judgement:
Special Leave Petition (Civil) Nos.
14179 80 of 1985 385 From the Judgment and Order dated 11.7.1985 of the Andhra Pradesh High Court in Writ Appeal No. 1443 and 1467 of 1984.
T.U. Mehta and A. Subba Rao for the Petitioners.
Dr. Y.S. Chitale, T.V.S.N. Chari and Miss Vrinda Grover for the Respondent.
The Judgment of the Court was delivered by THAKKAR, J.
Does that part of the provision which provides for payment of a larger amount of gratuity with prospective effect from the specified date offend Article 14 of the Constitution of India? Whether gratuity must be paid on the stepped up basis, to all those who have retired before the date of the upward revision, with retrospective effect, even if the provision provides for prospective operation, in order not to offend Article 14 of the Constitution of India? A Division Bench of the High Court of Andhra Pradesh says 'no '.
In our opinion it rightly says so.
The petitioners, erstwhile Government employees who had retired "before" April 1, 1978, inter alia claimed and contended before the High Court that they were entitled to the benefit to the Government order No. 88 dated 26 March, 1980 providing that: "(b) Retirement gratuity may be 1/3rd of pay drawn at the time of retirement for every 6 monthly service subject to maximum of 20 months pay limited to Rs.30,000.
" The said order in so far as gratuity is concerned is made effective from 1st April, 1978.
Says the High Court: "Therefore, we are now only concerned whether this G.O. Ms. No. 88, dated 26 3 1980, should be made applicable to the pensioners that retired prior to 1 4 1978 by revising their gratuity payable to them.
The learned Advocate General, contends, that gratuity is something different from the other pensionary benefits like the pension and the family pension, which are continuing ones.
The Gratuity that accrued to the petitioners prior to 1 4 1978 was calculated on the then existing Rules and paid.
In that way, the pensioners retired prior to 1 4 1978 will form themselves into a distinct class for purposes of the pay 386 ment of benefit of gratuity from the others that retired after 1 4 1978, from which date, the revised pension rules are made to be applied by the Government.
On the other hand, it is the contention of the writ petitioners that gratuity is a part and parcel of the pensionary benefits and the same cannot be looked separately from the other pensionary reliefs.
The learned counsel for the Writ Petitioners, no doubt, cited two decisions (1) V.P. Gautama, IAS Retd.
vs Union of India (SLJ 1984 (1) 120) (2) M.P. Tandon vs State of U.P. , where their Lordships that decided the above two cases, held, that no distinction can be made in the pensionary benefits including death cum retirement gratuity benefit between the pensioners that retired prior to the stipulated date and after the stipulated date.
In the decision D.S. Nakara vs Union of India, (A.I.R. , their Lordships of the Supreme Court enunciated the principle as follows: "With the expanding horizons of socioeconomic justice, the Socialist Republic and Welfare State which the country endeavours to set up and the fact that the old man who retired when emoluments were comparatively low are exposed to vegaries of continuously rising prices, the falling value of the ruppe consequent upon inflationary inputs, by introducing an arbitrary eligibility criteria, 'being in service and retiring subsequent to the specified date ' for being eligible for the liberalised pension scheme and thereby dividing a homogeneous class, the classification being not based on any discernible rational principle and being wholly unrelated to the objects sought to be achieved by grant of liberalised pension and the eligibility criteria devised being throughly arbitrary, the eligibility for liberalised pension scheme of "being in service on the specified date and retiring subsequent to that date" in the memoranda Exs.
P 1 and P 2, violated article 14 and is unconstitutional and liable to be struck down." After thus enunciating the principle, their Lordships have taken care to observe as follows: "But we make it abundantly clear that arrears are not re 387 quired to be made because to that extent the scheme is prospective." In our opinion, the arrears relating to gratuity benefit computed according to the Revised Pension Rules of 1980 may not be paid to the pensioners that retired prior to 1 4 1978 because at the time of retirement, they are governed by the then existing Rules and their gratuity was calculated on that basis.
The same was paid.
Since the revised scheme is operative from the date mentioned in the scheme, i.e. 1 4 1978, the continuing rights of the pensioners to receive pension and family pension must also be revised according to that scheme.
But the same cannot be said with regard to gratuity, which was accrued and drawn.
The reason why their Lordships of the Supreme Court in Nakara 's case refused to grant arrears to the pensioners that retired prior to the stipulated date would ipso facto apply for refusing to grant the revised gratuity, since that would amount to asking the State Government to pay arrears relating to gratuity after revising them according to the new scheme for those that retired prior to 1 4 1978 and that would amount to giving retrospective effect to the A.P. Revised Pension Rules, 1980, which came into effect from 29 10 1979 and in the case of Part II of those Rules from 1 4 1978.
The scheme is prospective and not retrospective.
Moreover, we must remember that when the State Government appointed the Pay Revision Commissioner to review the then existing scales of pay under G.O. Ms. No. 745, General Administration (Spl.
A) Department, dated 3 11 1978, the Pay Revision Commissioner was asked to take into account, while making his recommendation, the economic conditions in the State, the financial implications of his recommendations, and the impact thereof on the resources avilable for the plan and other essential non plan expenditure.
Surely, the Pay Revision Commissioner, when he made his recommendations to revise the pensionary benefits, is not contemplating to make his recommendations retrospective.
Otherwise, he would have taken financial implications of those recommendations and the impact thereof on the resources available for plan and other essential non plan expenditure of the State.
For this reason also, we cannot direct the State Government to re 388 vise the gratuity benefit, which was already paid to these petitioners who retired prior to 1 4 1978.
The Supreme Court has clearly stated in Nakara 's case that arrears are not required to be paid because to that extent the scheme is prospective.
Similar is the case with regard to the case of gratuity that was accrued and paid prior to the stipulated day mentioned in the G.O. promulgating the Revised Pension Rules of 1980.
" We fully concur with the view of the High Court.
The upward revision of gratuity takes effect from the specified date (April 1, 1978) with prospective effect.
The High Court has rightly understood and correctly applied the principle propounded by this Court in Nakara 's case, AIR 1983 S.C. 130.
There is no illegality or unconstitutionality (from the platform of Article 14 of the Constitution of India) involved in providing for prospective operation from the specified date.
Even if that part of the Notification which provides for enforcement with effect from the specified date is struck down the provision can but have prospective operation not retrospective operation.
In that event (if the specified date line is effaced), it will operate only prospectively with effect from the date of issuance of the notification since it does not retrospectively apply to all those who have already retired before the said date.
In order to make it retrospective so that it applies to all those who retired after the commencement of the Constitution on 26 January, 1950 and before the date of issuance of the notification on 26 March, 1980, the Court will have to re write the notification and introduce a provision to this effect saying in express terms that it shall operate retrospectively.
Merely striking down (or effacing) the alleged offending portion whereby it is made effective from the specified date will not do.
And this, the Court cannot do.
Besides, giving prospective operation to such payments cannot by any stretch of imagination be condemned as offending Art 14.
An illustration will make it clear.
Improvements in pay scales by the very nature of things can be made prospectively so as to apply to only those who are in the employment on the date of the upward revision.
Those who were in employment say in 1950, 1960 or 1970, lived, spent, and saved, on the basis of the then prevailing cost of living structure and pay scale structure, cannot invoke article 14 in order to claim the higher pay scale brought into force say, in 1980.
If upward pay revision cannot be made prospectively on account of Article 14, perhaps no such revision would ever be made.
Similar is the case with regard to gratuity which has already been paid to the petitioners on the then prevailing basis as it obtained at the time of their respective dates of retirement.
The amount got crystallized on 389 the date of retirement on the basis of the salary drawn by him on the date of retirement.
And it was already paid to them on that footing.
The transaction is completed and closed.
There is no scope for upward or downward revision in the context of upward of downward revision of the formula evolved later on in future unless the provision in this behalf expressly so provides restrospectively (downward revision may not be legally premissible even).
It would be futile to contend that no upward revision of gratuity amount can be made in harmony with Article 14 unless it also provides for payment on the revised basis to all those who have already retired between the date of commencement of the Constitution in 1950, and the date of upward revision.
There is therefore no escape from the conclusion that the High Court was perfectly right in repelling the petitioners ' plea in this behalf.
For the sake of record we may mention that our attention was called to an order of a Division Bench of the High Court of Gujarat LPA 280 of 1983 dated 8.9.83 per P.D. Desai Acting C.J., which does not discuss the issues involved but is based on a concession said to have been made by the Advocate General who appeared for the State.
And also to a decision of the Allahabad High Court, (M.P. Tandon vs State of U.P., and (Punjab & Haryana High Court (V.P. Gautama vs Union of India, A.I.R. SLJ [1984] (1) 120.) In none ot these decisions the relevant passage from D.S. Nakara vs Union of India, , was considered.
Nor was the aspect regarding prospective operation considered on principle.
The High Court considered it shocking and was carried away by the fact that an employee who retired even one day before the enforcement of the upward revision would not get the benefit if the specified date of enforcement was not effaced by striking down the relevant provision.
But in all cases of prospective operation it would be so.
Just as one who files a suit even one day after the expiry of limitation would lose his right to sue, one who retires even a day prior to enforcement of the upward revision would not get the benefit.
This cannot be helped, there is nothing shocking in it unless one can say legislation can never be made prospective, and nothing turns on it.
These are the reasons which impelled us to dismiss the Special Leave Petition on 18 July, 1986.
A.P.J. Petition dismissed.

summary:
The Government Order No. 88 dated 26th March, 1980 provided that retirement gratuity may be 1/3rd of pay drawn at the time of retirement for every 6 monthly service subject to maximum of 20 months pay limited to Rs.30,000.
This order in so far as gratuity is concerned is made effective from 1st April, 1978.
The petitioners, erstwhile Government employees who had retired "before" April 1, 1978, filed petition under Article 226 in the High Court, contending that gratuity is a part and parcel of the pensionary benefits and the same cannot be looked separately from the other pensionary reliefs and therefore, they are also entitled to the benefit of gratuity retrospectively at the enhanced rate though they had retired before April 1, 1978 and had been paid gratuity at the then prevailing rate.
On behalf of the State the petition was contested and it was contended that gratuity is something different from the other pensionary benefits like pension and family pension, which are continuing ones.
The gratuity that accrued to the petitioners prior to 1.4.1978 was calculated on the then existing Rules and paid, and the pensioners who retired prior to 1.4.1978 form themselves into a distinct class for purposes of the payment of benefit of gratuity from the others who retired after 1.4.1978, the date from which, the revised pension rules are made applicable by the Government.
The High Court dismissed the petition holding that the upward revision of gratuity takes effect from the specified date (April 1, 1978) with prospective effect.
384 Dismissing the Special Leave Petition of the Pensioners ' Association this Court, ^ HELD: 1.
The upward revision of gratuity takes effect from the specified date (April 1, 1978) with 'prospective ' effect.
The High Court has rightly understood and correctly applied the principle propounded by this Court in Nakara 's case, wherein it was held that no arrears are required to be paid because to that extent the scheme is prospective.
[388B C] V.P. Gautama, IAS Retd.
vs Union of India (S.L.J. 1984(1) 120), and M.P. Tandon vs State of U.P., [1984] Lab.
I.C.677, referred to.
D.S. Nakara vs Union of India, (A.I.R. 1983SC 130), relied upon.
There is no illegality or unconstitutionality involved in providing for prospective operation from the specified date.
Even if that part of the Notification which provides for enforcement with effect from the specified date is struck down the provision can but have prospective operation not retrospective operation.
In that event it will operate only prospectively with effect from the date of issuance of the notification since it does not retrospectively apply to all those who had already retired before the said date.
[388C E] 3.
In order to make the notification retrospective so that it applies to all those who had retired after the commencement of the Constitution on 26 January, 1950 and before the date of issuance of the notification on 26 March 1980, the Court will have to re write the Notification and introduce a provision to this effect saying in express terms that it shall operate retrospectively.
Merely striking down or effecing the alleged offending portion whereby it is made effective from the specified date will not do.
And this, the Court cannot do.
Besides, giving prospective operation to such payments cannot by any stretch of imagination be condemned as offending Article 14.
[388D F] 4.
Those who were in employment say in 1950, 1960 or 1970, lived, spent, and saved, on the basis of the them prevailing cost of living structure and pay scale structure, cannot invoke Article 14 in order to claim the higher pay scale brought into force say, in 1980.
If upward pay revision cannot be made prospectively on account of Article 14, perhaps no such revision would ever be made.
Similar is the case with regard to gratuity which has already been paid to the petitioners on the then prevailing basis as it obtaind at the time of their respective dates of retirement.
And it was already paid to them on that footing.
The transaction is completed and closed.
[388F H; 389A]


judgement:
Civil Appeal No. 1126 (NT) of 1974 From the Judgment Order dated 9th January, 1973 of the Calcutta High Court in Income Tax Reference No. 5 of 1967.
V.S. Desai, Dr. M.B. Rao and Miss A. Subhashini for the Appellant.
Nemo for the Respondent.
The Judgment of the Court was delivered by PATHAK, J.
This appeal by certificate granted by the High Court is directed against the judgment of the Calcutta High Court answering the following question in the negative: "Whether on the facts and in the circumstances of the case, the extra amount of compensation amounting to Rs. 392 7,24,914 was income arising or accruing to the assessee during the previous year relevant to the assessment year 1956 57.
" The assessee, who is the respondent before us, is a limited company dealing in land.
It maintains its accounts on the mercantile system.
By an order dated June 21, 1946 under rule 75A(1) of the Defence of India Rules read with section 19 of the Defence of India Act, 1939 certain plots of land measuring about 19.17 acres in village Kankulia in the District of 24 Parganas and belonging to the assessee, were requisitioned by the Government of West Bengal.
Subsequently the land was acquired permanently in the State Government under s.5, Requisition of Land (Continuance of Powers) Act, 1951 by a notice of acquisition dated December 27, 1952 published in the Gazette dated January 8, 1953.
The Land Acquisition Officer awarded a sum of Rs.24,97,249 as compensation payable to the assessee.
The assessee was not satisfied with the amount of compensation, and preferred an appeal before the Arbitrator, 24 Parganas, Calcutta.
The Arbitrator made an award dated July 29, 1955 whereby he fixed the amount of compensation at Rs.30,10,873 on account of the permanent acquisition of the land, thus enhancing the original amount of compensation by Rs.5,13,624 on which he directed interest at 5 per cent per annum from January 8, 1953, the date of acquisition, to the date of payment.
The Arbitrator also directed that further recurring compensation at Rs.6272/10/4 per mensem should be paid to assessee from the date of requisition till the date of the acquisition.
The State Government now appealed to the High Court and during the pendency of the appeal on April 25, 1956 it deposited Rs.7,36,691, which the assessee was permitted to withdraw on May 9, 1956 on furnishing security.
On receipt of the amount the assessee credited it in its suspense account on the same date.
During the assessment proceedings for the assessment year 1956 57, the relevant accounting period being the year ended March 31, 1956 the Income Tax Officer brought to tax a sum of Rs.7,24,914 in the assessee 's business income.
This represented the difference between the sum of Rs.7,37,190 payable to the assessee in terms of the award dated July 29, 1956 of the Arbitrator and a sum of Rs.12,276 out of that amount which had already been assessed to tax.
The Income tax Officer treated the sum as liable to income tax during that year on the basis that the income accrued to the assessee on the date of the award.
393 The assessment was confirmed by the Appellate Assistant Commissioner of Income tax on first appeal.
In second appeal by the assessee before the Income tax Appellate Tribunal, two contentions were raised by it.
It was urged that the amount of compensation received by the assessee was not a receipt of a revenue nature.
It was also contended that in any event the amount did not accrue to the assessee as its income during the relevant previous year ended March 31, 1956.
The Appellate Tribunal rejected the first contention and held that the compensation received by the assessee related to the acquisition of land which was the stock in trade of the assessee, and was, therefore, a trading receipt of the business carried on by the assessee, and therefore, a receipt of a revenue nature liable to tax.
The Appellate Tribunal, however, accepted the other contention that the sum of Rs.7,24,914 was not taxable in the assessment year 1956 57.
It allowed the appeal accordingly by its order dated February 22, 1964.
At the instance of the Revenue the Appellate Tribunal referred the question of law set out earlier to the Calcutta High Court for its opinion, and by its judgment dated January 9, 1973 the High Court answered the question in favour of the assessee and against the Revenue.
The question raised in this appeal is limited to the point whether on the facts and circumstances of the case the Revenue can claim that the sum of Rs.7,24,914 payable to the assessee as compensation can be said to have accrued to it as income during the previous year ended March 31, 1956 relevant to the assessment year 1956 57.
Now as long ago as E.D. Sassoon & Company Ltd. and others vs Commissioner of Income tax, Bombay City, this Court considered the question as to the point at which income could be said to accrue or arise to an assessee for the purpose of the Indian Income Tax Act.
In the majority judgment delivered by N.H. Bhagwati, J. it was explained that the words "arising or accruing" describe a right to receive profits, and that there must be a debt owed by some body.
"Unless and until there is created in favour of the assessee a debt due by somebody", it was observed "it cannot be said that he has acquired a right to receive the income or the income has accrued to him".
In the present case, although the award was made by the Arbitrator on July 29, 1955 enhancing the amount of compensation payable to the assessee, the entire amount was in dispute in the appeal filed by the State Government.
Indeed, the dispute was regarded by the Court as real and substantial, because the assessee was not permitted to withdraw the sum of Rs.7,36,691 deposited by the State Government on April 25, 1956 without furnishing a security bond for refunding the amount in 394 the event of the appeal being allowed.
There was no absolute right to receive the amount at that stage.
If the appeal was allowed in its entirety the right to payment of the enhanced compensation would have fallen altogether.
This is a case which must be distinguished from that decided by this Court in Kedarnath Jute Mfg. Co. Limited.
vs Commissioner of Income Tax (Central), Calcutta., where the liability to sales tax arose immediately on a dealer affecting sales which were subject to sales tax and what remained to be done was a mere quantification of that liability.
The case compares rather with Commissioner of Income tax vs Jai Parkash Om Parkash Co. Ltd. The very foundation of the claim made by the assessee was in serious jeopardy and nothing would be due if the appeal was decided against the assessee.
Our attention has been drawn by the Revenue to Pope The King Match Factory vs Commissioner of Income tax, That case, however, proceeded on the basis that excise duty was payable and its quantification alone remained to be decided in the appeal.
We may point out that the Andhra Pradesh High Court, dealing with the taxability of compensation received under the Land Acquisition Act in Khan Bahadur Ahmed Alladin & Sons.
vs Commissioner of Income tax, held that when land was taken over by the Government the right of the owner to compensation was an inchoate right until the compensation had been actually determined and had become payable.
It was observed that the enhanced compensation accrued to an assessee only when the Court accepted the claim and not when the land was taken over by the Government.
Examining the question whether income could be said to have accrued to the assessee on the date when possession of the land was taken by the Government for the purpose of assessment to tax in the year of assessment P. Jaganmohan Reddy, C.J., speaking for the Court, said: "If the actual amount of compensation has not been fixed, no income could accrue to him.
It cannot be contended that the mere claim by the assessee, after taking of possession, at a particular rate or for a certain sum is the compensation.
It is the amount actually awarded by the Collector or subsequently decreed by the court which accrues to him, and the respective amounts, whether awarded by the Collector or the court accrue on the respective dates on which the award or the decree is passed.
Income tax is not levied on a mere right to receive compensation; there must be something tangible, something in the nature of a debt, 395 something in the nature of an obligation to pay an ascertained amount.
Till such time, no income can be said to have accrued . . . .
On the date when the Collector awarded the compensation, it is only that amount which had accrued or deemed to accrue, whether in fact paid or not.
But by no stretch of the words in section 4(1)(b)(i), could it be said that the right to enhanced compensation, which has not yet been accepted by the proper forum, namely, the court, has become payable on the date when the original compensation become payable, for being included in that year of assessment.
The enhanced compensation accrues only when it becomes payable, i.e., when the court accepts the claim.
As has been stated earlier, a mere claim by the assessee, after taking of possession of the land, at a particular rate or for a certain sum is not compensation.
It must not be forgotten that, even if a court was awarded enhanced compensation, there is a right of appeal by the Government to the High Court, and the High Court may either disallow that claim or reduce the compensation.
As against that judgment, there is further right of appeal to the Supreme Court.
The assessee also can appeal against the insufficiency of the enhanced compensation.
Can it be said that the final determination by the highest court of the compensation would entitle the Income tax Officer, notwithstanding the period of limitation fixed under the Income tax Act, to reopen the assessment in which he had included the initial compensation awarded by the Collector and recompute the entire income on the basis of the final compensation? We do not think there can be any justification for such a proposition.
On a proper construction of the terms 'accrue ' or 'arise ', we are of the view that such an interpretation cannot be placed.
The interpretation given by us does not affect the interests of the revenue.
At the same time, it safeguards the assessee and prevents harassment.
To hold otherwise would be contrary to the provisions of law.
" The legal position was explained in further detail by the Gujarat High Court in Topandas Kundanmal vs Commissioner of Income tax, Gujarat, The High Court was called upon to decide without the right to receive the enhanced compensation under the Land Acquisition Act accrued or arose to the assessee when he sought 396 a reference under section 18 of the Act or when the award was made by the Civil Judge although an appeal was pending against that award.
The learned Judges referred to the nature of an award made by the Collector, and adverting to the opinion of this Court in Harish Chandra Raj Singh vs The Deputy Land Acquisition Officer & Anr., [1962] 1 SCR 676 that the award made by the Collector was merely an offer or tender of the compensation determined by the Collector to the onwer of the property on the acquisition, the High Court observed: ". the legal position which emerges is that there is no liability in praesenti to pay an enhanced compensation till it is judicially determined by the final court since the entire question, namely, whether the offer made by the Land Acquisition Officer is inadequate and the claimant is entitled to an additional compensation and if yes, at what rate is in flux till the question is set at rest finally, we do not think that any enforceable right to a particular amount of compensation arises.
The offer made by Land Acquisition Officer, by his award, if not accepted by a claimant would not result automatically in a liability to pay additional compensation as claimed by party aggrieved.
There is no doubt a liability to pay compensation as offered by the Land Acquisition Officer.
But that is far from saying that liability is a liability to pay additional compensation or enhanced compensation as claimed by a party aggrieved.
If there is an existing liability, the mere fact that the payment is postponed to the future would not detract that liability from becoming a debt but the liability to pay unliquidated damages or additional compensation which are inchoate or contingent would not create a debt." Khan Bahadur Ahmed Alladin & Sons (supra) and Topandas Kundanmal (supra) were relied on by the Gujarat High Court in Additional Commissioner of Income tax, Gujarat vs New Jehangir Vakil Mills Co. Ltd., for reaffirming that it was on the final determination of the amount of compensation that the right to such income in the nature of compensation would arise or accrue and till then there was no liability in praesenti in respect of the additional amount of compensation claimed by the owner of the land.
It is unnecessary to refer to all the cases cited before us.
It is sufficient to point out that there is a clear distinction between cases 397 such as the present one, where the right to receive payment is in dispute and it is not a question of merely quantifying the amount to be received, and cases where the right to receive payment is admitted and the quantification only of the amount payable is left to be determined in accordance with settled or accepted principles.
We are of opinion that the High Court is right in the view taken by it and, therefore, this appeal must be dismissed.
The appeal is dismissed.
There is no order as to costs.
P.S.S. Appeal dismissed.

dataset_name: IN-Abs

summary:
During the pendency of the appeal by the State against an arbitrator 's award made on July 29, 1955 enhancing the original amount of compensation the Government deposited the extra amount, which the assessee was permitted to withdraw on May 9, 1956 on furnishing security.
During the assessment proceedings for the relevant assessment year the Income tax Officer brought that amount to tax as the assessee 's business income.
The Appellate Tribunal, however, accepted the assessee 's contention that the amount could not be said to have accrued to the assessee as its income during the relevant previous year, and therefore, was not liable to tax in the particular assessment year.
The High Court answered the question referred in favour of the assessee and against the Revenue.
Dismissing the appeal of the Revenue, this Court, ^ HELD: It is only on the final determination of the amount of compensation that the right to such income in the nature of compensation arises or accrues and till then there is no liability in praesenti in respect of the additional amount of compensation claimed by the owner of the land.
[396G] There is a clear distinction between cases where the right to receive payment is in dispute and it is not a question of merely quantifying the amount to be received, and cases where the right to receive payment is admitted and the quantification only of the amount payable is left to be determined in accordance with settled or accepted principles.
[396H;397A B] 391 In the instant case, although the award was made by the arbitrator on July 29, 1955 enhancing the amount of compensation payable to the assessee, the entire amount was in dispute in the appeal filed by the Goverment.
There was no absolute right to receive the amount at that stage, for if the appeal had been allowed in its entirety the right to payment of the enhanced compensation would have fallen altogether.
The sum, therefore, could not be said to have accrued or arisen during the relevant assessment year.
[393G; 394A B] E.D. Sassoon & Company Ltd. and others vs Commissioner of Income tax, Bombay City, , Commissioner of Incometax vs Jai Parkash Om Parkash Co. Ltd., , Pope The King Match Factory vs Commissioner of Income tax, , Khan Bahadur Ahmed Alladin & Sons vs Commissioner of Income tax, , Topandas Kundanmal vs Commissioner of Income tax, Gujarat, , Harish Chandra Raj Singh vs The Deputy Land Acquisition Officer & Anr., [1962] 1 SCR 676 and Additional Commissioner of Income tax, Gujarat, vs New Jehangir Vakil Mills Co. Ltd., , referred to.
Kedarnath Jute Mfg. Co. Ltd. vs Commissioner of Income Tax (Central), Calcutta, , distinguished.


judgement:
Civil Appeal Nos.
166870 of 1974 etc.
From the Judgment and order dated 17.8.1973 of the Allahabad High Court in W.T. Reference No. 371 of 1971 and I.T. Reference No. 452 of 1971.
V.S. Desai, and Miss A. Subhashini for the Appellants.
P.K. Mukharjee and A. K. Sengupta for the Respondents.
The Judgment of the Court was delivered by SABYASACHI MUKHARJI, J.
These appeals arise by special leave from the decision of the High Court of Allahabad dated 17th August, 1973.
Two of these appeals are in respect of assessment years 1966 67 and 1967 68 arising out of the proceedings under the Wealth Tax Act, 1957.
The connected reference was under the Income Tax Act, 1961 and related to the assessment year 1968 69.
A common question of law arose in all these cases and these were disposed of by the High Court by a common judgment.
One Rangi Lal and his son Chander Sen constituted a Hindu 258 undivided family.
This family had some immovable property and the business carried on in the name of Khushi Ram Rangi Lal.
On October 10, 1961, there was a partial partition in the family by which the business was divided between the father and the son, and thereafter, it was carried on by a partnership consisting of the two.
The firm was assessed to income tax as a registered firm and the two partners were separately assessed in respect of their share of income.
The house property of the family continued to remain joint.
On July 17, 1965, Rangi Lal died leaving behind his son, Chander Sen, and his grandsons, i.e. the sons of Chander Sen.
His wife and mother predeceased him and he had no other issue except Chander Sen.
On his death there was a credit balance of Rs.1,85,043 in his account in the books of the firm.
For the assessment year 1966 67 (valuation date October 3, 1965), Chander Sen, who constituted a joint family with his own sons, filed a return of his net wealth.
The return included the property of the family which on the death of Rangi Lal passed on to Chander Sen by survivorship and also the assets of the business which devolved upon Chander Sen on the death of his father.
The sum of Rs.1,85,043 standing to the credit of Rangi Lal was not included in the net wealth of the family of Chander Sen (hereinafter referred to as 'the assessee family ') on the ground that this amount devolved on Chander Sen in his individual capacity and was not the property of the assessee family.
The Wealth tax officer did not accept this contention and held that the sum of Rs.1,85,043 also belonged to the assessee family.
At the close of the previous year ending on October 22, 1962, relating to the assessment year 1967 68, a sum of Rs.23,330 was credited to the account of late Rangi Lal on account of interest accruing on his credit balance.
In the proceedings under the Income tax Act for the assessment year 1967 68, the sum of R.S. 23,330 was claimed as deduction.
It was alleged that interest was due to Chander Sen in his individual capacity and was an allowable deduction in the computation of the business income of the assessee faimly.
At the end of the year the credit balance in the account of Rangi Lal stood at Rs.1,82,742 which was transferred to the account of Chander Sen.
In the wealth tax assessment for the assessment year 1967 68, it was claimed, as in the earlier year, that the credit balance in the account of Rangi Lal belonged to Chander Sen in his individual capacity and not to the assessee family.
The Income tax officer who completed the assessment disallowed the claim relating to interest on the ground that it was a payment made by Chander Sen to himself.
Likewise, in the wealth tax assessment, the sum of Rs.1,82,742 was included by the Wealth tax officer in the net wealth of the assessee family.
On appeal the Appellate Assistant Commissioner of Income tax accepted the assessee 's claim in 259 full.
He held that the capital in the name of Rangi Lalluded in the wealth of the assessee family.
He also directed that in the income tax assessment the sum of Rs.23,330 on account of interest should be allowed as deduction.
The revenue felt aggrieved and filed three appeals before the Income tax Appellate Tribunal, two against the assessments under the Wealth tax Act for the assessment years 1966 67 and 1967 68 and one against the assessment under Income tax Act for the assessment year 1967 68.
The Tribunal dismissed the revenue 's appeals.
The following question was referred to the High Court for its opinion: "Whether, on the facts and in the circumstances of the case, the conclusion of the Tribunal that the sum of Rs.1,85,043 and Rs.1,82,742 did not constitute the assets of the assessee Hindu undivided family is correct?" Similarly in the reference under the Income tax Act, the following question was referred: "Whether, on the facts and in the circumstances of the case, the interest of Rs,23,330 is allowable deduction in the computation of the business profits of the assessee joint family?" The answer to the questions would depend upon whether the amount standing to the credit of late Rangi Lal was inherited, after his death, by Chander Sen in his individual capacity or as a Karta of the assessee joint family consisting of himself and his sons.
The amount in question represented the capital allotted to Rangi Lal on partial partition and accumulated profits earned by him as his share in the firm.
While Rangi Lal was alive this amount could not be said to belong to any joint Hindu family and qua Chander Sen and his sons, it was the separate property of Rangi Lal.
On Rangi Lal 's death the amount passed on to his son, Chander Sen, by inheritance.
The High Court was of the opinion that under the Hindu Law when a son inherited separate and self acquired property of his father, it assumed the character of joint Hindu family property in his hands qua the members of his own family.
But the High Court found that this principle has been modified by section 8 of the .
260 Section 8 of the said Act provides, inter alia, that the property of a male Hindu dying intestate devolved according to the provisions of that Chapter in the Act and indicates further that it will devolve first upon the heirs being the relatives specified in class I of the Schedule.
Heirs in the Schedule Class I includes and provides firstly son and thereafter daughter, widow and others.
It is not necessary in view of the facts of this case to deal with other clauses indicated in section 8 or other heirs mentioned in the Schedule.
In this case as the High Court noted that the son, Chander Sen was the only heir and therefore the property was to pass to him only.
The High Court in the judgment under appeal relied on a bench decision of the said High Court rendered previously.
Inadvertently, in the judgment of the High Court, it had been mentioned that the judgment was in Khudi Ram Laha vs Commissioner of Income tax U.P, but that was a case which dealt with entirely different problem.
The decision which the High Court had in mind and on which in fact the High Court relied was a decision in the case of Commissioner of Income tax, U. P. vs Ram Rakshpal, Ashok Kumar, In the said decision the Allahabad High Court held that in view of the provisions of the , the income from assets inherited by a son from his father from whom he had separated by partition could not be assesssed as the income of the Hindu undivided family of the son.
The High Court relied on the commentary in Mulla 's Hindu Law, Thirteenth Edition page 248.
The High Court also referred to certain passages from Dr. Derret 's "Introduction to Modern Hindu Law" (paragraph 411, at page 252).
Reliance was also placed on certain observations of this Court and the Privy Council as well as on Mayne 's 'Hindu Law '.
After discussing all these aspects the Court came to the conclusion that the position of the Hindu Law was that partition took away by way of coparcenary the character of coparcener property which meant that the share of another coparcener upon the divisions although the property obtained by a coparcener by a partition continued to be coparcenary property for him and his unseparated issue.
In that case what had happened was one Ram Rakshpal and his father, Durga Prasad, constituted a Hindu undivided family which was assessed as such.
Ram Rakshpal separated from his father by partition on October 11, 1948.
Thereafter Ram Rakshpal started business of his own, income whereof was assessed in the hands of the assessee family.
Shri Durga Prasad also started business of his own after partition in the name and style of M/s Murlidhar Mathura Prasad which was carried on by him till his death.
261 Durga Prasad died on March 29, 1958 leaving behind him his widow, Jai Devi, his married daughter, Vidya Wati and Ram Rakshpal and Ram Rakshpal 's son, Ashok Kumar, as his survivors.
The assets left behind by Durga Prasad devolved upon three of them in equal shares by succession under the .
Vidya Wati took away her 1/3rd share, while Jai Devi and Shri Ram Rakshpal continued the aforesaid business inherited by them in partnership with effect from April, 1, 1958 under a partnership deed dated April 23, 1958.
The said firm was granted registration for the assessment year 1958 59.
The share of profit of Shri Ram Rakshpal for the assessment year under reference was determined at Rs.4,210.
The assessee family contended before the Income tax Officer that this profit was the personal income of Ram Rakshpal and could not be taxed in the hands of the Hindu undivided family of Ram Rakshpal, and held that Ram Rakshpal contributed his ancestral funds in the partnership business of Murli Dhar Mathura Prasad and that, hence, the income therefrom was taxable in the hands of the assessee family.
The High Court finally held on these facts in C.I.T vs Ram Rakshpal (supra) that the assets of the business left by Durga Prasad in the hands of Ram Rakshpal would be governed by section 8 of the .
The High Court in the Judgment under appeal was of the opinion that the facts of this case were identical with the facts in the case of Commissioner of Income tax, U.P. (supra) and the principles applicable would be the same.
The High Court accordingly answered the question in the affirmative and in favour of the assessee so far as assessment of wealth tax is concerned.
The High Court also answered necessarily the question on the income tax Reference affirmatively and in favour of the assessee.
The question here, is, whether the income or asset which a son inherits from his father when separated by partition the same should be assessed as income of the Hindu undivided family of son or his individual income.
There is no dispute among the commentators on Hindu Law nor in the decisions of the Court that under the Hindu Law as it is, the son would inherit the same as karta of his own family.
But the question, is, what is the effect of section 8 of the ? The lays down the general rules of succession in the case of males.
The first rule is that the property of a male Hindu dying intestate shall devolve according to the provisions of Chapter II and class I of the Schedule provides that if there is a male heir of class I then upon the heirs mentioned in class I of 262 the Schedule.
Class I of the Schedule reads as follows: "Son; daughter; widow; mother; son of a pre deceased son; daugther of a predeceased son; son of a pre deceased daughter, daughter of a pre deceased daughter; widow of a pre deceased son; son of a pre deceased son of a pre deceased son; daughter of a pre deceased son of a pre deceased son; widow of a pre deceased son of a pre deceased son.
" The heirs mentioned in class I of the Schedule are son, daughter etc.
including the son of a pre deceased son but does not include specifically the grandson, being a son of a son living.
Therefore, the short question, is, when the son as heir of class I of the Schedule inherits the property, does he do so in his individual capacity or does he do so as karta of his own undivided family? Now the Allahabad High Court has noted that the case of Commissioner of Income tax, U.P. vs Ram Rakshpal, Ashok Kumar (supra) after referring to the relevant authorities and commentators had observed at page 171 of the said report that there was no scope for consideration of a wide and general nature about the objects attempted to be achieved by a piece of legislation when interpreting the clear words of the enactment.
The learned judges observed referring to the observations of Mulla 's Commentary on Hindu Law, and the provisions of section 6 of the that in the case of assets of the business left by father in the hands of his son will be governed by section 8 of the Act and he would take in his individual capacity.
In this connection reference was also made before us to section 4 of the .
Section 4 of the said Act provides for overriding effect of Act.
Save as otherwise expressly provided in the Act, any text, rule or interpretation of Hindu Law or any custom or usage as part of that law in force immediately before the commencement of this Act shall cease to have effect with respect to any matter for which provision is made in the Act and any other law in force immediately before the commencement of the Act shall cease to apply to Hindus in so far it is inconsistent with any of the provisions contained in the Act.
Section 6 deals with devolution of interest in coparcenary property and it makes it clear that when a male Hindu dies after the commencement of the Act having at the time of his death an interest in a Mitakshara coparcenary property, his interest in the property shall devolve by survivorship upon the surviving members of the coparcenary and not 263 in accordance with the Act.
The proviso indicates that if the deceased had left him surviving a female relative specified in class I of the Schedule or a male relative specified in that class who claims through such female relative, the interest of the deceased in Mitakshara coparcenary property shall devolve by testamentary or intestate succession, as the case may be, under this Act and not by survivorship.
Section 19 of the said Act deals with the mode of succession of two or more heirs.
If two or more heirs succeed together to the property of an intestate, they shall take the property per capita and not per stripes and as tenants in common and not as joint tenants.
Section 30 stipulates that any Hindu may dispose of by will or other testamentary disposition any property, which is capable of being so disposed of by him in accordance with the provisions of the .
It is clear that under the Hindu law, the moment a son is born, he gets a share in the father 's property and becomes part of the comparcenary.
His right accrues to him not on the death of the father or inheritance from the father but with the very fact of his birth.
Normally, therefore whenever the father gets a property from whatever source from the grandfather or from any other source, be it separated property or not, his son should have a share in that and it will become part of the joint family of his son and grandson and other members who form joint Hindu family with him.
But the question is; is the position affected by section 8 of the Succession Act, 1956 and if so, how? The basic argument is that section 8 indicates the heirs in respect of certain property and class I of the heirs includes the son but not the grandson.
It includes, however, the son of the predeceased son.
It is this position which has mainly induced the Allahabad High Court in the two judgments, we have noticed, to take the view that the income from the assets inherited by son from his father from whom he has separated by partition can be assessed as income of the son individually.
Under section 8 of the the property of the father who dies intestate devolves on his son in his individual capacity and not as karta of his own family.
On the other hand, the Gujarat High Court has taken the contrary view.
In Commissioner of Income tax, Gujarat I vs Dr. Babubhai Mansukhbhai (Deceased), the Gujarat High Court held that in the case of Hindus governed by the Mitakshara law, where a son 264 inherited the self acquired property of his father, the son took it as the joint family property of himself and his son and not as his separate property.
The correct status for the assessment to income tax of the son in respect of such property was as representing his Hindu undivided family.
The Gujarat High Court could not accept the view of the Allahabad High Court mentioned hereinbefore.
The Gujarat High Court dealt with the relevant provisions of the Act including section 6 and referred to Mulla 's Commentary and some other decisions.
Before we consider this question further, it will be necessary to refer to the view of the Madras High Court.
Before the full bench of Madras High Court in Additional Commissioner of Income tax, Madras vs P.L. Karappan Chettiar, , this question arose.
There, on a partition effected on March 22, 1954, in the Hindu undivided family consisting of P, his wife, their sons, K and their daughter in law, P was allotted certain properties as and for this share and got separated.
The partition was accepted by the revenue under section 25A of the Indian Income tax Act, 1922.
K along with his wife and their subsequently born children constituted a Hindu undivided family which was being assessed in that status.
P died on September 9, 1963, leaving behind his widow and divided son, K, who was the karta of his Hindu undivided family, as his legal heirs and under section 8 of the Hindu Seccession Act, 1956, the Madras High Court held, that these two persons succeeded to the properties left by the deceased, P, and divided the properties among themselves.
In the assessment made on the Hindu undivided family of which K was the karta, for the assessment year 1966 67 to 1970 71, the Income tax Officer included for assessment the income received from the properties inherited by K from his father, P. The inclusion was confirmed by the Appellate Assistant Commissioner but, on further appeal, the Tribunal held that the properties did not form part of the joint family properties and hence the income therefrom could not be assessed in the hands of the family.
On a reference to the High Court at the instance of the revenue, it was held by the Full bench that under the Hindu law, the property of a male Hindu devolved on his death on his sons and grandsons as the grandsons also have an interest in the property.
However, by reason of section 8 of the , the son 's son gets excluded and the son alone inherits the property to the exclusion of his son.
No interest would accrue to the grandson of P in the property left by him on his death.
As the effect of section 8 was directly derogatory of the law established according to Hindu law, the statutory provision must prevail in view of the unequivocal intention in the statute itself, 265 expressed in section 4(1) which says that to the extent to which provisions have been made in the Act, those provisions shall override the established provisions in the texts of Hindu law.
Accordingly, in that case, K alone took the properties obtained by his father, P, in the partition between them, and irrespective of the question as to whether it was ancestral property in the hands of K or not, he would exclude his son.
Further, since the existing grandson at the time of the death of the grandfather had been excluded, an after born son of the son will also not get any interest which the son inherited from the father.
In respect of the property obtained by K on the death of his father, it is not possible to visualise or envisage any Hindu undivided family.
The High Court held that the Tribunal was, therefore, correct in holding that the properties inherited by K from his divided father constituted his separate and individual properties and not the properties of the joint family consisting of himself, his wife, sons and daughters and hence the income therefrom was not assessable in the hands of the assessee Hindu undivided family.
This view is in consonance with the view of the Allahabad High Court noted above.
The Madhya Pradesh High Court had occasion to consider this aspect in Shrivallabhdas Modani vs Commissioner of Income Tax, M.P. I, , and the Court held that if there was no coparcenary subsisting between a Hindu and his sons at the time of death of his father, property received by him on his father 's death could not be so blended with the property which had been allotted to his sons on a partition effected prior to the death of the father.
Section 4 of the , clearly laid down that "save as expressly provided in the Act, any text, rule or interpretation of Hindu law or any custom or usage as part of that law in force immediately before the commencement of the Act should cease to have effect with respect to any matter for which provision was made in the Act".
Section 8 of the as noted before, laid down the scheme of succession to the property of a Hindu dying intestate.
The schedule classified the heirs on whom such property should devolve.
Those specified in class I took simultaneously to the exclusion of all other heirs.
A son 's son was not mentioned as an heir under class I of the schedule, and, therefore, he could not get any right in the property of his grandfather under the provision.
The right of a son 's son in his grandfather 's property during the lifetime of his father which existed under the Hindu law as in force before the Act, was not saved expressly by the Act, and therefore, the earlier interpretation of Hindu law giving a right by birth in such property "ceased to have effect".
The Court 266 further observed that in construing a Codification Act, the law which was in a force earlier should be ignored and the construction should be confined to the language used in the new Act.
The High Court felt that so construed, section 8 of the should be taken as a self contained provision lying down the scheme of devolution of the property of a Hindu dying intestate.
Therefore, the property which devolved on a Hindu on the death of his father intestate after the coming into force of the , did not constitute HUF property consisting of his own branch including his sons.
It followed the full bench decision of the Madras High Court as well as the view of the Allahabad High Court in the two cases noted above including the judgment under appeal.
The Andhra Pradesh High Court in the case of Commissioner of Wealth Tax, A.P. II vs Mukundgirji, , had also to consider the aspect.
It held that a perusal of the would disclose that Parliament wanted to make a clean break from the old Hindu law in certain respects consistent with modern and egalitarian concepts.
For the sake of removal of any doubts, therefore, section 4(1)(a) was inserted.
The High Court was of the opinion that it would, therefore, not be consistent with the spirit and object of the enactment to strain provisions of the Act to accord with the prior notions and concepts of Hindu law.
That such a course was not possible was made clear by the inclusion of females in class I of the Schedule, and according to the Andhra Pradesh High Court, to hold that the property which devolved upon a Hindu under section 8 of the Act would be HUF property in his hands vis a vis his own sons would amount to creating two classes among the heirs mentioned in class I, viz., the male heirs in whose hands it would be joint family property vis a vis their sons; and female heirs with respect to whom no such concept could be applied or contemplated.
The intention to depart from the pre existing Hindu law was again made clear by section 19 of the which stated that two or more heirs succeed together to the property of an intestate, they should take the property as tenants in common and not as joint tenants and according to the Hindu law as obtained prior to two or more sons succeeding to their father 's property took a joint tenants and not tenants in common.
The Act, however, has chosen to provide expressly that they should take as tentants in common.
Accordingly the property which devolved upon heirs mentioned in class I of the Schedule under section 8 constituted the absolute properties and his sons have no right by birth in such properties.
This decision, however, 267 is under appeal by certificate to this Court.
The aforesaid reasoning of the High Court appearing at pages 23 to 26 of Justice Reddy 's view in 144 I.T.R. appears to be convincing.
We have noted the divergent views expressed on this aspect by the Allahabad High Court, Full Bench of the Madras High Court, Madhya Pradesh and Andhra Pradesh High Courts on one side and the Gujarat High Court on the other.
It is necessary to bear in mind the Preamble to the .
The Preamble states that it was an Act to amend and codify the law relating to intestate succession among Hindus.
In view of the preamble to the Act, i.e., that to modify where necessary and to codify the law, in our opinion it is not possible when Schedule indicates heirs in class I and only includes son and does not include son 's son but does include son of a predeceased son, to say that when son inherits the property in the situation contemplated by section 8 he takes it as karta of his own undivided family.
The Gujarat High Court 's view noted above, if accepted, would mean that though the son of a predeceased son and not the son of a son who is intended to be excluded under section 8 to inherit, the latter would by applying the old Hindu law get a right by birth of the said property contrary to the scheme outlined in section 8.
Furthermore as noted by the Andhra Pradesh High Court that the Act makes it clear by section 4 that one should look to the Act in case of doubt and not to the pre existing Hindu law.
It would be difficult to hold today the property which devolved on a Hindu under section 8 of the Hindu Succession would be HUF in his hand vis a vis his own son; that would amount to creating two classes among the heirs mentioned in class I, the male heirs in whose hands it will be joint Hindu family property and vis a vis son and female heirs with respect to whom no such concept could be applied or contemplated.
It may be mentioned that heirs in class I of Schedule under section 8 of the Act included widow, mother, daughter of predeceased son etc.
Before we conclude we may state that we have noted the obervations of Mulla 's Commentary on Hindu law 15th Edn.
dealing with section 6 of the at page 924 26 as well as Mayne 's on Hindu Law, 12th Edition pages 918 919.
The express words of section 8 of The , 268 1956 cannot be ingorned and must prevail.
The preamble to the Act reiterates that the Act is, inter alia, to 'amend ' the law, with that background the express language which excludes son 's son but included son of a predeceased son cannot be ignored.
In the aforesaid light the views expressed by the Allahabad High Court, the Madras High Court, Madhya Pradesh High Court, and the Andhra Pradesh High Court, appear to us to be correct.
With respect we are unable to agree with the views of the Gujarat High Court noted hereinbefore.
In the premises the judgment and order of the Allahabad High Court under appeal is affirmed and the appeals Nos.
1668 1669 of 1974 are dismissed with costs.
Accordingly Appeal No. 1670 of 1974 in Income tax Reference which must follow as a consequence in view of the findings that the sums standing to the credit of Rangi Lal belongs to Chander Sen in his individual capacity and not the joint Hindu family, the interest of Rs. 23,330 was an allowable deduction in respect of the income of the family from the business.
This appeal also fails and is dismissed with costs.
The Special Leave Petition No. 5327 of 1978 must also fail and is dismissed.
There will be no order as to costs of this.
A.P.J. Appeals and Petition dismissed.

summary:
Rangi Lal and his son Chander Sen constituted a Hindu undivided family.
They had some immovable property and the family business.
By a partial partition the HUF business was divided between the two and thereafter it was carried on by a partnership consisting of the two.
The house property of the family continued to remain joint.
The firm was assessed to income tax as a registered firm and the two partners were separately assessed in respect of their share of income.
The mother and wife of Rangi Lal having pre deceased him, when he died he left behind him his only son Chander Sen and his grandsons.
On his death there was a credit balance of Rs.1,85,043 in his account in the books of the firm.
In the wealth tax assessment for the assessment year 1966 67, Chander Sen, who constituted a joint family with his own sons, filed a return of his net wealth by including the property of the family which u on the death of Rangi Lal passed on to him by survivorship and, also the assets of the business which devolved upon him on the death of his father.
The sum of R.S. l ,85,0 13 standing to the credit of Rangi Lal was, however, not included in the net wealth of the assessee family.
Similarly, in the wealth tax assessment for the assessment year 1967 68 a sum of Rs.1,82,742 was not included, in the net wealth of the assessee family.
It was contended that these amounts devolved on Chander Sen 255 in his individual capacity and were not the property of the assessee family.
The Wealth tax officer did not accept this contention and held that these sums also belonged to the assessee family.
A sum of Rs.23,330 was also credited to the account of late Rangi Lal on account of interest accruing on his credit balance.
In the proceedings under the Income Tax Act for the assessment year 1367 68 this sum was claimed as deduction on the same ground.
The Income tax officer disallowed the claim on the ground that it was a payment made by Chander Sen to himself.
On appeal, the Appellate Assistant Commissioner of Income tax accepted the assessee 's claim in full and held that the capital in the name of Rangi Lal devolved on Chander Sen in his individual capacity and as such was not to be included in the wealth of the assessee family.
The sum of Rs.23,330 on account of interest was also directed to be allowed as deduction.
The Income tax Appellate Tribunal dismissed the appeals filed by the Revenue and its orders were affirmed by the High Court.
On the question: "Whether the income or asset which a son inherits from his father when separated by partition should be assessed as income of the Hindu Undivided Family consisting of his own branch including his sons or his individual income", dismissing the appeals and Special Leave Petition of the Revenue, the Court, ^ HELD: 1.
The sums standing to the credit of Rangi Lal belong to Chander Sen in his individual capacity and not the Joint Hindu Family.
The interest of Rs.23,330 was an allowable deduction in respect of the income of the family from the business.
[268C D] 2.1 Under section 8 of the , the property of the father who dies intestate devolves on his son in his individual capacity and not as Karta of his own family.
Section 8 lays down the scheme of succession to the property of a Hindu dying intestate.
The Schedule classified the heirs on whom such property should devolve.
Those specified in class I took simultaneously to the exclusion of all other heirs.
A son 's son was not mentioned as an heir under class I of the Schedule, and, therefore, he could not get any right in the property of his grandfather under the provision.
[265F G] 256 2.2 The right of a son 's son in his grandfather 's property during the lifetime of his father which existed under the Hindu law as in force before the Act, was not saved expressly by the Act, and therefore, the earlier interpretation of Hindu law giving a right by birth in such property "ceased to have effect".
So construed, section 8 of the Act should be taken as a self contained provision laying down the scheme of devolution of the property of a Hindu dying intestate.
Therefore, the property which devolved on a Hindu on the death of his father intestate after the coming into force of the Hindu Succession Act, 1356, did not constitute HUF property consisting of his own branch including his sons.
[265G H; 266A C] 2.3 The Preamble to the Act states that it was an Act to amend and codify the law relating to intestate succession among Hindus.
Therefore, it is not possible when the Schedule indicates heirs in class I and only includes son and does not include son 's son but does include son of a predeceased son, to say that when son inherits the property in the situation contemplated by section 8, he takes it as Karta of his own undivided family.
[267C D] 2.4 The Act makes it clear by section 4 that one should look to the Act in case of doubt and not to the pre existing Hindu law.
It would be difficult to hold today that the property which devolved on a Hindu under section X of the Act would be HUF in his hand vis a vis his own son; that would amount to creating two classes among the heirs mentioned in class I, the male heirs in whose hands it will be joint Hindu family property and vis a vis sons and female heirs with respect to whom no such concept could be applied or contemplated.
[267E G] 2.5 Under the Hindu law, the property of a male Hindu devolved on his death on his sons and the grandsons as the grandsons also have an interest in the property.
However, by reason of section 8 of the Act, the son 's son gets excluded and the son alone inherits the properly to the exclusion of his son.
As the effect of section 8 was directly derogatory of the law established according to Hindu law, the statutory provisions must prevail in view of the unequivocal intention in the statute itself, expressed in section 4(1) which says that to the extent to which provisions have been made in the Act, those provisions shall override the established provisions in the texts of Hindu Law.
[264G H; 265A B] 2.6 The intention to depart from the pre existing Hindu law was again made clear by section 19 of the Hindu Succession Act which stated that 257 if two or more heirs succeed together to the property of an intestate, they should take the property as tenants in common and not as joint tenants and according to the Hindu law as obtained prior to Hindu Succession Act two or more sons succeeding to their father 's property took a joint tenants and not tenants in common.
The Act, however, has chosen to provide expressly that they should take as tenants in common.
Accordingly the property which devolved upon heirs mentioned in class I of the Schedule under section 8 constituted the absolute properties and his sons have no right by birth in such properties.
[266F H] Commissioner of Income tax, U. P. vs Ram Rakshpal, Ashok Kumar, ; Additional Commissioner of Income tax, Madras vs P.L. Karuppan Chettiar, 114 I.T.R. 523; Shrivallabhdas Modani vs Commissioner of Income Tax, M.P I., and Commissioner of Wealth Tax A.P. II vs Mukundgirji , approved.
Commissioner of Income tax, Gujarat l vs Dr. Babubhai Mansukhbai (Deceased), , overruled.


judgement:
Civil Appeal No. 1665 of 1974 From the Judgment and order dated 28.9.1973 of the Allahabad High Court in I.T. Reference No. 195 of 1971.
With Civil Appeal No. 145 of 1976.
Dalip Singh, K.C. Dua and Miss A. Subhashini for the Appellant.
Harish Salve, K.J. John, Ranjit Kumar and B.P. Singh for the Respondent.
The Judgment of the Court was delivered by SABYASACHI MUKHARJI, J.
These two appeals were heard together.
Civil Appeal No. 1665 of 1974 arises from the decision of the High Court of Allahabad in Income Tax Reference No. 195 of 1971.
The assessee, Elgin Mills Ltd., at the relevant time, was a public limited company engaged in the business of manufacture of textile goods.
The assessment year involved is the year 1964 65 of which the relevant previous year ended on 30th September, 1963.
For the purposes of assessment under the provisions of Companies Profits (Surtax) Act, 1964, a dispute arose between the assessee and the revenue with regard to the computation of "Standard deductions".
The company claimed that the following amounts should be treated as 411 reserves for the purposes of computation of its capital: (a) Investment Reserve Rs.85,00,000 (b) Rehabilitation reserve Rs.40,00,000 (c) Forfeited Dividend reserve Rs.96,374 The Income tax Officer did not include any of the said 'reserves ' in the capital of the assessee company on the basis that these did not represent reserve in the real sense.
On appeal, the Appellate Assistant Commissioner held that the Rehabilitation reserve and Forfeited Dividends reserve represented reserves but the investment reserve account did not constitute real reserve.
Both the assessee as well as the revenue went up in appeal before the Tribunal.
The Tribunal disposed of these appeals by a similar order along with two similar appeals relating to the assessment year 1963 64 which arose out of proceedings under the .
The Tribunal held that all the three accounts represented reserves for the purposes of assessment under the .
The Tribunal was further of the view that all the three represented reserves for the purposes of assessment under the and as the principle involved was the same as under the Companies Profits (Surtax) Act, 1964, the Tribunal held that the accounts in question represented reserves under the latter Act also.
At the instance of the Commissioner, reference was made to the High Court for the assessment year 1964 65 on the following questions: "1.
Whether, on the facts and in the circumstances of the case, the tribunal was right in arriving at its decision by applying the principles laid down in the second schedule to the , instead of the provisions of the second Schedule to the Companies Profits (Surtax) Act, 1964, for computation of capital of the assessee company for the assessment year 1964 65. 2.
Whether, on the facts and in the circumstance of the case, the tribunal was right in holding that (a) Investment Reserve (b) Rehabilitation reserve (c) Forfeited Dividend Reserve were includible in the capital computation of the company in accordance with the second schedule to the Companies Profits (surtax) Act, 1964.
" 412 The High Court noted that in the connected reference No. 196 of 1971 Commissioner of Income tax vs Elgin Mills Company Ltd. (decision dated 19th July, 1973)) arising out of proceedings under the , it had already held that these accounts in question constituted reserve in the real sense and as such should be taken into consideration in determining the standard deductions under section 9(2) of the Act, 1963.
It was not disputed before the High Court that if the present reference had been under the , the accounts in question would have to be held as reserves by the High Court in view of its previous judgment.
But it was contended that the provisions of the Companies Profits (Surtax) Act, 1964 were different from the provisions of the Super Profit Tax Act, 1963.
The High Court did not accept this contention.
The High Court was of the view that under both the Acts, charging sections (section 4) were identically worded except that the expression "standard deduction" in had been replaced by the expression "statutory deductions" in the Companies Profits (Surtax) Act, 1964.
Under both Acts these deductions had to be computed with reference to the capital employed in the assessee company.
Under both the Acts reserves of the company were to be treated as its capital and the only difference was in the second schedule to the , an explanation had been added.
The said explanation was to the following effect: "For the removal of doubts it is hereby declared that any amount standing to the credit of any account in the books of a company as on the first day of the previous year relevant to the assessment year which is of the nature of item (5) or item (6) or item (7) under the heading "RESERVES AND SURPLUS" or of any item under the heading "CURRENT LIABILITIES AND PROVISIONS" in the column relating to "Liabilities" in the Form "Balance Sheet" given in of Schedule VI to the (I of 1956), shall not be regarded as a reserve for the purposes of computation of the capital of a company under the provision of this schedule.
" This explanation, the High Court noted, merely clarified what was implicit in the Super Profit Tax Act, 1963.
Item No. S in the prescribed Balance Sheet under the is "Surplus ' i.e. Balance in profit and loss account after providing for proposed alloca 413 tions, namely, Dividend, Bonus, or Reserves.
Item No. (6) was "Proposed additions to reserves" and item No. (7) was "Sinking Funds".
The Accounts mentioned in the explanation would not form a reserve for the purposes of the computation of capital of a company.
In any case the High Court was of the view that none of the accounts in dispute fell under the heading "current liabilities".
It was contended before the High Court on behalf of the revenue that any amount credited to those accounts during the relevant previous year would fall in item No. 6 viz. proposed additions to reserves.
The High Court found that there were no additions to those funds during the relevant previous year inasmuch as the amount standing in those accounts were being brought forward from year to year.
In those circumstances the Tribunal was right in deciding the question with regard to the admissibility of the three accounts in question on the principle application to .
This Court in Vazir Sultan Tobacco Co. Ltd. vs Commissioner of Income Tax, held that the expression "reserve '.
in and the Companies Profits (Surtax) Act, 1964 are in pari materia.
On merits, it was agreed that the points were covered by the previous decision of the High Court in the case of Commissioner of Income tax, Kanpur vs British India Corporation (P) Ltd., Accordingly, the High Court answered both the questions in the affirmative and in favour of the assessee.
This appeal arises out of the said decision of the High Court.
In Commissioner of Income tax, Kanpur vs British India Corporation (P) Ltd. (supra), the High Court noted the distinction between 'provision ' and 'reserves ' and observed that when an amount was set apart for a future liability, it was called a reserve and when it was set apart to meet an existing liability, it was called a provision.
The High Court was of the view that the Tribunal in that case was right in holding that capital reserve, stocks and stores reserves, bad and doubtful debts reserves, obsolescence reserve, loans and insurance reserves and investment reserves were to be included in the computation of capital.
The Tribunal was not right in including, according to the High Court, forfeited money reserve as the assessee had been transferring to this account dividends which had not been collected by the share holders after they had been declared, and as and when the shareholders made a claim, made payments and debited the same to the account.
The High Court, therefore, was of the view that this account represented a provision in respect of an existing liability.
The High Court in Income Tax Reference No. 196 of 1971 had to 414 deal with investment reserve account, rehabilitation reserve account, capital reserve account and depreciation reserve account and held that these were reserves but the account maintained as dividend account did not represent reserve.
The High Court in its judgment noted that on the 19th July 1973 relying on other judgment in Income Tax Reference No. 200 of 1917 Commissioner of Income Tax vs The Saran Engineering Co. Ltd. had answered the question by saying that the aforesaid items were re serves.
This is the subject matter of civil appeal No. 1599 of 1974 which will also be disposed of by another judgment of this Court.
Civil Appeal No. 1665 of 1974 and Civil Appeal No. 145 of 1976 which arose out of the Income Tax Reference No. 196 of 1971 have been heard together and are being disposed of by this judgment.
In this connection it would be desirable to dispose of Civil Appeal No. 145 of 1976 separately first.
It was submitted that the assessee had shown capital of Rs.2,63,79,218 which included the aforesaid reserves including investment reserves, rehabilitation reserve, capital reserve, depreciation reserve and forfeited dividends.
The submission on behalf of the revenue by Sree Dalip Singh was that the amount of Rs.85 lakhs in the relevant year as investment reserve was set apart by the assessee company to meet the liabilities of its Bombay Sub sidiaries, M/s Madhav Mills Ltd. and Calico Processors Ltd. which were known to the assessee on the date of the balance sheet.
The Directors ' report, according to the revenue, left no room for doubt that these were anticipated losses of the assessee company in the form of the investments made in its Bombay subsidiaries known at the date of the balance sheet.
These were liabilities, according to Sree Singh actually staring in the face of the assessee company when it prepared the balance sheet.
The Tribunal had held that it was a reserve because it was formed by transfer of the amount from capital/General reserve.
This according to the revenue, could not be accepted.
Revenue submitted that it was a common ground that originally the amount was set apart out of the undistributed mass of profits and therefore the moment it was taken out of the capital or general reserve, it ceased to be a capital or general reserve, and but for its being set apart to meet the liabilities of its subsidiaries, it had again gone back and formed part of the undistributed mass of profits and thereby assumed its original character.
It was submitted that the reserve in order that it might be so called in the real sense of the term must come out of the profits of the 415 company.
But if reserves were constituted out of assets which were sold A or by any other means it would be difficult to term the amounts shown as reserve.
It was submitted that the investments by the assessee company in the Bombay subsidiaries were in the nature of bad and doubtful debts.
Therefore, these were dead losses of the assessee company as the holding company, and these amounts were ultimately bound to be writ ten off and according to the revenue 's submission, the substance of the matter clearly was that the amount of RS.85 lakhs though shown as a reserve, was, in fact, a provision to meet the anticipated losses or bad and doubtful debts in the shape of investments in the two subsidiaries aforesaid which were shown at the date of the balance sheet.
For the assessee Sree Salve drew our attention to the distinction between reserve and provision which has been discussed in the decision of this Court in Metal Box Co. Ltd. vs Their Workmen, at 67 68.
According to the revenue, the nature and object of the subsidiary companies have to be kept in view and the practical result, revenue contended before us, was that the shareholders of the holding company whose share capital had been employed for the floatation of the subsidiary companies had not only no power to control the dealings of the subsidiary companies but in fact had no knowledge of, nor any right to the knowledge of or dealings of the subsidiary companies.
The expressions 'Provision ' and 'Reserve ' are defined in Schedule VI Part III to the .
In the decision of this Court in Vazir Sultan 's case (supra) it has been held that a provision was meant to provide for any known liability and the substance of the matter had to be kept in view.
It was further submitted by Sree Singh that the depreciation reserve could not be considered to be reserve in the real sense at all.
Forfeited dividends reserve of R.S. 1,08,771 had to be a provision.
On the other hand, on behalf of the revenue, it was submitted that in order to constitute reserve, there must be an appropriation of profits current or accumulated and not a charge against the profits for the year.
The conduct must bear out the intention to create a reserve.
It must not be to set apart to meet any known liability, a liability known but existing on the date of the balance sheet.
The explanation 'reserve ' has been defined in the text books of Accountancy which has been noted by this Court.
It was urged that it could not be disputed 416 that reserve might be general or specific reserve, what was required was that amount should be kept aprat for one or the other purpose either general or specific.
The distinction between provision and reserve must be found out bearing in mind main features of the reserve.
These are (1) It must be an appropriation of profits, current or accumulated and not a charge against the profits for the year.
(2) The conduct of the parties must bear out that intention.
(3) It must not be to set apart to meet any known liability a liability known to exist on the date of the balance sheet.
Reference in this connection may be made to the observations of this Court in Vazir Sultan 's case (supra) at pages 569 70.
The Calcutta High Court in Commissioner of Income Tax vs Eyre Smelting Private Ltd., , noted the characteristics of 'provisions ' as well as 'reserves '.
It held, inter alia, that provisions were made against anticipated losses and contingencies, it held further that an amount set aside of the profits designed to meet a contingency or liability or commitment or diminution in the value of the assets known to exist would be a reserve, and an amount set aside to provide for a known liability to which the amount cannot be determined with substantial accuracy would be a provision.
The said High Court differed from the decision of the Allahabad High Court in British India Corporation (P) Ltd. (supra) in respect of 'bad and doubtful debts. ' Whether in respect of bad and doubtful debts the account could be treated as reserve or provision would depend upon the facts and circumstances of the case.
The distinction between 'provision ' and 'reserve ' has been clarified by this Court in Metal Box Company of India Ltd. vs Their Workmen (supra) at pages 67 68 which states as follows: "The next question is whether the amount so provided is a provision or a reserve.
The distinction between a provision and a reserve is in commercial accountancy fairly well known.
Provisions made against anticipated losses and contingencies are charges against profits and, therefore, to be taken into account against gross receipts in the P. & L. account and the balance sheet.
On the other hand, reserves are, appropriations of profits, the assets by which they are represented being retained to form part of the capital employed in the business.
Provisions are usually shown in the balance sheet by way of deductions from the assets in respect of which they are made whereas general reserves and reserve funds are shown as part of the proprietor 's interest 417 (see Spicer and Pegler 's Book keeping and Accounts, 15th A Edition, page 42).
An amount set aside out of profits and other surpluses, not designed to meet a liability, contingency, commitment or diminution in value of assets known to exist at the date of the balance sheet is a reserve but an amount set aside out of profits and other surpluses to pro vide for any known liability of which the amount cannot be determined with substantial accuracy is a provision: (see William Pickles Accountancy, second edition, p. 192; , clause 7, Schedule VI to the : which defines provision and reserve).
" This Court in Commissioner of Income Tax (Central) Calcutta vs Standard Vaccum oil Co., at 698, observed that the ordinary meaning of the expression reserve was something specifically kept apart for further use or for specific occasion.
The observations made therein will have to be understood in the light of the subsequent decisions of this Court in Metal Box (supra) and Vazir Sultan (supra).
This Court in Vazir Sultan Tobacco Co. Ltd. etc.
vs Commissioner of Income tax etc.
(supra) considered the expression 'reserve ' in the and Companies (Profit) Surtax Act, 1964.
It is not necessary to set out all the conclusions of this Court.
Our attention was drawn to Datta 's on the Company Law (Third Edition) at page 42 1.
"Reserves" consist of appropriations from profits and other surplus and retained for future use.
This, however, does not include any amount which had been kept to meet any liability or diminution in value of assets known to exist as on the date of the balance sheet.
The essence and substance of the matter has to be kept in view.
As reiterated before, the distinction between 'provision ' and 'reserve ' is while the 'provision ' is a charge of profits which are taken into account in the gross receipt of Profits & Loss Account, 'reserve ' is an appropriation of profit to provide for the asset which is represented.
Keeping these tests and the facts of these appeals in mind, we must hold that the conclusion of the High Court in Civil Appeal No. 1665 of 1974 holding that the investment reserve and rehabilitation reserve were reserves and were entitled to be treated so under the relevant Act is right.
But in the facts of the case, the High Court was 418 not right in holding that the forfeited dividend reserve was reserve and question No. 2 also in the affirmative.
It should have followed in this respect its previous decision in respect of forfeited dividend reserve in Commissioner of Income Tax vs British India Corporation (supra).
The appeal, therefore fails, except on the point of "Forfeited Dividend Reserve." In Civil Appeal No. 145 of 1976, we are concerned with five items as mentioned i.e. investment reserve, rehabilitation reserve, capital reserve, depreciation reserve and forfeited dividends and in view of the facts found, we are of the opinion that first four items constituted reserves and were entitled to be treated as such under the Act and the forfeited dividends did not represent reserve.
This appeal accordingly fails in view of the facts found by Tribunal and reiterated by the High Court and the principles applicable as mentioned hereinbefore.
The High Court in its order had excluded "Forfeited dividend account" from the reserve.
The High Court was right in so doing.
In the facts and circumstances of the case, the parties will pay and bear their own costs in both the appeals.
CA 1665/74 allowed in part.
M.L.A. CA 145/76 dismissed.

summary:
In Civil Appeal No. 1665 of 1974, a dispute arose between the respondent assessee and the Revenue with regard to the computation of "standard deductions" under the provision of Companies Profits (Surtax) Act, 1964.
The respondent assessee claimed that the three amounts in respect of three accounts, namely, (a) investment reserve (b) rehabilitation reserve and (c) forfeited dividend reserve should be treated as reserves for the purposes of computation of its capital for the assessment year 1964 65 of which the relevant previous year ended on 30th Sept., 1963.
The Income tax officer did not include any of the said "reserves" in the capital of the respondent company on the basis that these did not represent "reserve" in the real sense.
The matter, ultimately went before the Tribunal.
It held: (i) that all the three accounts represented "reserves" for the purposes of assessment under the and as the principle involved was the same as under the Companies Profits (Surtax) Act, 1964, the accounts in question represented "reserves" under the latter Act also.
The High Court also, relying on its earlier decision in Commissioner of Income tax, Kanpur vs British India Corporation (P) Ltd. 92 TIRE 38, affirmed the view taken by the Tribunal and held (i) that under both the Acts charging sections (section 4) were identically worded except that expression(Standard Deduction) in had been replaced by the expression "statutory deductions" in Companies Profits (Surtax) Act, 1964; (ii) that under both Acts these deductions had to be computed with reference to the capital employed in the assessee 's Companies; and (iii) that under both the Acts reserves of the company were to be treated as its capital and the only difference was in the 409 Second Schedule to the Companies Profits (Surtax) Act, 1964 where an A explanation had been added, and this explanation merely clarified what was implicit in the Super Profit Tax Act, 1963.
In C.A. No. 145 of 1976 the assessee respondent had shown capital of Rs.2,63,79,218 which included inter alia investment reserve, rehabilitation reserve, capital reserve, depreciation reserve and forfeited dividends.
The High Court held that the first four items constituted reserves and the forfeited dividends account did not represent reserve.
Dismissing the C.A. No. 145 of 1976 and allowing CA No. 1665 of 1974 in part, ^ HELD: 1.1 The conclusion of the High Court in CA 1665 of 1974 holding that the investment reserve and rehabilitation reserve were reserves and were entitled to be treated so under the relevant Act is right.
But, in the facts of the case, the High Court was not right in holding that the "forfeited dividend reserve" was reserve.
However, in CA No. 145 of 1976, the Tribunal and the High Court had rightly excluded "forfeited dividend account" from the reserve.
[417G H; 418D] 2.1 The Supreme Court in Vazir Sultan Tobacco Co. Ltd. vs Commissioner of Income Tax [1981] 132 TIRE, 559 held that the expression "reserve" in and the Companies Profits (Surtax) Act, 1964 are in pari materia.
[413C D] 2.2 The distinction between "provision" and "reserve" is while the "provision" is a charge of profits which are taken into account in the gross receipt of Profits and Loss Account, "reserve" is an appropriation of profit to provide for the asset which it represented.
Reserve might be general or specific reserve, what is required is that the amount should be kept apart for one or the other purpose either general or specific.
The distinction between provision and reserve must be found out bearing in mind the main features of the reserve.
These are: (i) it must be an appropriation of profits, current or accumulated and not a charge against the profits for the year; (ii) the conduct of the parties must bear out that intention; (iii) it must not be to set apart to meet any known liability a liability known to exist on the date of the balancesheet.
[416A C] In the instant cases, keeping in view the aforesaid tests, invest 410 ment reserve, rehabilitation reserve, capital reserve and depreciation reserve constituted "reserves" and are entitled to be treated as such under Companies Profits (Surtax) Act, 1964.
The "forefeited dividends" do not represent "reserve".
[417G H; 418A B] Vazir Sultan Tobacco Co. Ltd. vs Commissioner of Income Tax, [ ]981] ; Metal Box Co. Ltd vs Their Workmen, at 67 68; and Commissioner of Income Tax (Central) Calcutta vs Standard Vaccum oil Co., at 698 relied upon.
Commissioner of Income tax, Kanpur vs British India Corporation (P) Ltd., approved.
Commissioner of Income Tax vs Eyre Smelting Private Ltd., referred to.