacturing costs, interest, insurance, etc.).
The selling agent advanced 2 sums of money in the assessment years 1956 57 and 1957 58 respectively, and received, during those 2 years, two sums as their 50% commission on the net profits of the new plant.
The assessee claimed, in its returns for those 2 years, that the amounts paid as commission to the selling agent were expenses incurred to earn profit and could, therefore, be deducted under section lO(2)(xv) lncome Tax Act, 1922; but the Income Tax officer disallowed the claim.
On appeal, the Appellate Assistant Commissioner held in favour of the assessee, but the Tribunal, on further appeal held that the agreement between the assessee and the selling agent amounted to a joint venture for the distribution of profits between the two, after the profits were ascertained, and upheld the contention of the Revenue that the two sums were not legal deductions within section 1O(2)(xv).
On reference, the High Court held in favour of the assessee.
Allowing the appeal to this Court, ^ HELD: (I)(a) In order to fall within section 10(2)(xv) the deduction claimed must amount to an expenditure which was laid out or expended wholly and exclusively for the purpose of the business profession or vocation; and this depends upon the facts of each case; and [191 G H] (b) In order to determine the reasonableness of the expenditure, the test of commercial expediency would have to be adjudged from the point of view of the businessman and not of the Income Tax Department.
[191H 192A] (2) It is well settled that the Court, in order to construe an agreement has to look to the substance or the essence of it rather than to its form.
A party cannot escape the consequences of law merely by describing an agreement in a particular form, though, in essence and substance, it may be a different transaction.
[l94 G H] (a) Clause 3 of the agreement requires not only consultation by the assessee with the selling agent, but also the consent, for me programme of manufacture of the product.
that is, if the agent withholds its consent, it could veto the programme of manufacture.
Such a limitation placed on the power of the assessee is not in consonance with a pure and simple contract of agency.
[192 F G] (b) Under cl.
6(1) the selling agent would have to make a full and complete investment for the working of the new plant to the fullest possible capacity 187 including wages, power, stores, repairs etc.
This is more in consonance with a partnership than an agency.
[193 C D] (c) Clause 6(ii) provides that the plant should be overhauled before tho commencement and the termination of the agreement.
This is also beyond the role of a simple selling agent.
[193 D E] (d) Sub clauses (Viii) and (ix) of cl. 6 show that any damage to the goods in transit would have to be debited to the account of the new plant and that such accounts would have to be maintained separately.
The object of these sub clauses is that the selling agent should be in a position to ascertain the net profits and control the working of the new plant.[193E] (e) An analysis of the terms of cl. 7(i) shows that the selling agent was agent to secure most liberal and profitable terms.
While it is difficult to lay down any rule of universal application as to what percentage of profit would be consistent with the payment in lieu of services, the conduct of the selling agent, in the present case.
in sharing half of the net profits is not consistent with payments made to agents for services rendered.
Taking the totality of the provisions of c the agreement, the percentage of profits and the manner in which it is to be deter mined is more consistent with the position of the selling agent as a partner than as an agent.
1194 A Cl (f) In cl. 7 there is also provision for the selling agent sharing the loss incurred by the assessee, by deducting 50% of the loss from its remuneration, and for a lump sum deduction of Rs. 50,000/ towards depreciation etc., for deter mining the net profit or loss position.
Clause 7(iv) provides for a separate commission account to be maintained by the selling agent and for payment of commission every 6 months.
Having regard to the terms and conditions of the agreement, the view taken by the Tribunal that the two sums were not legally deductible under section 10(2)(xv) was correct.
By contributing to the investments by controlling the manufacturing programme, by sharing to the extent of 50 per cent in the net profits ascertained in the manner stipulated in the agreement, and above all, by agreeing to share SO per cent of the losses which are to be deducted from the commission of the agent, the selling agent has actually contributed to a joint venture and became completely equated with the assessee, and therefore, the agreement between the two is really a sort of a partnership and has been given the cloak and colour of an agency to conceal the real intent and purpose of the commercial venture; and it must be construed as an agreement for division of profits in specified proportions.
[194 C D, F; 195 E G; 201 E F] British Sugar Manufacturers Ltd. vs Harris (Inspector of Taxes), , applied.
(3) The decision in Dharamvir 's case is distinguishable.
[195, G H] (a) In that case it was not agreed between the assessee and the trust, which agreed to advance a loan to him, that the profits would be ascertained after deducting the net expenses as in the agreement in the present case.
[196 B C] (b) While the contract was to be carried on in accordance with the policy settled between the assessee and the trust, in that case, it did not give any veto power to the trust to torpedo the contract.
In the present case, the agreement gave to the selling agents controlling power at every stage in the programme of manufacture and even at the stage of the sale of the products, by requiring the consent of the selling agent.
[196 C D] (c) Not only was there no provision in Dharamvir 's case under which the trust was to share the loss, but there was an express provision to the contrary.
Therefore, the payment of interest at the rate of 6 per cent on the loan advanced to the assessee by the trust and a percentage in the profits, in that case, is quite consistent with a remuneration in lieu of services lent and would amount to an expenditure incurred by the assessee, wholly and exclusively for the purpose of the business which was conducted by the assessee.
[196 D E] (4) In the present case, it is difficult to hold that commercial expediency dictated the assessee to allow itself to be completely overshadowed by its selling 188 agent, so as to pay them not only for the services rendered but allow them to share profits, control the manufacture of goods and to share the losses.
The test of commercial expediency cannot be reduced to the shape of a ritualistic formula.
The test merely means that the Court will place itself in the position of a businessman and find out whether the expenses incurred could be said to have been laid out for the purpose of the business, or whether the transaction was merely a subterfuge for the purpose of sharing or dividing the profits ascertained in a particular manner.
In the ultimate analysis, the matter would depend on the intention of the parties as spelt out from the terms for the agreement or the surrounding circumstances, the nature or character of the trade or venture, the purpose for which the expenses are incurred and the object which is sought to be achieved for incurring those expenses.
If the expenses incurred amount o a profit of an enduring nature, they may be treated as capital expenditure; whereas, if the expenses merely serve to promote or increase the commercial activity, they may amount to an expenditure which is incurred for the purpose of the business.
[196H 197D] J. K. Woollen Manufacturers vs Commissioner of Income Tax, V.P. [1969]1 S.C.R. 525, distinguished.
Commissioner of Income Tax, Kerala vs Travancore Sugar and Chemicals Ltd., , 10; Commissioner of income Tax, Bombay vs Poona Electric Supply Co. Ltd., 49 I.T.R. 913, 924 and Jamshedpur Motor Accessories Stores vs Commissioner of Income Tax, Bihar & Orissa, , 672 referred to.
(5) The High Court is not entitled to go behind the Statement of the case submitted by the Tribunal.
But, in the present case, in interpreting the agreement, the High Court relied upon what it called surrounding circumstances, namely, that the assessee was a losing concern from its inception, that it was in such a bad shape that it had to get rid of its first selling agent.
BECAUSE, it caused considerable embarrassment to the assessee while the second selling agent was prepared to give the assessee advantageous terms.
that the selling agent had no other connection than a business connection with the assessee; and that because of the death of one of the promoters of the assessee, who commanded credit in the money market, the assessee was not able to raise money from the banks.
But, these facts were not found by the Tribunal nor was there any warrant for any of the assumptions.
[198G 199C] Commissioner of Income Tax, Poona vs Manna Ramji and Company, , 37, followed.
(6) The facts found by the Tribunal and those mentioned in its Statement of the case to the High Court, lead to the inescapable conclusion that the agreement is nothing but a joint venture to divide the profits after they are ascertained, and hence, the payments to the selling agent cannot, in any sense be deemed to be expenses incurred by the assessee for the purpose of its business or for earning profits.
Pondicherry Railway Co. Ltd. vs Commissioner of Income Tax madras, A.I.R. 1931 P.C. 165, 170, referred to.


judgement:
Civil Appeal No. 522 of 1971.
Appeal by special leave from the judgment and order dated the 26th April, 1968 of the Calcutta High Court in I. T. Reference No. 50 of 1965.
N. N. Goswamy and Arvind Minocha for the Appellant.
B. B. Ahuja and section P. Nayar for the Respondent.
The Judgment of the Court was delivered by FAZAL ALI, J.
This appeal by special leave involves the interpretation of the scope, extent and ambit of section 34(1) (b) of the Income tax Act, 1922 with particular reference to the connotation and import of the word `information ' used in section 34(1) (b).
Although the question appears to have been settled in one form or the other by the decisions of this Court, the changing and diverse society such as ours ' dealing in complex commercial activities continues to produce multifarious facts of taxable income which has escaped assessment cloaked under difficult propositions and knotty legal problems.
It is the onerous task of this Court to dispel the doubts and resolve and reconcile the differing views taken by the High Courts in various situations which every time poses a new problem.
The points involved in the instant case have baffled many a legal brain so much so that the High Court also appears to have been in two minds whether to place the information in the instant case as based on the materials already on the record of the original assessment of 1956 57 revealed by closer circumspection or to the information derived from subsequent or fresh facts.
Before, however, examining the legal incidents of section 34 of the Income tax Act, 1922, it may be necessary for us to travel into the domain of the facts of the present case which are short and simple.
969 The assessee appellant M/s Kalyanji Mavji & Company is a registered partnership firm dealing in various commercial activities.
The said firm filed its return for the year 1956 57 corresponding to the accounting Gujarati Diwali Year 2001 showing a total income of Rs. 7,44,551/ after claiming a deduction of a sum of Rs. 43,116/ being the amount of interest paid by the assessee on the debts incurred for the partnership business.
The Income tax officer accepted the return but on appeal to the Appellate Assistant Commissioner the assessment was reduced by a sum of Rs. 9,200/ by his order dated July 3, 1958.
For the assessment year 1957 58 the assessee showed the same income and the deduction claimed was allowed.
The next year 1958 59, however, presented quite a different complexion.
While the assessee filed his return in the year 1958 59, the Income tax officer concerned suspected the correctness of the return particularly the deduction of interest and found that as the amount of the deduction claimed was utilised for giving interest free loans to the partners for clearing up their income tax dues it could not be said to be a loan incurred for the expenses of the partnership business and he accordingly disallowed the deduction claimed by the appellant.
This discovery led the Income tax officer to issue notice to the appellant under section 34(1) (b) of the Income tax Act, 1922 hereinafter referred to as `the Act ' for reopening the assessment of the year 1956 57 hereafter to be referred to as `the original assessment ' on the ground that the deduction having been wrongly allowed, taxable income and escaped assessment.
After hearing the appellant the Income tax officer completed the assessment and included the sum of Rs. 43,116/ to the total income shown, by the assessee.
Thereafter the appellant filed an appeal before the Appellate Assistant Commissioner against the order of the Income tax officer but the appeal was dismissed by the Appellate authority which confirmed the order of the Income tax officer.
It may be pertinent to note here, that in his order the Appellate Assistant Commissioner pointed out that in the assessment years 1958 59 and 1959 60 the Income tax officer found that the appellant had no evidence with him to show that the funds borrowed on which the interest was paid were utilised for the purpose of the business and not diverted to the partners.
Thereafter the appellant filed a second appeal to the Income tax Appellate Tribunal, "B", Bench Calcutta.
The Tribunal after having accepted the facts culminating in the order of the Appellate Assistant Commissioner was of the opinion that the information of the Income tax officer resulting in the notice under section 34(1) (b) of the Act to the assessee was not based on any fresh facts but was derived from the materials on the records of the original assessment.
The Tribunal further found that if the Income tax officer while completing the original assessment would have been careful enough to scrutinise the balance sheet he would have at once detected the infirmity on the basis of which the subsequent Income tax officer issued the notice under section 34(1) (b)` of the` Act to the appellant.
The Tribunal further was of the opinion that the subsequent Income tax officer merely changed his opinion on the basis of the very materials that were before him when the original assessment was made and that was not sufficient to attract the provisions of section 34(1) (b) of the Act.
The Tribunal accordingly allowed the appeal and set aside the order of the Income tax officer issuing notice to the assessee under section 34(1) (b) 970 for reopening the original assessment.
Thereafter the respondent, namely, the Commissioner of Income tax approached the Tribunal for making a reference to the High Court under section 66(1) of the Act as a result of which the Tribunal referred the case to the High Court at Calcutta after framing the following question: "Whether on the facts and in the circumstances of the case, the Tribunal, was right in holding that the re assessment made by the Income tax officer under section 34(1) (b) of the Indian Income tax Act, 1922 was incompetent ?" The High Court, after hearing the parties, differed from the view taken by the Tribunal and held that the present case squarely fell within the ambit of section 34(1) (b) of the Act inasmuch as the information on the basis of which the Income tax officer sought to re open the original assessment was based on subsequent facts as also on the materials of the original assessment revealed by more careful and closer circumspection of those materials.
The High Court referred to a number of decisions of this Court as also to the decisions of the Calcutta High Court.
The appellant sought leave to appeal to this Court against the order of the High Court, which having been refused, the appellant obtained special leave from this Court, and hence this appeal.
In support of the appeal it was contended by Mr. Banerjee that the view taken by the High Court is legally erroneous inasmuch as the admitted facts of this case would disclose that the information relied upon by the Income tax officer in order to re open the original assessment was not derive from external sources but amounted to a mere change of opinion on the very facts and materials that were present on the record of the original assessment.
It was also submitted that it was not open to the Income tax officer to have re opened the original assessment merely because he took a different view of the matter in the assessment year 1958 59.
Lastly it was argued that the High Court had not correctly applied the ratio laid down by this Court in Commissioner of Income tax, Gujarat vs A. Raman and Company(1).
Mr. Ahuja appearing for the Revenue submitted that the order of the Income tax officer was fully justified and the High Court had taken the correct view of the law.
In order to appreciate the contentions advanced by counsel for the parties, it is necessary to make a brief survey of the provisions of section 34(1) of the Income tax Act, 1922.
The section runs thus: "34.
(1) If (a) the Income tax officer has reason to believe that by reason of the omission or failure on the part of an assessee to make a return of his income under section 22 for any year or to disclose fully and truly all material facts necessary for his assessment for that year, income, profits or gains chargeable to income tax have escaped assessment for that year, or have been under assessed or assessed at too low a rate, or 971 have been made the subject of excessive relief under the Act, or excessive loss or depreciation allowance has been computed, or (b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income tax officer has in consequence of information in his possession reason to believe that income, profits or gains chargeable to income tax have escaped assessment for any year, or have been under assessed, or assessed at too low a rate, or have been made the subject of excessive relief under this Act, or that excessive loss or depreciation allowance has been computed, he may in cases falling under clause (a) at any time and in cases falling under clause (b) at any time within four years of the end of that year, serve on the assessee, or, if the assessee is a company, on the principal officer thereof, a notice containing all or any of the requirements which may be included in a notice under sub section (2) of section 22 and may proceed to assess or reassess such income profits or gains or recompute the loss or depreciation allowance; and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub section Provided * * * *" It would be seen that section 34(1) contemplates two categories of cases for re opening the previous assessment (1) where there has been an omission or failure on the part of the assessee to make a return of his income under section 22 or to disclose fully and truly all material facts necessary for his assessment; and (2) where there has been no such omission on the part of the assessee but the Income tax officer on the basis of information in his possession finds that income chargeable to tax has escaped assessment for any year.
It is, therefore, manifest that the first category deals with cases where an assessee is himself in default and the second category deals with cases where there is no fault on the part of an assessee but where the income chargeable to tax has actually escaped assessment for one reason or the other and the Income tax officer comes to know about the same.
In the instant case, however, we are concerned with clause (b) of section 34(1) extracted supra.
Before however proceeding to interpret the ambit and import of section 34(1) (b) it may be necessary to consider the history of section 34 of the Act which appears to have passed through different phases with amendments and additions made to the section from time to time.
Section 34 as it stood in 1922 was as follows: "34.
If for any reason income profits or gains chargeable to income tax has escaped assessment in any year, or has been assessed at too low a rate, the Income tax officer may, at any time within one year of the end of that year, serve on 972 the person liable to pay tax on such income, profits or gains, or in the case of a company on the principal officer thereof, a notice containing all or any of the requirements which may be included in a notice under sub section (2) of section 22 and may proceed to assess or reassess such income, profits or gains, and the provisions of this Act shall, so far as may be apply accordingly as if the notice were a notice issued under that sub section: Provided that the tax shall be charged at the rates at which it would have been charged had the income, profits or gains not escaped assessment or full assessment, as the case may be.
" It would be seen that in the section as it stood in 1922 the word `information ' was not there at all and the section merely empowered the Income tax officer to reopen the assessment of any year where income chargeable to tax had escaped assessment.
No conditions or limitations on the power of the Income tax officer were at all laid down under the section.
It appears that the appropriate Legislature in its wisdom thought that this would be too wide a power to be given to the Income tax officer and may not be workable.
In these circumstances, by the Indian Income tax (Amendment) Act, 1939, this section was recast as under: "34 (1) If in consequence of definite information which has come into his possession the Income tax Officer, discovers that income, profits and gains chargeable, to income tax have escaped assessment in any year, or have been under assessed, or have been assessed at too low, a rate, or have been the subject of excessive relief under this Act the Income tax officer may, in any case in which he has reason to believe that the assessee has concealed the particulars of his income or deliberately furnished inaccurate particulars 1, thereof, at any time within eight years, and in any other case at any time within four years of the end of that year, serve on the person liable to pay tax on such income, profits or gains, or, in the case of a company, on the principle officer thereof, a notice containing all or any of the requirements which may be included in a notice under sub section (2) of section 22, and may proceed to assess or re assess such income, profits or gains, and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub section: Provided * * * " It may be pertinent to note that by virtue of this amendment the concept of the Income tax officer deriving definite information was introduced for the first time.
The word 'information ' was qualified by `definite ' and an additional condition was incorporated namely that the Income tax officer discovers that income chargeable to tax had 973 escaped assessment.
This provision led the Courts to approach the provisions of the section with greater circumspection and stricter scrutiny as a result of which many cases of escaped assessments had to be set at naught by some decisions of the Courts.
This led the Parliament to take a fresh view of the situation.
Accordingly by the Income tax and Business Profits Tax (Amendment) Act, 1948, the section was re cast in the present form as quoted above.
There were further amendments in 1954 and 1956 with which we are not concerned.
Ultimately by the Income tax Act, 1961, the section underwent a complete transformation and even the setting of the section was changed which now forms section 147(a) & (b) of the Income tax, 1961.
We are now concerned in this case only with section 34(1) (b) as it stood after the amendment of 1948.
Another pertinent fact which may be mentioned here is that although section 34 was the subject of several amendments, yet the word `information ' which was introduced in 1939 has not been defined at all.
Since the word `information ' has not been defined, it is difficult to lay down any rule of universal application.
At the same time it cannot be disputed that the object of the Act was to see that the tax collecting machinery is made as perfect and effective as possible so that the tax payer is not allowed to get away with escaped Income tax.
The fact that the adjective `definite ' qualified the word `information ' and the word `discovers ' which were introduced in the Income tax (Amendment) Act, 1939 were deleted by the Amendment Act of 1948 would lead to the irresistible inference that the word `information ' is of the widest amplitude and comprehends a variety of factors.
Nevertheless the power under section 34(1) (b), however wide it may be, is not plenary because the discretion of the Income tax officer is controlled by the word "reason to believe".
It was so held by this Court in Bhimraj Pannalal vs Commissioner of Income tax Bihar and Orissa(1), while affirming the decision of the Patna High Court in Bhimraj Panna Lal vs Commissioner of Income tax, Bihar and Orissa(1).
This legal proposition, however, is not disputed.
It, therefore, follows that information may come from external sources or even from materials already on the record or may be derived from the discovery of new and important matter or fresh facts.
The word `information" will also include true and correct state of the law derived from relevant judicial decisions either of the Income tax authorities or other courts of law which decide income tax matters.
Where the ground on which the original assessment is based is held to be erroneous by a superior court in some other case, that will also amount to a fresh information which comes into existence subsequent to the original assessment.
A subsequent Privy Council decision is also included in the word `information '.
Thus it is very difficult to lay down any hard and fast rule.
But this Court has in two leading cases laid down some objective tests and principles to determine the applicability of section 34(1) (b) of the Act which we shall now discuss.
974 In Maharaj Kumar Kamal Singh vs The Commissioner of Income tax, Bihar & Orissa(1) the word "information" fell for interpretation by this Court, where it was observed thus: "We would accordingly hold that the word "information" in section 34(1) (b) includes information as to the true and correct state of the law and so would cover information as to relevant judicial decisions.
If that be the true position, the argument that the Income tax officer was not justified in treating the Privy Council decision in question as information within section 34 (1) (b) cannot be accepted.
* * * * * In our opinion, even in a case where a return has been submitted, if the Income tax officer erroneously fails to tax a part of assessable income, it is a case where the said part of the income has escaped assessment.
The appellant 's attempt to put a very narrow and artificial limitation on the meaning of the word "escape" in section 34(1)(b) cannot therefore succeed.
" It will be seen that this Court was in favour of placing not a narrow but a liberal interpretation on the provisions of section 34(1) (b) of the Act.
This decision was considered by this Court in Commissioner of Wealth Tax, West Bengal vs Imperial Tobacco Company of India Ltd.(2) where Wanchoo, J., speaking for this Court observed as follows: "It may be added that after the decision of this Court in Maharaj Kumar Kamal Singh 's case it is now settled that "information in section 34(1) (b) included information as to the true and correct state of law, and so would cover information as to relevant judicial decisions" and that such information for the purpose of section 34(1) (b) of the Income tax Act need not be confined only to cases where the Income tax officer discovers as a fact that income has escaped assessment.
" Similarly in Commissioner of Income tax, Excess Profits Tax, Hyderabad, Andhra Pradesh vs V. Jagan Mohan Rao and ors.(3), while following the decision of this Court in Maharaj Kumar Kamal Singh 's case (supra) it was observed as follows: "In these circumstances it was held by this Court firstly that the word information in section 34(1) (b) included information as to the true and correct state of the law, and so would cover information as to relevant judicial decisions, secondly that `escape ' in section 34(1) was not confined to cases where no return had been submitted by the assessee or where income had not been assessed owing to inadvertence or oversight or other lacuna attributable to the assessing authorities.
But even in a case where a return had been submitted, if the Income tax officer had erroneously failed to tax a part of the assessa 975 ble income, it was a case where that part of the income had escaped assessment.
The decision of the Privy Council, therefore, was held to be information within the meaning of section 34(1)(b) and the proceedings for re assessment were validly initiated.
" The matter was again fully considered by this Court in A. Raman and Company 's case (supra), where Shah, J., speaking for the Court extended the connotation of the word `information ' to two different categories of cases and observed as follows: "The expression "information" in the context in which it occurs must, in our judgment, mean instruction or knowledge derived from an external source concerning facts or particulars, as to law relating to a matter bearing on the assessment.
* * * * * Jurisdiction of the Income tax officer to reassess income arises if he has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment.
That information, must, it is true, have come into the possession of the Income tax officer after the previous assessment,`but even if the information be such that it could have been obtained during the previous assessment from an investigation of the materials on the record, or the facts disclosed thereby or from other enquiry or research into facts or law, but was not in fact obtained, the jurisdiction of the Income tax officer is not affected.
" An analysis of this case would clearly show that the information as contained in section 34(1) (b) must fulfil the following conditions: (1) The information may be derived from an external source concerning facts or particulars as to law relating to matter bearing on the assessment; (2) That the information must come after the previous or the original assessment was made.
In fact the words "in consequence of information" as used in section 34(1) (b) clearly postulate that the information must be subsequent to the original assessment sought to be reopened; and (3) That the information may be obtained even on the basis of the record of the previous assessment from an investigation of the materials on the record, or the facts disclosed thereby or from other enquiry or research into facts or law.
These categories are in addition to the categories laid down by this Court in Maharaj Kumar Kamal Singh 's case which has been consistently followed in several decisions of this Court as shown above.
976 On a combined review of the decisions of this Court the following tests and principles would apply to determine the applicability of section 34(1) (b) to the following categories of cases: (1) Where the information is as to the true and correct state of the law derived from relevant judicial decisions; (2) Where in the original assessment the income liable to tax has escaped assessment due to oversight, in advertence or a mistake committed by the Income tax officer.
This is obviously based on the principle that the tax payer would not be allowed to take advantage of an oversight or mistake committed by the Taxing Authority; (3) Where the information is derived from an external source of any kind.
Such external source would include discovery of new and important matters or knowledge of fresh facts which were not present at the time of the original assessment; (4) Where the information may be obtained even from the record of the original assessment from an investigation of the materials on the record, or the facts disclosed thereby or from other enquiry or research into facts or law.
If these conditions are satisfied then the Income tax officer would have complete jurisdiction to re open the original assessment.
It is obvious that where the Income tax officer gets no subsequent information, but merely proceeds to re open the original assessment without any fresh facts or materials or without any enquiry into the materials which form part of the original assessment, section 34(1) (b) would have no application.
Learned counsel for the appellant heavily relied on the decision of this Court in Bankipur Club Ltd. vs Commissioner of Income tax, Bihar and Orissa(1) in support of the proposition that in the instant case the Income tax officer has proceeded to re open the assessment on the basis of the very materials which formed the subject of the original assessment.
It was submitted that in the original assessment the assessee had claimed a deduction and had produced the balance sheet and these very factors were also present when the Income tax officer sought to make the assessment for the year 1958 59 and 1959 60, and since no fresh facts were brought to his notice it was not open to him to re open the original assessment.
The facts of the case relied upon by the appellant are clearly distinguishable from the facts of the present case.
In Bankipur Club Ltd. 's(1) case it appears that the Club had in its return placed all the materials with full details.
The facts placed before the Income tax officer were self evident and no calculation or scrutiny was necessary to find out the effect of the materials 977 placed before the Income tax officer.
In view of this peculiar situation, Hegde, J., speaking for the Court observed: "The fact that the club had received certain amounts as guests charges from its members had been placed before the Income tax officer.
It is not the case of the Income tax officer that he did not come to know all the relevant facts when he made the original orders of assessment.
It is also not his case that at the time he made those orders he was not aware of the true legal position.
It was for the Income tax officer to show that he had received some information subsequent to his passing the original orders of assessment.
No such material was placed before the Tribunal.
That being so, the Tribunal, in our opinion, was right in holding that the Income tax officer was incompetent to initiate proceedings under section 34(1) (b).
" In the instant case it would appear that three additional facts had come into existence after the original assessment for the year 1956 57 was made by the Income tax officer.
These were (i) that for the assessment year 1958 59 the Income tax officer did not accept the assessee 's plea that he should be allowed deduction for a sum of Rs. 43,116/ ; (2) that the Income tax officer came to a finding that the assessee had not proved that the amount of deduction claimed was really in connection with the partnership business but held that this was on account of interest free advance to the partners to pay their income tax dues; and (3) the conduct of the appellant in not clearing the doubts of the Income tax officer when the appellant was given the notice to contest the assessment merely on the question of law also spoke volumes against the assessee and was also an additional factor which weighed with the Income tax officer.
It would be seen that the Income tax officer in his order, which is Annexure A to the statement of case filed by the Tribunal, observed as follows: "In the course of the assessment proceedings for 1958 59 however it was discovered that the assessee 's claim of payment of interest on money borrowed was not proper.
Inasmuch as the entire money borrowed had been utilised not for the purpose of business but in giving interest free advance to the partners of the firm. . . . .
In fact no argument as regards the allowance or disallowance of the interest amount in question was placed but the entire argument of the representative proceeded on the basis that the action u/s 34 itself was illegal. . . . .
There is no doubt that there has been under assessment in this case and there is also no doubt that the fact of under assessment has been brought to the notice of the Income tax officer only in the course of the income tax proceedings for 1958 59.
" Similarly the appellate Assistant Commissioner in his order, which is Annexure B to the statement of the case, observed as follows: "At the time of the original assessment the appellant claimed an interest of Rs. 43,116/ which was allowed by 978 the I.T.O. in full.
However, later on, while making the assessment for the assessment years 1958 59 and 1959 60, the I.T.O. found that the appellant had no evidence with him to show that the funds borrowed on which the interest was paid, in fact, were utilised for the purpose of the business and not diverted to the partners.
" These findings by the two authorities have been clearly mentioned in the order of the Tribunal, which, while narrating the facts, observed as follows: "Subsequently, however, when the Income tax officer was making the assessment for the assessment year 1958 59, he discovered that the assessee did not utilise the borrowed money for the purpose of the business but for giving interest free advances to its partners.
The Income tax officer, therefore, had reasons to believe that income to the extent of Rs. 43,116/ had been under assessed and he issued notice under section, 34." Thus in view of the findings given by the Income tax authorities the following facts emerge: (1) that at the time of the original assessment the appellant had filed his return claiming a deduction of Rs. 43,116/ and filed the balance sheet in support of his plea; (2) that the balance sheet showed that the capital of the firm was Rs. 8,70,000/ , total drawings by the partners stood at Rs. 29,31,998/ and the loans were Rs. 6,63,292/ The Income tax officer who completed the original assessment appears to have accepted the claim of the appellant because the balance sheet without any further scrutiny and a close calculation would not have revealed that the amount of deduction claimed was really in the nature of interest free loans given to the partners to meet their income tax liabilities: (3) that in 1958 59 the Income tax officer discovered that the deduction claimed by the appellant was not correct and he accordingly called upon it to prove its plea but the appellant led no evidence before the Income tax officer.
From this the Income tax officer concluded that the amount sought to be claimed as deduction was not incurred for the purpose of the partnership business.
Thus, therefore, the subsequent information was (1) the discovery by the Income tax officer that the deduction was wrongly claimed and his disallowance of that deduction; and (ii) the conduct of the appellant itself in not adducing any evidence or materials to prove its stand that the deduction was validly claimed.
979 We might mention that it was submitted by Mr. Banerjee that in fact the amount sought to be deducted was paid towards the income tax liability of the partners and this was done to protect the business itself and to improve the credit of the partners.
Even this specific plea does not appear to have been taken before the Income tax officer.
We are, however, not concerned with this particular plea because we are given to understand by the counsel for the appellant that the appeals against the assessment orders for the years 1958 59 and 1959 60 are pending before the Income tax authorities.
In these circumstances we are clearly of the opinion that the facts of the present case clearly fall within the tests and principles laid down by this Court in A. Raman and Company 's case (supra) inasmuch as the Income tax officer proceeded on the basis of the information which came to him after the original assessment by fresh facts revealed in the assessment for the year 1958 59 and consisted of the conduct of the appellant itself in not adducing any evidence to support its plea.
We are, therefore, unable to agree with the view of the Tribunal that this was a case of a mere change of opinion by the Income tax officer on the materials which were already on the record.
our attention was also drawn by the learned counsel for the appellant to the decision of the Bombay High Court in Commissioner of Income tax, Bombay City II vs H. Holck Larsen(1).
In this case, Chandrachud, J., as he then was, speaking for the Court after review of the authorities of this Court and other High Courts, observed as follows: "What is obligatory in order to apply section 34(1)(b) is that he must have "information" in his possession in consequence of which he has reason to believe that the income has escaped assessment or is under assessed, etc.
The distinction really consists in a change of opinion unsupported by subsequent information on the one hand and a change of opinion based on information subsequently obtained, on the other.
In the former class of cases, the assessment proceedings are attempted to be re opened without the discovery of an error and without receiving any information as to fact or law. . . . .
Such a reopening is based on a "mere" change of opinion and is without jurisdiction. . .
In the latter class of cases, the reopening is based on information leading to the requisite belief and is therefore within the jurisdiction of the officer.
" This decision is really based on the question whether it is open to the Income tax officer to change his opinion subsequently on the same materials and reopen the original assessment.
We are no doubt inclined to agree with the view expressed by Chandrachud, J., in the aforesaid case, but as this question is not free from difficulty as there is some divergence of judicial opinion on the subject, we would refrain from giving any definite decision on this point, particularly when in 980 the view we take in the instant case, this point does not really arise for determination in this case, which is really based on another principle, namely, that the information was derived by the Income tax officer from fresh facts and is clearly covered by the principles laid down in A. raman and Company 's case (supra).
For the reasons given above, we find ourselves in complete agreement with the view taken by the High Court.
Accordingly the appeal fails and is dismissed but without any order as to costs.
S.R. Appeal dismissed.

dataset_name: IN-Abs

summary:
The appellant company, a registered partnership firm, filed its income tax returns for the years 1956 57 and also for 1957 58 respectively showing a total income of ' Rs. 7,44,551/ , after claiming a deduction of a sum of Rs. 43,116/ , being the amount of interest paid by the assessee on the debts incurred for the partnership business along with the balance sheet in support of the said deductions.
The Income Tax officer accepted the claim on the basis of the balance sheet.
When the assessee filed his return for the year 1958 59, the Income Tax officer discovered that the deduction claimed by the appellant was not correct and called upon the assessee to prove its plea.
But, the assessee did not lead any evidence before him.
The Income Tax officer finding that the deduction of interest claimed was utilised for giving interest free loans to the partners for clearing their income tax dues and, as such, it could not be said to be a loan incurred for the expenses of the partnership firm, not only disallowed the deduction claimed for that assessment year, but also issued a notice under section 34 (1) (b) for the re opening of the original assessment of the previous years on the ground that the deduction having been wrongly allowed, taxable income escaped assessment.
Accordingly, the Income Tax officer re assessed him by including Rs. 43,116 to the total income.
The appeal to the Appellate Assistant Commissioner failed.
However, on second appeal, the Income Tax Appellate Tribunal "B" Bench, Calcutta, set aside the order of the reassessment opining that the information resulting in the reassessment notice under section 34(1)(b) was not based on any fresh facts, but was derived from the materials on the record of the original assessment amounting to a change of opinion and, as such, was not sufficient to attract the provisions of section 34(1)(b).
On the application of the respondent Revenue, the Tribunal made a reference under section 66(1) of the Act framing a question, namely, "Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the reassessment made by the Income Tax officer under section 34(1)(b) of the Indian Income Tax Act (1922) was incompetent ?" to the High Court, which answered it in the negative and held that the case squarely fell within the ambit of section 34(1)(b) of the Act inasmuch as the information on the basis of which the Income Tax officer sought to reopen the original assessment, was based on subsequent facts ' as also on the materials of the original assessment revealed by more careful and closer circumspection of these materials.
Negativing the following three contentions of the assessee appellant, namely, (i) The information relied upon by the Income Tax officer not having been derived from external sources, it amounted to a mere change of opinion on the very facts and materials that were present on the record of the original assessment not attracting the provisions of section 34(1)(b) of the Act.
967 (ii) It was not open to the Income Tax officer to have reopened the original assessment merely because he took a different view of the matter in the assessment year 1958 59.
(iii) That the High Court has not appreciated the ratio laid down by the Supreme Court in Commissioner of Income tax, Gujarat vs A. Raman and Company, , and dismissing the appeal by special leave, the Court ^ HELD: (1) section 34(1) contemplates two categories of cases for reopening the previous assessment (1) where there has been an omission or failure on the part of the assessee to make a return of his income under section 22 or to disclose fully and truly all materials facts necessary for his assessment; and (ii) where there has been no such omission on the part of the assessee but the Income Tax officer, on the basis of the information in his possession, finds that income chargeable to tax has escaped assessment for any year.
The first category deals with cases where an assessee is himself in default and the second category deals with cases where there is an default on the part of the assessee but where the income chargeable to tax has actually escaped assessment for one reason or the other and the Income Tax officer comes to know about the same[1971 E F] (2) The word "information" which has not been defined in the Act is of the widest amplitude and comprehends a variety of factors.
Nevertheless, the power under section 34(1)(b), however, wide it may be, is not plenary because the discretion of the Income Tax officer is controlled by the words "reason to believe".
[973 C & E] Bhimraj Pannalal vs Commissioner of Income tax, Bihar and Orissa, an Bhimraj Panna Lal vs Commissioner of Income tax, Bihar & Orissa, , followed.
(3) Since the Income Tax officer was to see that the tax collecting machinery is made as perfect and effective as possible so that the tax payer is not allowed to get away with escaped income tax, in view of the difficulty in laying down any rule of universal application, the following tests and principles would apply to determine the applicability of section 34(1)(b) to the following categories of cases: (i) Where the information is as to the true and correct state of law derived from relevant judicial decisions; (ii) Where in the original assessment the income liable to tax has escaped assessment duel to oversight, inadvertence or a mistake committed by the Income Tax officer on the principle that the tax payer would not be allowed to take advantage of an oversight or mistake committed by the taxing authority; (iii) Where the information is derived from an external source of any kind.
Such external source would include discovery of new and important matters or knowledge of fresh, facts which were not present at the time of the original assessment; and (iv) Where the information may be obtained even from the record of the original assessment from an investigation of the materials on the record or the facts disclosed thereby or from other enquiry or research into facts of law.
If these conditions are satisfied, then the Income Tax officer would have complete jurisdiction to reopen the original assessment.
It is obvious that where the Income Tax officer gets no subsequent information, but merely proceeds to reopen the original assessment without any fresh facts or materials or without any enquiry into the materials which from part of the original assessment, section 34(1)(b) would have no application.
[973 C, D, 976 A E] Maharaj Kumar Kamal Singh vs The Commissioner of Income tax, Bihar & orissa [1959] Supp.
(1) S.C.R. 10; Commissioner of Wealth tax, West Bengal vs Imperial Tobacco Company of India Ltd. [1966] Supp.
S.C.R. 174; Commissioner of Income tax.
Excess Profits Tax.
Hyderabad, Andhra Pradesh vs V. Jagan Mohan Rao and ors.
and Commissioner of Income tax Gujarat vs A. Raman and Company, , discussed.
968 (4) In the instant case the subsequent information was the discovery by the Income Tax officer the deduction was wrongly claimed and the consequent disallowance of that deduction and the conduct of the assessee itself in not adducing any evidence or materials to prove its stand that the claim was validly made which led to the issue of the notice under section 34(1)(b) for reopening the assessment [978 H] (5) The case really fell within the tests and principles laid down in A. Raman Company 's case and within the ambit of section 34(1)(b) inasmuch as the Income Tax officer proceeded on the basis of the information which came to him after the original assessment, by fresh facts revealed in the assessment for the year 1958 59 and consisted of the conduct of the assessee in not adducing any evidence to support its plea.
It was not a case of a mere change of opinion by the Income Tax officer on the materials which were already on record.
[1979 B C] Commissioner of Income tax, Gujarat vs A. Raman and Company, , applied.
Bankipur Club Ltd. vs Commissioner of Income tax, Bihar and Orissa, , 834, distinguished.
[On the question "Whether it is open to the I.T.O. to change his opinion subsequently on the same materials and reopen the original assessment" which arose in the decision in Commissioner of Income Tax, Bombay City 2 vs H. Holck Larsen, , 479, relied on by the appellant assessee and also on the contention that in fact the amount sought to be deducted was paid towards the income tax liabilities of the partners, the Court applied "Non liquet"]