judgement:
Appeal No. 405 of 1957.
Appeal from the judgment and order dated May 15, 1956, of the Calcutta High Court in I.T.R. No. 20 of 1953.
section Mitra, B. Das and section N. Mukherjee, for appellants Nos. 2 to 41.
A. N. Kripal and D. Gupta, for the respondent.
November 23.
The Judgment of the Court was delivered by HIDAYATULLAH, J.
The point involved in this appeal is a very short one; but it requires a long narration of facts to reach it.
The appeal is against the judgment and order of the High Court of Calcutta dated May 15, 1956, arising out of an Income tax Reference.
By the Calcutta Municipal Act VI of 1863, there was established a Corporation under the name of "The Justices of the Peace for the Town of Calcutta".
By a notification issued on November 2, 1864, one square mile of land forming part of the Panchannagram Estate was acquired by the Government of Bengal at the instance of the Justices.
Section CXII of the Municipal Act provided that the Justices might "agree with the owners of any land for the absolute purchase thereof. . for any other purpose whatever connected with the conservancy of the Town".
Under section CXIII, it was provided that if there was any hindrance to acquisition by private treaty, the Government of Bengal upon the representation of the Justices would compulsorily acquire the land and vest 600 such land in the Justices on their paying compensation awarded to the proprietor.
The action which was taken by the notification was under section CXIII of the Municipal Act, and the acquisition was under Act VI of 1857, an Act for the acquisition of land for public purposes.
The Panchannagram Estate was permanently settled under Regulation 1 of 1793.
After the acquisition, the proprietor of Panchannagram Estate was granted abatement of land revenue assessed on the Estate to the extent of Rs. 386 7 1.
This represented the proportionate land revenue on the land acquired.
In August, 1865, the Justices were required to pay Rs. 54,685 2 10 as compensation payable to the proprietor and to other persons holding interest in the land.
Another piece of land which is described as an open level sewer, was also acquired about the same time, and separate compensation was paid for it.
With the amount of conveyance charges, the total compensation thus paid by the Justices was Rs. 57,965 8 10.
On October 27,1865, the Government called upon the Justices to pay a further sum of Rs. 7,728 13 8.
This order has not been produced in the case; but from other correspondence, it is easy to see that the amount represented an amount capitalized at 20 years ' purchase of land revenue attributed to the area acquired, which, as has been stated above, came to Rs. 386 7 1.
This payment was made on or about January 12, 1866.
Similarly, another amount was paid in July of the same year for redemption of the land revenue in respect of the strip of land for the open sewer.
On December 5, 1870, a conveyance was executed by the Secretary of State in favour of the Justices of the Peace.
It was there stated, inter alia: "Whereas the Honourable the Lieutenant Governor of Bengal hath thought fit that the said land so acquired as aforesaid would be vested in the said Justices of the Peace for the Town of Calcutta a Corporation created by and authorised to hold land under the said Act No. VI of 1863 of the Council of the Lieutenant Governor of Bengal to the end and intent 601 that the said land may be held by the said Justices for a public purpose, namely, for the conservancy of the Town. . and subject in every way to the same ' Act but free and discharged from all payment of land revenue, land tax and all and every tax or imposition in the nature of revenue derivable from land payable to Government in respect thereof; NOW THIS IN DENTURE WITNESSETH. .to hold the saidpieces of land, hereditaments and premises intended to be conveyed with the appurtenances except as aforesaid unto the said Justices of the Peace for the Town of Calcutta and their successors for ever free and clear and for ever discharged from all Government land revenue whatever or any payment or charge in the nature thereof to the end and intent that the said land may be used for a public purpose namely for the conservancy of the town upon the trusts and subject to the powers, provisions, terms and conditions contained in the said Act No. VI of 1863 of the Council of the Lieutenant Governor of Bengal and to the rules heretofore passed or hereafter to be passed by the Government of Bengal under the the said last mentioned Act;".
On January 23, 1880, a temporary lease of the land known as the 'Square Mile ' was granted by the Justices of the Peace to the predecessors in title of the appellant (assessee), Srish Chandra Sen who has, since the filing of the appeal, died, leaving behind 40 legal representatives who have been shown in the cause title of the appeal.
The lease was renewed for further periods, and the rent was also progressively increased.
The conservancy arrangements for which the land 'was held were carried out, but, the lessee had the right to carry on cultivation with the aid of sewage.
The assessee derived from this land various kinds of income, some being purely agricultural and some, non agricultural.
For the assessment year 1942 43, the total agricultural income was computed at Rs. 99,987 9 6, and non agricultural income, at Rs. 12,503 8 0.
Agricultural income tax was charged by the State of Bengal under the Agricultural Income 602 tax Act, on the agricultural income less expenses.
For the assessment years, 1943 44, 1944 45, 1945 46 and 1946 47, the assessments were made along similar lines.
In 1947, the Income tax Officer reassessed the income for the assessment year, 1942 43 after reopening the assessment under section 34 of the Income tax Act on the ground that the so called agricultural income had escaped assessment to income tax under the Indian Income tax Act.
Assessments for the other years, 1943 44, 1944 45, 1945 46 and 1946 47 were also reopened, and the income in those years wag also similarly reassessed.
The assessee appealed to the Appellate Assistant Commissioner against all these orders of the Income tax Officer, but his appeals failed.
Against the orders of the Appellate Assistant Commissioner, appeals were filed before the Income tax Appellate Tribunal (Calcutta Bench).
The Tribunal dealt with the assessment for 1942 43 separately, and allowed the appeal as regards assessment for that year.
It held that the reassessment was improper under section 34 of the Income tax Act, because the Income tax Officer had not proceeded on any definite information but in the course of a "roving enquiry".
The Tribunal also held that the income was exempt from taxation to income tax under section 4(3)(viii) of the Act, inasmuch as this income was derived from land used for agricultural purposes, which continued to be assessed to land revenue.
In the appeals arising out of assessments for the subsequent years, a common order was passed by the Tribunal, remanding the appeals to the Appellate Assistant Commissioner for a rehearing.
The Tribunal stated that the appellants had filed a number of documents to establish that land revenue was assessed on the land which, the Department contended, proved the contrary.
The Tribunal felt that the matter should be reconsidered by the Appellate Assistant Commissioner, and hence remanded the cases.
The Appellate Assistant Commissioner in the rehearing held that the land in question continued subject to land revenue, and that the lump sum payment was merely payment of revenue in advance.
He accordingly allowed the appeals, and ordered exclusion of the income 603 from the assessments for the four years in question.
On appeal by the Department, the Tribunal changed its opinion, and came to the conclusion that the ' payment of a lump sum was not a payment in advance of the land revenue due from year to year but was land revenue capitalised.
It referred to the deed by which the proprietorship in the land was ves ted in the Corporation by the Secretary of State, and stated that by the document and the capitalisation of land revenue, the demand for land revenue was extinguished for ever.
It accordingly allowed the appeals, and restored the orders of assessment made by the Income tax Officer.
The assessee next moved the Tribunal for a reference setting out a number of questions which, he contended, arose out of the Tribunal 's order.
The Tribunal referred the following question of law for the opinion of the High Court: "Whether on the facts and in the circumstances of this case the Tribunal 's conclusion that the land was not assessed to land revenue within the meaning of section 2(1)(a) of the Indian Income tax Act is justified?" The reference was heard by Chakravarti, C. J., and Sarkar, J., (as he then was).
In an elaborate judgment, the learned Chief Justice upheld the conclusions of the Tribunal, and answered the question in the affirmative.
Sarkar, J., in an equally elaborate order expressed his doubts about the correctness of the Chief Justice 's reasons, but declined to disagree with him.
The question that arises in this case, as we have stated in the opening of this judgment, is a very short one.
It is an admitted fact that by payment of ' a lump sum the liability to pay land revenue was redeemed and no land revenue was de manded or was ever demandable from the Justices or their assigns in perpetuity.
The contention of the assessee is that this redemption saved the Justices from the liability for payment but did not affect the assessability of the land to revenue under Regulation I of 1793.
Unless, it is contended,.
there was a cancellation of the assessment, a,% is to be found in the 604 Land Tax and Tithe Redemption Acts in England, the liability must be deemed% to continue and land would still be assessed to land revenue for purposes of section 2(1)(a) of the Indian Income tax Act.
That section reads as follows: "2(1) 'Agricultural income ' means (a) any rent or revenue derived from land which is used for agricultural purposes, and is either assessed to land revenue in (the taxable territories) or subject to a local rate assessed and collected by Officers of (the Government) as such".
It is not denied that both the conditions, namely, "used for agricultural purposes" and "is either assessed to land revenue or subject to a local rate. . . have to co exist.
It is admitted by the Department that there is no question of subjection to a local rate assessed and collected, in this case.
The income derived from the land was from its use for agricultural purposes, and the first condition is thus satisfied.
The dispute centres round the point whether the land .can be said to be assessed to land revenue, in spite of the lump sum payment in 1865.
In the High Court, the matter was examined from three different points of view.
The first was the effect of acquisition of the land by Government upon the continued assessability of the land to land revenue.
The learned Chief Justice held that by the acquisition the assessment ceased to subsist.
The second was the effect of the redemption of land revenue by the Justices by a lump sum payment.
The learned Chief Justice was of opinion that it had the effect of cancelling the assessment.
The last was the effect of the grant free from land revenue, about which the learned Chief Justice was of opinion that it freed the land from assessment to land revenue.
Sarkar, J., agreed as to the first, but expressed doubts about the second and third propositions.
According to the learned Judge, the acceptance of a lump sum payment in lieu of recurring annual payments was more a matter of agreement than a cancellation of assessment to land revenue.
The matter has been argued before us from the 605 argument about the interpretation to be placed on the, conveyance by the Secretary of State which, according to him, only freed the Justices from 'payment ' of the assessed land revenue but did not cancel the assessment.
No Act of Legislature bearing upon the power of Government to accept a Iump sum payment in lieu of the annual demands for land revenue has been brought to our notice.
Counsel admitted that they were unable to find any such legislative provision.
We have thus to proceed, as did the High Court, without having before us the authority of a legislative enactment.
The only materials to which reference was made are: an extract from the explanatory notes in the Revenue Roll of the Touzi which shows that an abatement of land revenue pro tanto was granted to the proprietor of Panchannagram Estate, and a despatch from the Secretary of State for India (Lord Stanley) No. 2 (Revenue) dated December 31, 1858 recommending redemption of land revenue by an immediate payment of a sum of equivalent value, together with a Resolution of Government (Home Department No. 3264 (Rev) dated October 17, 1861) on permission to redeem the existing land revenue by the immediate payment of one sum equal in value to the revenue redeemed.
By the resolution, it was provided that such redemption would be limited to 10 per cent of the total revenue in the Collectorate and the price to be paid was to be fixed at 20 years ' purchase of the existing assessment.
It may be mentioned that in Despatch No. 14 dated July 9, 1862, the Secretary of State for India (Sir Charles Wood) did not agree with the earlier policy, but did not cancel it.
It may thus be assumed that what was done was under the authority of the Crown, which was then paramount, which paramountcy included the prerogative to free land from the demand of land revenue with or without conditions.
We have, therefore, to examine three things: the effect of acquisition on the continuance of the assessment to land revenue, the effect of redemption by a down payment on the same, 77 606 and the effect of the grant, free from land revenue, to the Justices.
The acquistion was under Act VI of 1857.
That Act provided in B. XXVI as follows: "When any land taken under this Act forms part of an estate paying revenue to Government, the award shall specify the net rent of the land including the Government Revenue, and the computed value of such rent: and it shall be at the discretion of the Revenue authorities either to pay over the whole of such value to the owner of the estate on the condition of his continuing to pay the jumma thereof without abatement; or to determine what proportion of the net rent shall be allowed as a remission of revenue, in which case a deduction shall be made from the said value proportionate to the value of such remission.
" This provision only saved the Estate assessed to land revenue from liability to pay land revenue proportionately falling upon the land acquired compulsorily, subject to a like proportionate reduction in the amount of compensation payable to the proprietor of the estate, but the provision cannot be stretched to mean that the liability of the land actually acquired, to land revenue in the hands of grantees from the Government also ceased.
Be that as it may, it is hardly necessary to view the present case from this angle at all, because, whether the land acquired continued to be subject to an assessment or must be deemed to be reassessed as a separate estate, the result would be the same if Government demand still subsisted on it, as, in fact, it did.
There could have been no redemption of the liability by a down payment if no land revenue could have been demanded.
The fact that the recurring liability was redeemed by a lump sum payment itself shows that in the view of Government as well as of the Justices, the 'Square Mile ' was still subject to the recurring demand and was thus still assessed to land revenue.
It is, therefore, not profitable to investigate the effect of acquisition on the continued liability of the land to land revenue between the time there was acquisition and the vesting of the land in the Justices.
For the above reason, we need not examine at 607 length the case in Lord Colchester vs Kewnoy where the acquisition by the Crown was held not to make, the area acquired immune from land tax, because the burden of the tax would then have fallen upon the remaining land situated in the unit from which it was acquired and on which unit a quota of the land tax was chargeable.
Such a position does not arise here, because the Panchannagram Estate was given abatement and a lump sum was paid to free the land acquired from the liability to land revenue.
Similarly, the decision of this Court in The Collector of Bombay vs Nusserwanji Rattanji Mistri and Others (2), where on the acquisition of some Foras lands held under Foras Land Act (Bombay Act VI of 1851) the Foras tenure was declared to have come to an end and on the same lands being resold by Government as freehold, they were declared not to be subject to assessment to which they were previously subject, is not very helpful.
There do not appear to be any rules prior to 1875, which were framed under the Land Acquisition Act of 1870 (Act X of 1870) and which are to be found in the Calcutta Gazette of July 7, 1875, p. 818.
If there were, they have not been brought to our notice.
But a practice similar to the rules seems to have obtained under section XXVI of the Act of 1857.
That Act also did not contain any provision for making rules, as are to be found in the subsequent Acts for compulsory acquisition of land.
In the absence of any statutory law or rules, we must take the facts to be that after acquisition the Panchannagram Estate was given abatement of land revenue, and the demand for land revenue was transferred to the land acquired and granted to the Justices.
At that stage, the liability to assessment remained, and it was that liability which was redeemed by a down payment.
We next consider the effect of redemption.
Learned counsel for the appellant contends that redemption in this connection means that by a single payment, the liability for periodical payments is saved but the assessment on the land remains uncancelled.
He has cited Wharton 's Law Lexicon to show the meaning of (1) (2) ; 608 the word "redemption", which is "commutation or the substitution of one lump payment for a succession of annual ones: e.g. See the Land Tax and the Tithe Redemption Acts and many other statutes".
Redemption is the act of redeeming which in its ordinary meaning is equal to bringing off a charge or obligation by payment.
To what extent this redemption freed the land or its holder from the obligation depends not so much upon what the obligation was before redemption as what remained of that obligation after it.
Here, the payment itself was meant to be "an immediate payment of one sum equal in value to the revenue redeemed" (vide the Resolution of Government dated October 17, 1861).
By the down payment, the entire land revenue to be recovered from that land was redeemed.
The payment was equal to the capitalised value of the land revenue.
When such a payment took place, it cannot be said that the assessment for land revenue remained.
The land was freed from that assessment as completely as if there was no assessment.
Thenceforward, the land would be classed as revenue free, in fact and in law.
In The Land Law of Bengal (Tagore Law Lectures, 1895) p. 81 section C. Mitra described these revenue free lands as follows: "There is another class of revenue free lands which comes within these rules laid down in the Registration and Tenancy Acts, namely, lands of which Government has, in consideration of the payment of a capitalised sum, granted proprietary title free in perpetuity from any demand of land revenue.
" That this is what had happened here is quite apparent from the conveyance by the Secretary of State vesting the land in the Justices.
It is significant that there is no mention of the payment of Rs. 7,728 13 8, nor of the assessability of the lands to land revenue.
On the other hand, the deed of conveyance merely reaffirmed the position, which existed before by stating: ". to hold the said pieces of land, hereditaments and premises intended to be conveyed with the appurtenances except as aforesaid unto the said Justices of the Peace for the Town of Calcutta and their successors for ever free and clear and for ever discharged 609 from all Government land revenue whatever or any payment or charge in the nature thereof.
" There can be no doubt that the land revenue was for ever extinguished and the land became free from land revenue, assessment in perpetuity.
It cannot thereafter be said that the land was still assessed to land revenue.
Mr. Mitra made a great effort to construe the operative part quoted above with the aid of the recital in the deed, where it was stated: ". but free and discharged from all payment of land revenue, land tax and all and every tax or imposition in the nature of revenue derivable from land payable to Government.
He drew attention to the word 'payment ', and contended that what was saved was payment of land revenue.
He argued that in case of ambiguity it was permissible to construe the operative portion of a deed in the light of the recitals, and cited Halsbury 's Laws of England, 3rd Edn., Vol.
XI, p. 421, para.
680, Gwyn vs Neath Canal Co. (1) and Orr vs Mitchell (2).
If there was any ambiguity in the operative portion of the deed, we may have taken the aid of the recitals.
But there is no ambiguity in the deed.
The history of redemption is a matter of record, and it is plain that Government was accepting a down payment and freeing land from land revenue.
This is precisely what was done, and the result of the down payment is set out with great clarity in the deed itself, and it is that there was no land revenue assessed on or demandable from that land.
In fact, no demand or payment or charge in the nature of land revenue could ever be made on it.
In view of this, it is, in our judgment, quite satisfactorily established that this land was not assessed to land revenue and the income from it did not fall within section 2(1)(a) of the Income tax Act.
The answer given by the High Court was thus correct.
In the result, the appeal fails, and will be dismissed with costs.
(1868) L R. Appeal dismissed (2) , 254.

dataset_name: IN-Abs

summary:
By a notification dated November 2, 1864, a piece of land forming part of the Panchannagram Estate which was permanently settled under Regulation 1 of 1793, was acquired by the Government of Bengal at the instance of the justices of the Peace for the Town of Calcutta, which was a corporation established under the provisions of the Calcutta Municipal Act, 1863, and the justices were required to pay the compensation payable to the proprietor of the Estate.
After the acquisition, the proprietor of the Estate was granted abatement of land revenue assessed on the Estate to the extent of Rs. 386 7 1, being the proportionate land revenue on the land acquired.
On October 27, i865, the Government called upon the justices to pay a sum of Rs. 7,728 13 8, which represented the amount capitalised at 20 years ' purchase of land revenue attributed to the area acquired.
On December 5, i870, the Secretary of State executed in favour of the justices of the Peace a conveyance of the land acquired, which stated, inter alia, that it was "ever free and clear and for ever discharged from all Government land revenue whatever or any payment or charge in the nature thereof to the end and intent that the said land may be used for a public purpose, namely, for the conservancy of the town." On January 23, 1880, a lease of the land was granted by the Justices to the predecessors in title of the appellant, under which the lessee had the right to carry on cultivation with the aid of sewage.
Before the income tax authorities the appellant claimed that the agricultural income derived by him from the land was not liable to income tax, but the claim was rejected on the ground that on the payment of a lump sum in 1865 the liability to pay land revenue was redeemed and no land revenue was demanded thereafter; consequently, the income derived from the land was not agricultural income within the meaning of section 2(1) of the Indian Income tax Act, 1922, and was not, therefore, exempt from tax.
The appellant 's contention was that the redemption only saved the justices from liability for payment but did not affect the assessability of the land to revenue under Regulation 1 of 1793.
599 Held, that by the down payment of a lump sum in 1865 the entire land revenue to be recovered from the land was redeemed and the land became free from land revenue assessment in perpetuity, as completely as if there was no assessment.
Thereafter, the land could not be said to be assessed to land revenue within the meaning of section 2(1) of the Indian Income tax Act, 1922, and, consequently, the income derived therefrom could not be considered to be agricultural income under that section.
The Collector of Bombay vs Nusserwanji Rattanji Mistri and others; , , distinguished.


judgement:
minal Appeal No. 118 of 1959.
Appeal by special leave from the judgment and order dated July 2, 1957, of the Calcutta High Court in Criminal Appeal No. 101 of 1956 arising out of the judgment and order dated January 16, 1956, of the Second Court of the Municipal Magistrate, Calcutta, in case No. 208B of 1955.
C. B. Aggarwala, B. B. Tawakley and B. P. Maheshwari, for the appellant.
Nalin Chandra Bannerjee, Sunil K. Basu, section N. Mukherjee for P. K. Bose, for the respondent No. 2. 1960.
November 24.
The Judgment of the Court was delivered by RAGHUBAR DAYAL, J.
This is an appeal by special leave against the 'Order of the Calcutta High Court affirming the conviction of the appellants Messrs. Madan Mohan Damma Mal Ltd., and Om Prokash Manglik, its Manager, under section 462 of the Calcutta Municipal Act, 1951 (W. B. XXXIII of 1951) hereinafter called the Act.
The facts leading to this appeal are that Messrs. Madan Mohan Damma Mal Ltd., (hereinafter called appellant No. 1) sent a consignment of mustard oil, about 499 maunds in weight, from Firozabad, the place of manufacture, to itself, at Calcutta, on December 25, 1954, in tank wagon No. 75612.
This wagon was placed at the Pathuriaghat siding at Calcutta at 666 about 8.45 a.m., on January 3, 1955.
Dr. Nityananda Bagui, Food Inspector of the Calcutta Corporation, accompanied by certain police officers, went to that siding and took three samples of mustard oil contained in this wagon, after arranging with Om Prokash Manglik, appellant No. 2, who was found near the wagon, the purchase of 12 ounces of oil for annas eight.
He took the sample of oil in three phials.
They were properly sealed.
One of them was given to appel lant No. 2.
The other two were kept by Dr. Bagui.
He sent one of them to the Public Analyst for examination, the same day.
Ashit Ranjan Sen, the Public Analyst, examined the oil contained in that phial on January 3, 1955, but could not come to any positive opinion about its purity.
Dr. Bagui, however, seized the tank wagon that evening, sealed it with the Corporation 's seal and left it in the custody of appellant No. 2.
The oil in the tank was allowed to be removed to the godown of the appellants on January 6, 1955.
The lock of the godown was then sealed with the seal of the Corporation.
Mr. Sen reported on January 4, 1955, that the oil was adulterated.
He sent a detailed report about the result of the examination on January 24, 1955.
On receipt of the report about the mustard oil being adulterated, Dr. Bagui filed a complaint against the appellants on February 4, 1955, with respect to their.
selling and keeping for sale mustard oil, a sample of which was found on analysis to be mustard oil which was adulterated with groundnut oil.
During the course of the trial, the trial Court, on an application on behalf of the appellants, ordered the despatch of the third sample phial of the oil in the custody of the Corporation 's Health Officer, to the Director of Health Services, Government of West Bengal, for analysis and report.
This sample was analysed by Dulal Chandra Dey, Court Witness No. 1, and found to be adulterated with groundnut oil.
The report of the Analyst was, however, sent to the Court under the signature of Dr. section K. Chatterjee, D. W. 2, Deputy Director of Health Services, Government of West Bengal.
667 The appellants appear to have sent the sample of oil in their possession to Om Prakash, Oil Expert to the U.P. Government, who reported on July 27, 1955, that the sample 'conforms to Agmark Specification for Mustard Oil and is considered to be free from adulterants such as sesame, groundnut and linseed oil '.
This report, however, has not been proved.
The Deputy Commissioner of Police, Enforcement Branch, Calcutta, sent a sample of mustard oil on January 10, 1955, to the Public Analyst, Food & Water, West Bengal Public Health Laboratory.
Sri section N. Mitra, D. W. 7, examined this sample and reported, on the basis of its saponification value to be 173.3, and iodine value to be 105, that the sample approximated to the standards of genuine mustard oil.
This report does not establish that the sample was of pure mustard oil.
Sri Mitra 's reply to the query from the Deputy Commissioner of Police for clarification, makes this very clear.
It is: "But, unless conclusive evidence of the presence of a foreign oil, corroborated in some instances by the figures of the usual oil contents, is obtained, the sample is not and cannot be declared adulterated.
In the present case the sample of mustard oil has already been examined exhaustively and has been certified as `approximating to standards ' but not as genuine.
The legal implication of the expression is that the sample will have the benefit of doubt.
" Further, there is no good evidence on the record to establish that the sample sent to Sri Mitra was a sample from the appellants ' tank wagon.
Dr. Bagui does not depose about the police people taking a sample of oil.
He was not questioned about the police taking any sample of the oil.
There seems to be no good reason for the police taking a sample of oil for the purpose of analysis and finding out whether the mustard oil was pure or not.
The case put to Dr. Bagui during his cross examination, on behalf of the appellants, appears to have been that he himself had taken four samples of the mustard oil in question and that one of those samples was sent to the Enforcement Branch.
Dr. Bagui denied that he had taken 668 four samples of the mustard oil, His statement is fully corroborated by the statement of Kalidas Ganguli, Sub Inspector, Calcutta Enforcement Branch, Police Department, who had accompanied Dr. Bagui on the occasion.
He stated that the Corporation Food Inspector took three samples and the police took the one ,,sample which was sealed with the Corporation seal.
We are not satisfied that the police actually took one sample of the oil and had it sealed with the Corporation seal as deposed to by Kalidas Ganguli.
The Courts below found on the evidence that the mustard oil in the appellants ' tank wagon was adulterated with groundnut oil, that the appellants were in possession of that oil and had stored that oil for sale, in view of the presumption arising under subs.
(4) of section 462 of the Act, and which had not been rebutted on behalf of the appellants.
Learned counsel for the appellants has questioned the correctness of these findings.
We have considered the evidence in connection with the analysis of the samples of mustard oil by the Chemists.
Ashit Ranjan Sen, P.W. 2, Public Analyst, who examined the first sample sent by Dr. Bagui on January 3 4, 1955, found it adulterated, on the basis of the data that the B. R. Index at 40 degree C was 60.4 and the Bellier 's test for groundnut oil was positive inasmuch as it gave turbidity at 28 degree C. Court Witness No. 1, Dulal Chand Dey, who actually analysed the sample sent by the Court, also found it adulterated, on the basis of his obtaining the saponification value to be 175.5, iodine value to be 106degree 8 and the appearance of turbidity at 27 degree C. He also found indication of the presence of a small amount of linseed oil.
The correctness of his opinion on these data is admitted by Sri Mitra, D.W. 7.
In these circumstances, the finding of the Courts below that the mustard oil in the appellant 's tank wagon was adulterated is correct.
It is not established that the sample of mustard oil sent to Sri Mitra by the Deputy Commissioner of the Enforcement Branch contained mustard oil from this tank wagon.
The opinion of Sri Mitra about the nature of that sample therefore does not go against the opinion 669 of Sri Sen and Sri Dey that the mustard oil analysed by them was adulterated with groundnut oil.
The other contention for the appellants is that they were not in possession of the oil when the sample of mustard oil was taken by Dr. Bagui and that therefore no presumption under sub section
(4) of section 462 of the Act can be raised against them for holding that the oil was stored for sale.
It appears from the judgment of the High Court under appeal that it was not disputed at the hearing before it that the appellants were in possession of the mustard oil whose sample had been taken.
On the evidence on the record we are of opinion that they were in possession of the mustard oil.
The consignment of oil was from the manufacturing firm, appellant No. 1, to itself at Calcutta.
Its manager, appellant No. 2, took delivery of the wagon from the railway authorities on January 3, 1955.
There is no direct evidence to the effect that such delivery was taken prior to Dr. Bagui 's taking sample of the mustard oil.
But the circumstances, in our opinion, conclusively establish that appellant No. 2 had taken delivery of the wagon prior to Dr. Bagui 's visit and taking samples of oil from the wagon.
Appellant No. 2 is not expected to and could not have got the wagon opened for 'the purpose of taking samples of oil, if he had not taken delivery of the wagon from the railway authorities.
The railway authorities themselves would have seen to it that nobody tampers with the contents of the wagon in its charge.
Appellant No. 2 must have therefore paid the freight for the wagon prior to Dr. Bagui 's visit and thus obtained delivery of the wagon.
It was thereafter that he got control over the wagon and was in a position to take out oil from it or to permit anyone else to take out oil.
We therefore hold that the appellants were in possession of the oil in the tank wagon when Dr. Bagui took samples of the oil from it.
The main contention, however, for the appellants is that the presumption that the mustard oil was stored for sale by the appellants, under sub section
(4) of section 462 of the Act, is rebuttable and has been fully rebutted in view of certain arrangements between the 83 670 U.P. Oil Millers Association and the Deputy Commissioner of Police, Enforcement Branch, and the letter of the appellants to the Secretary of the Association (Exhibit R) on January 3, 1955.
We have considered the various documents which have been referred to in support of the arrangement between the Association stand the Deputy Commissioner, Enforcement Branch, but do not find therein anything which would restrain legally the appellants from selling the oil even if it is found to be adulterated.
The proceedings of the meeting of the U. P. Oil Millers Association held on June 9, 1954, and attended by the Deputy Commissioner and Assistant Commissioner of the Enforcement Branch show that no such agreement has been arrived at.
Even the suggestion of the Deputy Commissioner that all the members of the Association should write to their respective mills that all the quantity of oil which would be imported should at first be passed and then made delivery of, was not fully accepted, the members simply stating that they always and invariably imported pure mustard oil.
It was, however, decided that the samples of oil be taken from the next morning, i.e., June 10, 1954.
We however find that in November 1954 the U. P. Oil Millers Association wrote to appellant No. I that according to the decision of the Deputy Commissioner of Police, Enforcement Branch, every application to draw sample and test it should be accompanied by a certificate signed by the Chemist or the Manager or the Proprietor of the Mills to the effect that the mustard oil in the tank wagon was pure mustard oil free from Argemoni, linseed or any other adulteration, and that in February 1955 and April 1955, the Deputy Commissioner of Police, Enforcement Branch had to remind the U. P. Oil Millers Association that it should advise all its members that whenever they indent any mustard oil from outside Bengal, they would see that the railway receipts be accompanied by a clear certificate of examination from the Chemist of the factory who examined the same.
Such directions from the Deputy Commissioner of Police, Enforcement Branch, do not appear to have 671 had any great effect, as the consignment of oil received by the appellants was without any such certificate.
Mahendra Kumar Gupta, D.W. 1, Chemist of the appellants ' mill, deposed however that he had taken the sample of the oil sent in that wagon and found it to be genuine mustard oil, free from any adulteration.
Any such certificate about the purity of the mustard oil sent is not proved to have accompanied the railway receipt and to have been shown or made over to Dr. Bagui, or to the Police Officers who had accompanied him at the time.
Letter Exhibit R was sent on behalf of appellant No. I to the Secretary of the U. P. Oil Millers Association at 10 a.m., on January 3, 1955.
The letter said: "Please arrange for sample and test through the proper authorities concerned, so that we may take the delivery of oil only if it is found pure on analysis." Any such statement can hardly be sufficient to rebut the presumption that the oil which was consigned by appellant No. I to itself at Calcutta was stored for sale.
The letter itself does not say that the oil will not be sold.
It simply says that they may take the delivery of the oil only if it is found pure on analysis.
What would be done to the oil if it is found to be impure, is not stated.
The Association was not in any arrangement with the Corporation which had the sole authority to take action with respect to the adulterat ed mustard oil.
The Enforcement Branch of the Police had nothing to do with it.
In the circumstances, all the so called arrangement with the Enforcement Branch of the Police and the consequent letters, similar to letter Exhibit R, seem to be a subtle device to make things difficult for the proper authorities responsible to see that mustard oil fit for sale be pure.
It is obvious in this case itself, how this sort of arrangement has provided an occasion for the coming into existence of the alleged fourth sample of mustard oil from the appellants ' tank wagon and the non committal report about its purity.
We are therefore of opinion that this letter Exhibit R, or the arrangement which led to such communication, does not establish 672 that the mustard oil in the wagon which will be otherwise presumed to be stored for sale by the appellants, was not stored for sale.
We are therefore of opinion that the conviction of the appellants of the offence under section 462 of the Act is correct.
The appeal therefore stands dismissed.
Appeal dismissed.

summary:
The first appellant No. 1 sent a consignment of mustard oil in a tank wagon from Firozabad, U. P. to itself at Calcutta where it took delivery of the wagon from the railway authorities.
The Food Inspector took samples of the oil from the wagon which on analysis were found to be adulterated.
The appellants were prosecuted under section 462 of the Calcutta Municipal Act, 951 for storing adulterated mustard oil for sale.
The 665 appellants contended that the presumption under sub section
(4) of section 462 that the mustard oil was stored for sale was rebutted in view of certain arrangements between the U. P. Oil Millers Association and the Deputy Commissioner of Police and of a letter written by the appellants to the Association asking that a sample may be taken and tested so that the appellants "may take the delivery of oil only if it is found pure on analysis.
" Held, that this was not sufficient to rebut the presumption '.
that the oil was stored for sale.
The letter did not say that the oil would not be sold; it was not stated as to what would be done if the oil was found to be impure.
There was no arrangement between the Association and the Corporation which was the sole authority to take action.
The arrangement and the letter were a device to make detection difficult.


judgement:
Appeal No.110 of 1957.
Appeal by special leave from the judgment and order dated February 25, 1955, of the former Bombay High Court in I.T.R. No. 57/X of 1954.
N. A. Palkhivala and I. N. Shroff, for the Appellant.
A. N. Kripal and D. Gupta, for the Respondent.
November 24.
The Judgment of the Court was delivered by KAPUR, J.
This is an appeal by special leave against the judgment and order of the High Court of Bombay answering the question submitted to it.
against the assessee firm who is the appellant before 653 us, the respondent being the Commissioner of Income tax.
The appeal relates to the assessment year 1949 50, the accounting year ended on July 25, 1948.
The appellant is a firm doing the business of importing dates from abroad and selling them in India.
During the accounting year the appellant imported dates from Iraq.
At the relevant time the import of dates by steamers was prohibited by two notifications dated December 12, 1946, and June 4, 1947, but they were permitted to be brought by country craft.
Goods which had been ordered by the appellant were received partly by steamer and partly by country craft.
Consignments, which were imported by steamer and were valued at Rs. 5 lacs were confiscated by the Customs Authorities under section 167, item 8 of the Sea Customs Act but under section 183 of that Act the, appellant was given an option to pay fines aggregating Rs. 1,63,950 which sum on appeal was reduced to Rs. 82,250.
This sum was paid and the dates were released.
On the sale of the goods certain profits accrued out of which it sought to deduct Rs. 82,250 paid as penalty on ordinary principles of commercial accounting.
The Income tax Officer disallowed this claim which was also disallowed by the Appellate Assistant Commissioner.
On appeal to the Income tax Appellate Tribunal this sum was held to be allowable by a majority of two to one.
At the instance of the respondent the Tribunal referred the following question to the High Court for its opinion: "Whether on the facts and in the circumstances of the case, the payment of Rs. 82,250 is an allowable expenditure under Section 10(2) (xv) of the Indian Income tax Act?" The High Court held that the above amount of Rs. 82,250 could not be said to have been paid for salvaging the goods but was paid as a penalty incurred in consequence of an illegal, act on the part of the appellant and was therefore not an allowable item under section 10(2)(xv) of the Income tax Act.
Against this judgment the appellant firm has come in appeal to this Court by special leave.
83 654 any contract of hire purchase was contemplated, cannot be applied simpliciter, because such a contract has in it not only the element of bailment but also the element of sale.
At common law the term 'hire purchase ' properly applies only to contracts of hire conferring an option to purchase, but it is often used to describe contracts which are in reality agreements to purchase chattels by instalments, subject to a condition that the property in them is not to pass until all instalments have been paid.
The distinction between these two types of hire purchase contracts is, however, a most important one, because under the latter type of contract there is a binding obligation on the hirer to buy and the hirer can therefore pass a good title to a purchaser or pledgee dealing with him in good faith and without notice of the rights of the true owner, whereas in the case of a contract which merely confers an option to purchase there is no binding obligation on the hirer to buy, and a purchaser or pledgee can obtain no better title than the hirer had, except in the case of a sale in market overt, the contract not being an agreement to buy within the Factors Act, 1889, or the Sale of Goods Act, 1893." The observations quoted above are based mostly on two leading cases which have come to be regarded as the locus classicus upon the subject, namely Lee vs Butler (1) in which the transaction was described by Lord Esher, M.R., as "Hire and Purchase Agreements" and Helby vs Matthews (2) in which the House of Lords distinguished the former case on the ground that in that case there was a binding contract to buy and not merely an option to buy, without any obligation to buy.
Both these cases were decided in terms of Factors Act of 1889 (52 & 53 Viet.
c. 45, section 9).
Both the kinds of agreements exemplified by the two leading cases aforesaid would now be included in the definition of 'hire purchase ' as contained in section 21 of the Hire Purchase Act, 1938 (1 & 2 Geo., 6, c. 53): " 'Hire purchase agreement ' means an agreement for the bailment of goods under which the bailee (1) (2) (1895] A.C. 471.
655 may buy the goods or under which the property in the goods will or may pass to the bailee, and where, by virtue of two or more agreements, none of which by itself constitutes a hire purchase agreement, there is a bailment of goods and either the bailee may buy the goods, or the property therein will or may pass to the bailee, the agreements shall be treated for the purposes of this Act as a single agreement made at the time when the last of the agreements was made.
" It is clear that under the Law, as it now stands, which has now been crystallised into the section of the Hire Purchase Act, quoted above, the transaction partakes of the nature of a contract or bailment with an element of sale, as aforesaid, added to it. 'in such an agreement, the hirer may not be bound to purchase the thing hired;.
he may or may not be.
But in either case, if there is an obligation to buy, or an option to buy, the goods delivered to the hirer by the owner on the terms that the hirer, on payment of a premium as also of a number of instalments, shall enjoy the use of the goods, which ultimately may become his property, the transaction amounts to one of hire purchase, even though the title to the goods has remained with the owner and shall not pass to the hirer until a certain event has happened, namely, that all the stipulated instalments have been paid, or that the hirer has exercised his option to finalise the purchase on payment of a sum, nominal or otherwise.
But it has been contended on behalf of the petitioners that there is no binding agreement to purchase the goods and that title is retained by the owner not as a security for payment of the price but absolutely.
According to third term of the agreement, on the hirer duly performing and observing the terms of the agreement, with particular reference to the payment of the monthly instalments, "the hiring shall come to an end and the vehicle shall, at the option of the hirer, become his absolute property; but until such payments as aforesaid have been made, the vehicle shall remain the property of the owners.
The hirer shall also have the option of purchasing the vehicle at any 656 belonging to him may be, the name and residence of the said person and the amount of penalty or increased rate of duty unrecovered; and such Magistrate shall thereupon proceed to enforce payment of the said amount in like manner as if such penalty or increased rate had been a fine inflicted by himself.
" These sections show the punishments provided for the breach of the prohibitions in regard to importation or exportation of goods under sections 18 and 19; the power of the Customs Authorities to give an option to pay in lieu of confiscation and how the penalties are to be imposed.
Therefore when the appellants incurred the liability they did so as a penalty for an infraction of the law; but it cannot be said that the money which they had to pay was not paid as a penalty and in fact under section 167(8) it was a penalty.
In support of his argument counsel for the appellant firm referred to Maqbool Hussain etc.
vs The State of Bombay etc.
(1) and to the following passage at p. 742 where Bhagwati, J., said: "Confiscation is no doubt one of the penalties which the Customs Authorities can impose but that is more in the nature of proceedings in rem than proceedings in personam, the object being to confiscate the offending goods which have been dealt with contrary to the provisions of the law and in respect of the confiscation also an option is given to the owner of the goods to pay in lieu of confiscation such fine as the officer thinks fit.
All this is for the enforcement of the levy of and safeguarding the recovery of the sea customs duties.
" Similar observations were made by section K. Das, J., in Shewpujanrai Indrasanrai Ltd. vs The Collector of Customs & Ors.
(2) where it was said that a distinction must be drawn between an action in rem and proceeding in personam and that confiscation of the goods is a proceeding in rem and the penalties are enforced against the goods whether the offender is known or not.
The view taken by this Court in the other two cases cited by counsel for the appellants, i.e., Leo Roy (1) ; (2) ; , 836.
657 Frey vs The Superintendent, District Jail, Amritsar (1) and Thomas Dana vs The State of Punjab (2) is the same.
In Dana case (2) Subba Rao, J., said at p. 298: "If the authority concerned makes an order of confiscation it is only a proceeding in rem and the penalty is enforced against the goods.
On the other hand, if it imposes a penalty against the person concerned, it is a proceeding against the person and he is punished for committing the offence.
It follows that in the case of confiscation there is no prosecution against the person or imposition of a penalty on him." In Maqbool Hussain 's case (3) the question for decision was whether after proceedings had been taken under the Sea Customs Act an accused person could be prosecuted and could or could not rely upon the plea of double jeopardy, it was held that he could not.
In Shewpujanrai 's case (4) the contention raised was that after proceedings had been taken under the Foreign Exchange Regulation Act it was not open to the Customs Authorities to take any action under the Sea Customs Act.
The other two cases were similar to Maqbool Hussain 's case (3).
The contention now raised before us is quite different.
What is to be decided in the present case is whether the penalty which was paid by the appellant firm was an allowable deduction within section 10(2)(xv) of the Income tax Act which provides: section 10(2)(xv) "any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation.
" The words "for the purpose of such business" have been construed in Inland Revenue vs Anglo Brewing Co. Ltd. (5) to mean "for the purpose of keeping the trade going and of making it pay".
The essential condition of allowance is that the expenditure should have been laid out or expended wholly and exclusively for the purpose of such business.
(1) ; (2) [1959] Supp.
I S.C.R. 274, 298.
(3) ; (4) ; , 836.
(5) , 813.
658 In deciding this case, reference to decisions in some English cases will be fruitful.
In Commissioners of Inland Revenue vs Warnes & Co. (1), the assessee who carried on the business of oil exporters were sued for a penalty on an information exhibited by the Attorney General under the Sea Customs Consolidation Act for breach of orders and proclamations.
The matter was settled by consent on the assessee agreeing to pay a mitigated penalty of pound 2,000.
All imputations on the moral culpability of the assessees were withdrawn.
The provisions of the Act under which this information was lodged and penalty paid was similar to the provisions of the Indian Sea Customs Act.
This amount was held not to be a proper deduction because in order to be within the provision similar to section 10(2) (xv) of the Indian Act the loss had to be something within commercial contemplation and in the nature of a commercial loss.
Rowlatt, J., relying on the observation of Lord Loreburn, L. C., in Strong & Co. vs Woodifield (2) said at p. 452: "but it seems to me that a penal liability of this kind cannot be regarded as a loss connected with or arising out of a trade.
I think that a loss connected with or arising out of a trade must, at any rate, amount to something in the nature of a loss which is contemplable and in the nature of a commercial loss.
I do not intend that to be an exhaustive definition, but I do not think it is possible to say that when a fine which is what the penalty in the present case amounted to has been inflicted upon a trading body, it can be said that that is a "loss connected, with or arising out of" the trade within the meaning of this rule.
" This statement of the law was approved in the Commissioners of Inland Revenue vs Alexander Von Glehn & Co. Ltd. (3) where also in similar circumstances by consent of the assessee penalty of pound 3,000 was paid and the penalty plus the costs were claimed as deduction in arriving at the profits.
The Special Commissioners had found that the penalty and costs were incurred by the assessee in the course of carrying on (1) (2) ; (3) [1920] .2
K.B. 553.
659 their trade and so incidental thereto and were admissible deductions.
Rowlatt, J., on a reference held it to be a non deductible item.
This judgment was affirmed on appeal by the Court of Appeal.
Lord Sterndale, M. R., was of the opinion that it was immaterial whether technically the proceedings were criminal or not.
The money that was paid was paid as a penalty and it did not matter if in the information it was called a forfeiture.
It was argued by the assessee in that case that no moral obliquity was attributed to them and that it did not matter whether the expense was incurred in consequence of an infraction of the law or whether it was a penalty for doing an illegal act.
At p. 565 Lord Sterndale said: "Now what is the position here? This business could perfectly well be carried on without any infraction of the law.
This penalty was imposed because of an infraction of the law, and that does not seem to me to be, any more than the expense which had to be paid in Strong & Co. vs Woodifield (1) appeared to Lord Davey to be, a disbursement or expense which was laid out or expended for the purpose of such trade. ." Warrington L.J. said at p.569: "It is a sum which the persons conducting the trade have had to pay because in conducting it they have so acted as to render themselves liable to this penalty.
It is not a commercial loss, and I think when the Act speaks of a loss connected with or arising out of such trade it means a commercial loss, connected with or arising out of the trade.
" In Strong & Co. vs Woodifield (1) a brewing company owned a licensed house in which they carried on the business of inn keepers.
They incurred a liability to pay damages on account of injuries caused to a visitor, by the falling in of a chimney.
This sum was held not to be allowable as a deduction in computing the profits ' Lord Loreburn, L. C., in his speech said no sum could be deducted unless it be money wholly and exclusively laid out or expended for the purpose of such (1) ; 660 trade and that only such losses could be deducted as were connected with it in the sense that they were really incidental to the trade itself and they could not be deducted if they were mainly incidental to some other vocation or fell on the trader in some character other than that of a trader.
Lord Davey observed:"I think the disbursements permitted are such as are made for that purpose.
It is not enough that the disbursement is made in the course of, or arise out of, or is connected with the trade or is made out of the profits of the trade.
It must be made for the purpose of earning profits.
" The following passage from Lord Sterndale 's judgment at p. 566 in Von Glehn 's case (1) from which we have already quoted shows the effect of incurring a penalty as a result of a breach of the law: "During the course of the trading this company committed a breach of the law.
As I say, it has been agreed that they did not intend to do anything wrong in the sense that they were willingly and knowingly sending these goods to an enemy destination; but they committed a breach of the law, and for that breach of the law, they were fined.
That, as it seems to me, was not a loss connected with the business, but was a fine imposed upon the company personally, so far as a company can be considered to be a person, for a breach of the law which it had committed.
It is perhaps a little difficult to put the distinction into very exact language, but there seems to me to be a difference between a commercial loss in trading and a penalty imposed upon a person or a company for a breach of the law which they have committed in that trading.
For that reason I think that both the decision of Rowlatt, J., in this case, and his former decision in Inland Revenue Commissioners vs Warnes & Co. (2) which he followed were right, and that this appeal should be dismissed with costs." In Spofforth and Prince vs Glider (3) the assessee was a firm of chartered accountants, who claimed a deduction for certain legal costs paid in connection with a (1) [1920) 2 K.B. 55.3.
(2) (3) 661 successful defence of one of the partners in a Police Court.
The assessee firm also sought legal advice in regard to matters connected with some proceedings.
Summons were issued against the assessee firm but were eventually dismissed.
The assessee contended that the whole of the costs incurred in connection with the proceedings were "wholly and exclusively" laid out or expended for the appellant 's profession and were therefore allowable deductions.
The Special Commissioner had held against the assessee which was upheld by the Court.
The test laid down by Lord Davey in Strong & Co. vs Woodifield (1) was applied and applying that test it was held that except the expenses for obtaining legal advice the other expenses were not admissible.
In Farrie vs Hall (2) F, a sugar broker was sued in the High Court for libel and the Court held that F had acted maliciously and that the defence of privilege could not prevail and awarded damages against him.
F sought to claim the amount of damages as an allowable deduction contending that it was an expenditure laid out wholly and exclusively for the purposes of his trade or was a loss connected with or arising out of the trade.
Relying on the cases above mentioned this amount was disallowed because it fell on the assessee in his character of a calumniator of a rival sugar broker and it was only remotely connected with his trade as a sugar broker.
Therefore it was not laid out exclusively and wholly for the purpose of his business.
We were also referred to the observations of Danckwerts, J. in Newson vs Robertson (3) where it was said that if the expenditure is incurred by the tax payer for more than one purpose including the commercial purposes in the sense that it is incurred for the purposes of earning profits of the trade and also some outside purpose then the expenses cannot be claimed at all as not being wholly and exclusively laid out or expended for the purpose of the trade.
In that case expenses claimed by a Barrister for (1) ; (2) (3) , 459.
84 662 travelling between his house and his chambers were disallowed because his object and purpose in travelling was mixed and not wholly and exclusively for the purpose of the profession.
Coming now to Indian cases; In Mask & Co. vs Commissioner of Income tax, Madras (1) the assessee in breach of his contract sold crackers at a lower rate and a decree was passed against him for damages for breach of contract which he claimed as an allowable deduction.
It was held that as the assessee had disregarded the undertaking given and his conduct was palpably dishonest it did not constitute an allowable expenditure.
Sir Lionel Leach, C. J., after referring to Warne 's case (2) and Von Glehn 's case (3) held that the amount did not constitute an expenditure falling within section 10(2)(xii).
The Madras High Court in Senthikumara Nadar & Sons vs Commissioner of Income tax, Madras (4) held that payments of penalty for an in.
fraction of the law fell outside the scope of permissible deductions under section 10(2)(xv).
In that case the assessee had to pay liquidated damages which was akin to penalty incurred for an act opposed to public policy a policy underlying the Coffee Market Expansion Act, 1942, and which was left to the Coffee Board to enforce.
Reference was also made during the course of arguments to Commissioner of Income tax vs Hirjee (1).
In that case the assessee was prosecuted under the Hoarding and Profiteering Ordinance but was finally acquitted and claimed the amount spent in defending himself under section 10(2)(xv) in his assessment.
It was held that the distinction between the legal expenses on a successful and unsuccessful defence was not sound and that the deductibility of such expenses under section 10(2)(xv) must depend on the nature and purpose of the legal proceedings in relation to the business whose profits are in computation and are unaffected by the final outcome of the proceedings.
A review of these cases shows that expenses which (1) (3) (2) (4) (5) ; 663 are permitted as deductions are such as are made for the purpose of carrying on the business, i.e., to enable a person to carry on and earn profit in that business.
It is not enough that the disbursements are made in the course of or arise out of or are concerned with or made out of the profits of the business but they must also be for the purpose of earning the profits of the business.
As was pointed out in Von Glehn 's case (1) an expenditure is not deductible unless it is a commercial loss in trade and a penalty imposed for breach of the law during the course of trade cannot be described as such.
If a sum is paid by an assessee conducting his business, because in conducting it he has acted in a manner, which has rendered him liable to penalty it cannot be claimed as a deductible expense.
It must be a commercial loss and in its nature must be con templable as such.
Such penalties which are incurred by an assessee in proceedings launched against him for an infraction of the law cannot be called commercial losses incurred by an assessee in carrying on his business.
Infraction of the law is not a normal incident of business and therefore only such disbursements can be deducted as are really incidental to the business itself.
They cannot be deducted if they fall on the assessee in some character other than that of a trader.
Therefore where a penalty is incurred for the contravention of any specific statutory provision, it cannot be said to be a commercial loss falling on the assessee as a trader the test being that the expenses which are for the purpose of enabling a person to carry on trade for making profits in the business are permitted but not if they are merely connected with the business.
It was argued that unless the penalty is of a nature which is personal to the assessee and if it is merely ordered against the goods imported it is an allowable deduction.
That, in our opinion, is an erroneous distinction because disbursement is deductible only if it falls within section 10(2)(xv) of the Income tax Act and no such deduction can be made unless it falls within the test laid down in the cases discussed above and it can be said to be expenditure wholly and exclusively laid for the purpose of the business.
Can it be said (1) 664 that a penalty paid for an infraction of the law, even though it may involve no personal liability in the sense of a fine imposed for an offence committed, is wholly and exclusively laid for the business in the sense as those words are used in the cases that have been discussed above.
In our opinion, no expense which is paid by way of penalty for a breach of the law can be said to be an amount wholly and exclusively laid for the purpose of the business.
The distinction sought to be drawn between a personal liability and a liability of the kind now before us is not sustainable because anything done which is an infraction of the law and is visited with a penalty cannot on grounds of public policy be said to be a commercial expense for the purpose of a business or a disbursement made for the purposes of earning the profits of such business.
In our opinion the High Court rightly held that the amount claimed was not deductible and we therefore dismiss this appeal with costs.
Appeal dismissed.

summary:
The appellant firm imported dates from abroad partly by steamer and partly by country craft.
At the relevant time import of dates by steamers had been prohibited by Government (1) [1945] 1 3 I.T.R. Supp.
(2) ; 652 notification, and the consignments which were imported by steamer were, therefore, confiscated by the customs authorities under section 167, item 8, of the Sea Customs Act, i878, but under section 183 of the Act the appellant was given an option to pay Rs. 82,250 as penalty in lieu of confiscation.
The appellant paid the amount and got the dates released.
Before the Income tax authorities it claimed to deduct the amount paid as penalty as an allowable expenditure under section 1O(2)(XV) of the Indian Income tax Act, 1922, but the claim was rejected.
It was contended that the order of confiscation was against the stock in trade and not against the person of the appellant firm and as the amount paid was expended for the release of the stock in trade, it was an allowable expenditure.
Held, that the amount paid by the appellant by way of penalty for a breach of the law could not be considered to be an expenditure laid out wholly and exclusively for the purpose of the business and was not an allowable deduction under section 1O(2) (xv) of the Indian Income tax Act, 1922.
Expenses which are permitted as deductions are such as are made in order to enable a person to carry on and earn profit in the business.
It is not enough that the disbursements are made in the course of or arise out of or are concerned with or made out of the profits of the business but they must also be for the purpose of earning the profits of the business.
An expenditure is not deductible unless it is a commercial loss in trade and a penalty imposed for breach of the law during the course of trade cannot on grounds of public policy be said to be a commercial expense for the purpose of a business or disbursement made for the purpose of earning the profits of such business.
Case law reviewed.


judgement:
Appeal No. 358 of 1958.
645 Appeal by special leave from the judgment and order dated 8th March, 1956, of the former Bombay High Court in I.T.R. No. 55 of 1955.
A. N. Kripal and D. Gupta, for the appellant.
N. A. Palkhivala and B. P. Maheshwari, for the respondents.
November 24.
The Judgment of the Court was delivered by KAPUR, J.
This is an appeal by special leave against the judgment and order of the High Court of Bombay in Income tax Reference No. 55 of 1955, in which two questions of law were stated for opinion and both were answered in favour of the assessee and against the Commissioner of Income tax who is the appellant before us and the assessee is the respondent.
The facts of this case are these: The respondent is a registered firm carrying on business as commission agents in Bombay.
For purposes of its business it borrowed money from time to time from Banks on joint promissory notes executed by it and by others with joint and several liability.
On September 26, 1949, the respondent borrowed Rs. 1,00,000 from the Bank of India on a pronote executed jointly with one Kishorilal.
Out of this amount a sum of Rs. 50,000 was taken by the respondent for purposes of its business and the rest by Kishorilal.
Kishorilal however failed to meet his liability and became a bankrupt.
The respondent had therefore to pay the Bank the whole amount, i.e., Rs. 1,00,000 with interest.
Out of the amount taken by Kishorilal the respondent received in the accounting year, from the Official Assignee, a sum of Rs. 18,805 and claimed the balance, i.e., Rs. 31,740 as deduction.
The accounting year was from August 26, 1949 to July 17, 1950, the assessment year being 1951 52.
This claim was disallowed both by the Income tax Officer as well as the Appellate Assistant Commissioner.
On Appeal to the Income tax Appellate Tribunal this sum was allowed ,as an allowable deduction under section 10(2)(xv) of the Income tax Act and as business loss.
82 646 At the instance of the Commissioner a case was stated to the High Court of Bombay by the Income tax Appellate Tribunal.
In the statement of the case which was agreed to by both parties the Tribunal said: "For the purpose of his business, he borrows from time to time money on joint and several liability from banks.
The Commercial practice is to borrow money from banks on joint and several liability.
An illustration will explain what we mean.
A and B require Rs. 50,000 each.
They find that the Bank would not advance Rs. 50,000 to each on his individual security.
They however, find that the Bank would be prepared to advance Rupees one lach on their joint and several liability.
They take Rupees one lac on joint and several liability and then divide the money equally between themselves.
" It also found that the Banks advanced monies to some constituents on their personal security also but they had to pay a higher rate of interest than when the money was borrowed on joint and several responsibility; that Rs. 1,00,000 borrowed from the Bank was in accordance with the commercial practice of Bombay.
On these facts the following two questions of law were referred to the High Court: "(1) Whether the assessee 's claim is sustainable under section 10(2)(xv) of the Act? (2) Whether the assessee 's claim that the loss was a business loss and, therefore, allowable as a deduction in computing the profits of the assessee 's business is sustainable under law?" Both these questions were answered in favour of the respondent and against the appellant.
Counsel for the Commissioner challenged the findings of the Tribunal in regard to the existence of commercial practice in Bombay but this ground of attack is not available to him because not only did the Tribunal give this finding in its Order, but in the agreed statement of the case also this finding was repeated as is shown by the passage quoted above.
The High Court also has proceeded on the basis of this commercial practice.
In the judgment under appeal the learned Chief Justice said: 647 "The finding of the Tribunal is clear and explicit that what the assessee was doing was not something out of the ordinary, but in borrowing this money on joint and several liability he was following a practice which was established as a commercial practice.
Therefore, the transaction was clearly in the course of the business and incidental to the business and it is this transaction which resulted in a loss to the assesses, he having to pay the liability of the surety.
" Therefore this appeal has to be decided on the basis that a commercial practice of financing business by borrowing money on joint and several liability was established.
It was argued on behalf of the appellant that this court in Madan Gopal Bagla vs Commissioner of Income Tax, West Bengal (1) had decided against the allowability of such losses.
But the facts of that case when carefully scrutinised are distinguishable and the decision does not support the contentions of the appellant.
No doubt certain features of that case and the present one are similar but they differ in essential features.
In that case the assessee was a timber merchant who obtained a loan of Rs. 1 lac from the Bank of India on the joint security of himself and one Mamraj, which the assessee paid off.
Mamraj also obtained a loan of Rs.
I lac on the joint security of himself and the assessee.
Mamraj became an insolvent and the assessee had to pay the whole of the amount borrowed with interest thereon.
The assessee there received a certain amount of money by way of dividends from the Receiver and the balance he wrote off as bad debt in the assessment year and claimed it as an allowable deduction under section 10.
The High Court there held that the debt could not be said to be a debt in respect of the business of the assessee as he was not carrying on the business of standing surety for other persons nor was he a money lender, he being simply a timber merchant; that it had not been established nor was it alleged that he was in the habit of standing surety for other persons "along with them for purposes of securing loans for their use and benefit" and even if money (1) ; 648 had been so borrowed and there had been a loss the loss would have been a capital loss and not a business loss to the assessee.
This statement of the law was approved by this Court but there mutuality, as an essential ingredient of the custom established, was found to be lacking as is shown by the following passage from the judgment of the court.
"The custom stated before the Appellate Assistant Commissioner was that persons carrying on business in Bombay used to borrow monies on joint security from the Banks in order to facilitate getting financial assistance from the Banks and that too at lower rates of interest.
A businessman could procure financial assistance from the Banks on his own, but he would in that case have to pay a higher rate of interest.
He would have to pay a lower rate of interest if he could procure as surety another business man, who would be approved by the Bank.
This, however, did not mean that mutual accommodation by businessmen was necessarily an ingredient part of that custom.
A could procure B, C or D to join him as surety in order to achieve this objective, but it did not necessarily follow that if A wanted to procure B, C or D to thus join him as surety he could only do so if he in his own turn joined B, C or D as surety in the loans which B, C or D procured in their turns from the Banks for financing their respective businesses.
Unless that factor was established, the mere procurement by A of B, C or D as surety would not be sufficient to establish the custom sought to be relied upon by the appellant so as to make the transaction of his having joined Mumraj Rambhagat as surety in the loan procured by Mumraj Rambhagat from Imperial Bank of India, a transaction in the course of carrying on his own timber business and to make the loss in the transaction a trading loss or a bad debt of the timber business of the appellant.
" Continuing at page 558 it was observed: "There were thus elements of mutuality and the essential ingredient in the carrying on of the money lending business, which were elements of the custom 649 proved in that case, both of which are wanting in the present case before us." Mr. Palkhivala for the respondent rightly argued that Madan Gopal Bagla 's case (1) was decided against the assessee because the custom of persons standing surety for each other for borrowing money and the element of mutuality which was an essential ingredient in the case of Commissioner of Income Tax, Madras vs section A. section Ramaswamy Chettiar (2) was not proved.
In the latter case it was established that there was a well recognised custom amongst Chettiars of raising funds for their business of money lenders by the execution of joint pronotes and that if a loss was sustained by one of the executants having to pay the whole on account of inability of the other it was a deductible loss.
The appellant also relied on a judgment of the Madras High Court in Commissioner of Income Tax vs section R. Subramanya Pillai (3).
In that case the assessee was a book seller who from time to time jointly with another person borrowed money out of which he employed a portion in his business.
One of such amounts borrowed was Rs. 16,200 out of which the assessee took Rs. 10,450 for his business needs and the other debtor took the balance.
The latter became insolvent and the assessee had to pay the whole of the money borrowed and claimed it as allowable deduction under section 10(2)(xi) or section 10(2)(xv) of the Act or as business loss and it was hold that he was not entitled, because the loss sustained by the assessee was too remote from the business of book selling carried on by him and was not sufficiently connected with the trade and therefore fell outside the range of those amounts which could properly be brought into profit and loss account of the business.
The decision in Commissioner of Income Tax vs section A. section Ramaswamy Chettiar (2) was there distinguished on the ground that the decision must be confined to its own peculiar facts and did not apply to business as the one in Subramanya Pillai 's Case (3).
The following passage from (1) ; , (2) (3) 650 the judgment of Viswanatha Sastri, J., in that case is relevant: "But there the business was one of money lending and the Court found that according to the wellknown and well recognised mercantile custom of Nattukottai bankers, they were in the habit of raising 'funds which formed the stock in trade of their money lending business by the execution of joint promissory notes in favour of bankers.
That was apparently the usual technique of obtaining credit adopted by the Nattukottai Chetti community money lenders.
In the context this Court held that where a Nattukottai Chetti money lender paid off in their entirety the debts jointly due by him and another as a result of the latter 's inability to pay, the loss sustained as a result of this transaction was a loss of the moneylending business itself and therefore a deductible item in computing profits.
" In the instant case it has been found that there was a well recognised commercial practice in Bombay of carrying on business by borrowing money from Banks on joint and several liability.
It was also found that by so doing the borrower could borrow money at a lower rate of interest than he otherwise would have paid; that the respondent had, in accordance with the commercial practice, borrowed the money, the whole of which he had to return because the joint promisor Kishori Lal had become bankrupt; mutuality was also held proved.
It cannot be said that the essential feature of the case now before us is in principle different from that of the Commissioner of Income tax vs Ramaswamy Chettiar (1).
In both cases the finding is that there is mutuality and custom of borrowing money on joint pronotes for the carrying on of business.
In our opinion in the circumstances proved in the present case, and on the facts established and on the findings given, the respondent was rightly held to be entitled to deduct the loss which was suffered by him in the transaction in dispute.
Counsel for the assessee drew our attention to a (1) 651 Privy Council judgment Montreal Coke and Manufacturing Co. vs Minister of National Revenue (1) but that, case can have no application to the facts of the present case because it was found there as a fact that the assessees 's financial arrangements were quite distinct from the activities by which they earned their income and expenditure incurred in relation to the financing ' of their business was not expenditure in the earning of their income within the statute.
It was then contended that the loss of the respondent was a 0capital loss and for this again reliance was placed on the judgment of this Court in Madan Gopal Bagla 's case (2 ) and particularly on the observation at page 559 where Bhagwati, J., quoted with approval the observations of the High Court in the judgment but as we have pointed out the facts of that case are distinguishable and what was said there has no application to the facts and circumstances proved in the present case.
In our view the judgment of the High Court is right and we therefore dismiss this appeal with costs.
Appeal dismissed.

summary:
For the purposes of its business the respondent borrowed a certain sum of money from the Bank of India on a pronote executed jointly by him and one Kishorilal in accordance with a commercial practice of carrying on business by borrowing money from Banks on joint and several liability.
The money was divided half and half between the respondent and Kishorilal but Kishorilal failed to pay off his liability as he became a bankrupt and the respondent had to pay the whole amount to the Bank.
The respondent, however, received from the Official Assignee a part of the sum taken by the Kishorilal leaving a balance still unpaid.
The respondent 's claim to deduct this unpaid balance under section 10(2)(XV) of the Income tax Act was refused by the Income tax Officer and the Appellate Assistant Commissioner but was allowed by the Income tax Appellate Tribunal on appeal.
On a reference made at the instance of the appellant the High Court decided the question in favour of the respondent assessee.
On appeal by the appellant by special leave, Held, that the view taken by the High Court was correct.
On the finding that there was a well establised Commercial practice of financing business by borrowing money on joint and several liability and by so doing the respondent could borrow at a lower rate of interest, and that there was mutuality between the borrowers for standing surety for each other for loans taken for business purposes, the respondent assessee in computing his business profits was entitled to deduct the loss suffered by him in paying the sum not paid by his co borrower.
Commissioner of Income tax vs Ramaswami Chettiar, , applied.
Madan Gopal Bagla vs Commissioner of Income tax, West Bengal, ; , Commissioner or Income tax vs section R. Subramanya Pillai, distinguished.
Montreal Coke and Manufacturing Co. vs Minister of National Revenue, [1945] 13 I.T.R. Supp. 1, not applicable.