judgement:
Appeal No. 768 of 1966.
Appeal by special leave from the judgment and order dated December 18, 1964 of the Gujarat High Court in Special Civil Application No. 332 of 1964.
B.Sen, section K. A Iyar, R. N. Sachthey and section P. Nayar, for the appellant.
section T. Desai and 0.
C. Mathur, for the respondent.
The Judgment of the Court was delivered by Shah, J.
The assessees M/s A. Raman & Company are dealers in "mill stores" in the course of their business they sell " mill stores" to other dealers including two concerns trading in the names of M/s A. M. Shah & Co. and M/s R. Ambalal & Co., which are owned by the Hindu undivided families, managers of which are the only partners of the assessees.
For the assessment years 1959 60, 1960 61 and 1961 62 the assessees were originally assessed by the Income tax Officer, Circle 1, Ward A, Ahmedabad, while the partners of the assessees and the Hindu undivided families which traded in the names of M / s A. M. Shah & Co. and M / s R. Ambalal & Co. were assessed by Income tax Officers in other Circles.
The cases of assessees, of the partners of the assessees and of the two Hindu undivided families trading in the names of A. M. Shah & Co. and R. Ambalal & Co. were later transferred to the Income tax Officer, Group Circle J, Ahmedabad.
That Officer by letter dated March 20, 1964 informed the assessees that he was convinced from a perusal of the assessment records of the assessees, their partners and their individual Hindu undivided families, that the partners of the assessees had contrived to divert profits of the assessees to their respective Hindu undivided families and had tried to "evade proper taxation", and on that ground he called upon the assessees to submit their objections, if any, to the reopening of the assessments for the years 1959 60, 1960 61 and 1961 62.
The assessees in reply contended that the Income tax Officer had no jurisdiction to reopen the assessments since the Hindu undivided families of the two partners and the assessees had submitted "effect and complete returns of income" supported by their books of account, "quantity details" of purchases, sales and expenses, and had given all material facts and relevant information necessary for assessment at the time of each assessment.
The Income tax Officer issued three separate notices under section 147 of the Income tax Act, 1961, requiring the assessees to show cause why the assessments for the years 1959 60, 1960 61 12 and 1961 62 should not be reopened.
The High Court of Gujarat in a petition for a, writ under article 226 of the Constitution quashed those notices and restrained the Income tax Officer from taking proceedings in pursuance thereof.
With special leave granted by this Court, the Commissioner of Income tax has appealed to this Court.
In support of the claim of the Income tax Officer, to reopen the assessments, reliance was placed in the High Court on cl.
(b) of section 147 (1), of the Income tax Act, 1961.
The material part of section 147(1)(b) may be read: "If (a) (b)notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance as the case may be, for the assessment year concerned.
Explanation 1 For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely: (a) where income chargeable to tax has been underassessed; or * * * * *" Under section 147(1)(b) reason to believe that income chargeable to tax has escaped assessment in consequence of information in the possession of the Income tax Officer is a condition precedent to the exercise of his jurisdiction to assess or reassess the income of the assessee.
If that condition does not exist, steps taken by the Income tax Officer to assess or reassess the income will be without jurisdiction.
It was held by this Court in Calcutta Discount Co. Ltd. vs Income tax Officer, Companies District I, Calcutta & Another(1) that the High Court in appropriate cases has power to issue an order prohibiting the Income tax Officer from proceeding to reassess the income when the conditions precedent do not exist.
At p. 207, K. C. Das Gupta, J., delivering the majority judgment of the Court observed: "It is well settled however that though the writ of prohibition or certiorari will not issue against an executive 13 authority, the High Courts have power to issue in a fit case an order prohibiting an executive authority from acting without jurisdiction.
Where such action of an exe cutive authority acting without jurisdiction subjects or is likely to subject a person to lengthy proceedings and unnecessary harassment, the High Courts, it is well settl ed, will issue appropriate orders or directions to prevent such consequences".
The High Court may, therefore, issue a high prerogative writ prohibiting the Income tax Officer from proceeding with re assessment when it appears that the Income tax Officer had no jurisdiction to commence proceeding.
The condition which invests the Income tax Officer with jurisdiction has two branches: (i) that the Income tax Officer has reason to believe that income chargeable to tax has escaped assessment; and (ii) that it is in consequence of information which he has in his possession and that he has reason so to believe.
Since the learned Judges of the High Court have concentrated their attention upon the second branch of the condition and have reached their conclusion in favour of the assessees on that branch, it would be appropriate to deal with the correctness of that approach.
The expression "information" in the context in which it occurs must, in our judgment, mean instruction or knowledge derived from an external source concerning facts or particulars, or as to law relating to a matter bearing on the assessment.
If as a result of information in his possession, the Income tax Officer has reason to believe that income chargeable to tax had escaped assessment, the Income tax Officer has jurisdiction to assess or reassess income under section 147(1)(b) of the Income tax Act, 1961.
Information in his possession that income chargeable to tax has escaped assessment furnishes a starting point for assessing or reassessing income.
If he has that information, the Income tax Officer may commence proceedings for assessment or reassessment.
To commence the proceeding for reassessment it is not necessary that on the materials which came to the notice of the Income tax Officer, the pre vious order of assessment was vitiated by some error of fact or law.
The High Court exercising jurisdiction under article 226 of the Constitution has power to set aside a, notice issued under section 147 of the Income tax Act, 1961, if the condition precedent to the exercise of the jurisdiction does not exist.
The Court may, in exercise of its powers, ascertain whether the Income tax Officer had in his possession any information: the Court may also determine whether from that information the Income tax Officer may have reason to believe that income chargeable to tax had escaped assessment.
But the jurisdiction of the Court extends no further.
Whether on the information in his possession he should commence 14 a proceeding, for assessment or reassessment, must be decided by the Income tax Officer and not by the High Court.
The Incometax Officer alone is entrusted with the power to administer the Act: if he has information from which it may be said, prima facie, that lie had reason to believe that income chargeable to tax had escaped assessment, it is not open to the High Court, exercising powers under article 226 of the Constitution, to set aside or vacate the notice for reassessment on a re appraisal of the evidence.
The High Court in this case was apparently of the view that the information in consequence of which proceedings for reassessment were intended to be started, could have been gathered by the Income tax Officer in charge of the assessment in the previous years from the disclosures made by the two Hindu undivided families.
But that, in our judgment, is wholly irrelevant.
Justification of the Income tax Officer to reassess income arises if he has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment.
That information, must, it is true, have come into the possession of the Income tax Officer after the previous assessment, but even if the information be such that it could have been obtained during the previous assessment from an investigation of the materials on the record, or the facts disclosed thereby or from other enquiry or research into facts or law, but was not in fact obtained, the jurisdiction of the Income tax Officer is not affected.
The High Court was also of the view that the inference raised by the Income tax Officer that the Hindu undivided families of the assessees had made profit by sale of articles purchased from the assessees larger than the profit which the assessees had made, was not justified, since there was no evidence on the record about the price at which similar goods were sold by the assessees to other merchants and about the profit which those other merchants made by sale of those goods.
But in a petition under article 226 of the Constitution the taxpayer may challenge the validity of a notice under section 147 of the Income tax Act, 1961, on the ground that either branch of the condition precedent does not exist, but an investigation whether the inferences raised by the Income tax Officer from the information are "correct or proper" cannot be made.
Counsel for the Commissioner is, therefore, right in contending that the High Court entered upon an investigation of matters which were not within their competence.
But the appeal of the Commissioner must still fail.
The case of the Commissioner on the materials placed before the High Court, suffers from a serious infirmity on the first branch of the jurisdictional condition.
The averments made in the affidavit filed by the Income tax Officer in that behalf do not establish the existence of that branch of the condition.
In reply to the averment by the 15 assessees that the Income tax Officer had no reason to believe that income had escaped assessment, the Income tax Officer stated: "In the course of the discussions I had at the several meetings hereinabove referred, I also learnt that in the earlier years also the petitioners (the assessees) had effected such sales to the said Hindu undivided families, and that over and above the margin of profits earned by the petitioners (the assessees) from the Hindu undivided families, the Hindu undivided families had earned substantial profits on the resale of such goods.
1, therefore, came to the conclusion that the creation of the Hindu undivided family business was merely a subterfuge or a contrivance by the partners of the petitioner firm (the assessees) to divert the huge profits made by the petitioners (the asses sees) on imported articles".
The plea raised by the Income tax Officer is that income which could have been earned by the assessees was not earned, and a part of that income was earned by the Hindu undivided families.
That according to the Income tax Officer was brought about by "a subterfuge or contrivance".
Counsel for the Commissioner contended that if by resorting to a "device or contrivance", income which would normally have been earned by the assessee is divided between the assessee and another person, the Incometax Officer would be entitled to bring the entire income to tax as if it had been earned by him.
But the law does not oblige a trader to make the maximum profit that he can out of his trading transactions.
Income which accrues to a trader is taxable in his hands: income which he could have, but has not earned, is not made taxable as income accrued to him.
By adopting a device, if it is made to appear that income which belonged to the assessee had been earned by some other person, that income may be brought to tax in the hands of the assessee, and if the income has escaped tax in a previous assessment a case for commencing a proceeding for reassessment under section 147(1)(b) may be made out.
Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited.
A taxpayer may resort to a device to divert the income before it accrues or arises to him.
Effectiveness of the device depends not upon considerations of morality, but on the operation of the Income tax Act.
Legislative injunction in taxing statutes may not.
except on peril of penalty, be violated, but it may lawfully be circumvented.
If the goods were nominally transferred to the Hindu undivided families the latter acting merely as benamdars for the assessees, and the profits were earning in truth by the assessees, income earned by sale of the goods by the Hindu undivided families may be held chargeable to tax as income which has escaped assessment to tax in 16 the hands of the assessees.
In the present case,, no such case was attempted to be made out in the affidavit filed by the Income tax Officer.
We hold, therefore, that on the materials on the record, the Income tax Officer.
had no reason to believe that income chargeable to tax had escaped assessment for the three years in question.
The order passed by the High Court is therefore confirmed.
There will, however, be no order as to costs in this Court and the High Court.
G.C. Appeal dismissed.

summary:
The assessee firm consisted of two partners who were managers of their respective Hindu Undivided Families.
The firm sold its goods to the aforesaid families and the families again sold the goods on their own account.
In income tax proceedings for the years 1959 60, 1960 61 and 1961 62 the firm and the Hindu Undivided Families were separately assessed in respect of their incomes.
Subsequently the Income tax Authorities took view that the sale of goods by the firm to the families was only a device to divert the profits of the firm and on this view issued notices under section 147 of the Incometax Act, 1961 requiring the assessee to show cause why the assessments for the years 1959 60, 1960 61 and 1961 62 should not be reopened.
The High Court of Gujarat in a petition for a writ under article 226 of the Constitution quashed those notices and restrained the Income tax Officer from taking proceedings in pursuance thereof.
With special leave granted by this Court, the Revenue appealed.
Held:(i) The High Court may issue a high prerogative writ prohibiting the Income tax Officer from proceeding with reassessment when it appears that the Income tax Officer had no jurisdiction to commence proceedings because the conditions precedent do not exist.
[12G H; 13B C] Calcutta Discount Co. Ltd. vs Income tax Officer, Companies District 1, Calcutta, & Anr. , followed.
It is however not open to the High Court exercising powers under article 226 to set aside or vacate the notice for reassessment by itself re appraising the evidence.
[15B] (ii)The condition which invests the Income tax Officer with jurisdiction has two branches: (i) that the Income tax Officer has reason to believe that income chargeable to tax has escaped assessment; and (ii) that it is in consequence of information which he has in his possession and that he has reason so to believe.
The expression 'information ' in the context of which it occurs must mean instruction or knowledge derived from an external source concerning facts or particulars, or as to law relating to a matter bearing on the assessment.
If he has such information the Income tax Officer may commence proceedings under section 147(1)(b).
But to commence such a proceeding it is not necessary that on the materials which came to the notice of the Income tax Officer, the previous order of assessment was vitiated by some error of fact or law.
[13C G] (iii)In the present case however the pre conditions for the issue of a notice of re assessment did not exist.
The law does not oblige a trader to make the maximum profit that he can out of his 11 trading transactions.
Income which accrues to a trader is taxable in his hands: income which he could have, but has not earned is not made taxable as income accrued to him.
Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited.
[15D G]


judgement:
Appeal No. 1984 of 1966.
Appeal from the judgment and order dated January 2, 1964 of the Madras High Court in T.C. No,.
153 of 1962.
section Swaminathan and R. Gopalakrishnan, for the appellant.
Veda Vyasa, A. N. Kirpal, R. N. Sachthey and section P. Nayar, for the respondent.
The Judgment of the Court was delivered by Ramaswami, J.
This appeal is brought from the judgment of the Madras High Court dated January 1, 1964 in Tax Case No. 153 of 1962.
The asessment year involved in this appeal is 1948 49, the corresponding previous year being the financial year 1947 48.
For the accounting period from November 13, 1947 to November 1, 1948 which was the corresponding previous year for the assessment year 1949 50 there was shown a credit of Rs. 25,000 in the capital account of the appellant.
On November 13, 1947, this amount was credited in the books of the appellant.
On October 30, 1948 this amount was transferred to the account of one Amrithlal.
Ranchoodas, the father in law of the appellant.
The Income tax Officer included the said amount as income of the appellant from undisclosed sources in the assessment for the assessment year 1949 50.
On appeal to the Appellate Assistant Commissioner the appellant contended that the amount could not be included in the assessment year 1949 50 because the credit appeared prior to March 31, 1948.
The Appellate Assistant Commissioner allowed the appeal holding that the credit came into the books of the appellant on November 13, 1947, i.e., in the financial year 1947 48 which is the previous year for the assessment year 1948 49.
On this finding, the Appellate Assistant Commissioner deleted the addition of Rs. 25,000 from the assessment of the appellant for the year 1949 50.
In doing so, the Appellate Assistant Commissioner followed the decision in C.1.T. vs 19 P.Darolia & Sons(1).
Consequently on November 3, 1958 the, Income tax Officer issued a notice under section 34(1)(a) of the Incometax Act, 1922, (hereinafter referred to as the. 'Act ' to the appellant for the assessment year 1948 49.
By his order dated April 20, 1959 he rejected the contention of the appellant that the assessment was barred by limitation and assessed the sum of Rs. 25,000 as income from other sources.
The appellant took the matter in appeal to the Appellate Assistant Commissioner who, by his order dated February 23, 1960, allowed the appeal.
He took the view that there was no finding in the order of the Appellate Assistant Commissioner that the credit represented the income of the appellant or that the same credit should be assessed in the assessment year 1948 49.
He further held that the notice under section 34 issued on November 3, 1958 was bad in law and was not saved by the second proviso to section 34(3) of the Act.
The Commissioner of Incometax preferred an appeal against the order of the Appellate Assistant Commissioner to the Income tax Appellate Tribunal which allowed the appeal, holding that "the order of the Appellate Assistant Commissioner in the appeal against the assessment for 1949 50 should be taken to contain a finding that the sum of Rs. 25,000 represented income of the assessee to be considered in the assessment year 1948 49".
At the instance of the appellant the Appellate Tribunal referred the following questions of law for the opinion of the High Court under section 66(1) of the Act: "(1) Whether on the facts and in the circumstances of the case, the proceedings initiated against the assessee for the assessment year 1948 49 under section 34 and the assessment for the said year are barred by limitation and.
hence not lawful? (2) Whether the proceedings initiated against the assessee for the assessment year 1948 49 under section 34 and the assessment made under section 34 for the assessment year 1948 49 could be justified in law as for the purpose of giving effect to, a finding or directions in the order of the Appellate Assistant Commissioner in I.T.A. No. 134 of 1958 59? (3) Whether on the facts and in the circumstances of the case, the assessment made is saved from the bar of limitation under the second proviso to section 34(3)?" By its judgment dated January 2, 1964, the High Court answered the questions in favour of the respondent and against the appellant.
The High Court followed an earlier decision in A.S. Khader Ismail vs Income tax officer(1), in which it had held that the word "finding" in the proviso to section 34(3) of the Act must be given a (1) (2) 20 wide significance so as to include not only findings necessary for the disposal of the appeal but it would apply to cases where it is held that the income in question was in respect of an earlier year which was not the subject matter of the appeal before the appellate authority.
On behalf of the appellant Mr. Swaminathan put forward the argument that the decision of the High Court is contrary to the view taken by this Court in Income tax Officer, A Ward, Sitapur vs Murlidhar Bhagwan Das(1) in which it was held that the expressions "finding" and "direction", in the second proviso to section 34(3), meant respectively, a finding necessary for giving relief in respect of the assessment for the year in question, and a direction which the appellate or revisional authority, as the case may be, was empowered to give under the sections mentioned in that proviso.
A "finding", therefore, could only be that which was necessary for the disposal of an appeal in respect of an assessment of a particular year.
The Appellate Assistant Commissioner might hold, on the evidence, that the income shown by the assessee was not the income for the relevant year and thereby exclude that income from the assessment of the year under appeal.
The finding in that context was that the income did not belong to the relevant year.
He might incidentally find that the income belonged to another year, but that was not a finding necessary for the disposal of an appeal in respect of the year of assessment in question.
It was further held that the second proviso to section 34(3) did not save the time limit prescribed under section 34(1) in respect of an escaped assessment of a year other than that which was the subject matter of the appeal or revision, as the case may be, and accordingly the notice issued under section 34(1) (a) in that case was barred by limitation and was not saved by the second proviso to section 34(3).
In the course of its judgment this Court overruled the judgment of the Madras High Court in A. section Khader Ismail vs Income tax Officer(1).
It follows therefore that the view taken by the High Court in the present case is not correct in law and must be overruled.
On behalf of the respondent, however, Mr. Veda Vyasa con tended that in answering the reference the effect of section 2 of the Income tax (Amendment) Act (Act 1 of 1959) must be taken into consideration and in view of the amendment made by that section of the amending Act the questions referred to the High Court must be answered necessarily against the appellant.
Section 2 of the Amendment Act.
1959 inserted in section 34 of the Act a new sub section (4) which provides: "A notice under clause (a) of sub section (1) may be issued at any time notwithstanding that at the time of the issue of the notice the period of eight years specified (1)52 I.T.R. 335.
(2) 21 in that subsection before its amendment by clause of section 18 of the Finance Act, 1956 (18 of 1956), had expired in respect of the year to which the notice relates.
Section 4 of the Amending Act, 1959 read as follows: "No notice issued under clause (a) of sub section (1) of section 34 of the principal Act at any time before the commencement of this Act and no assessment, reassessment or settlement made or other proceeding taken in consequence of such notice shall be called in question in any court, tribunal or other authority merely on the ground that at the time the notice was issued or at the time the assessment or re assessment was made the time within which such notice should have been issued or the assessment or re assessment should have been made under that section as in force before its amendment by clause (a) of section 18 of the Finance Act, 1956 (18 of 1956), had expired.
" Mr. Veda Vyasa referred to the decision of the Bombay High Court in Onkarmal Meghraj vs C.I.T. Bombay I.(1) in which it was held that there was nothing in section 2 or 4 of the Amendment Act of 1959 to restrict the terms of the words "at any time" occurring in section 4 of that Act as meaning "at any time after April 1, 1956", viz., the date on which the amendments made by the Finance Act, 1956, came into force and there was nothing in the provisions of the Amendment Act of 1959 which limited the retrospective operation of section 4.
It was also held that since the enactment of the Amendment Act of 1959 a notice issued after April 1, 1956, for reopening an assessment, by virtue of section 4, could not be permitted to be called in question on the ground that the notice was not issued within the period prescribed by the unamended section 34(1)(a).
On behalf of the respondent reference was also made to the decision of this Court in section C. Prashar vs Vasantsen Dwarkadas,(2) in which it was held that section 4 of the Amendment Act, 1959 operated on and validated notices issued under section 34(1)(a) as amended in 1948 even earlier than April 1, 1956, in other words, in respect of assessment years prior to March 31, 1956.
and therefore notices issued under section 34(1)(a) of the Income tax Act before April 1, 1956, could not be challenged on the ground that they were issued beyond the time limit of eight years from the respective assessment years prescribed by the 1948 amendment.
On behalf of the appellant Mr. Swaminathan raised the objection that the point was not taken up by the respondent in the High Court, nor was there any reference to it in the statement of the case tiled by the respondent.
It was also contended that the point raised was outside the scope of the questions of law referred by the Appellate Tribunal to the High Court.
We do not think there is any substance in the (1) (2 ) ; 22 objection raised on behalf of the appellant.
One of the questions referred to the High Court is "whether on the facts and in the circumstances of the case the assessment made is saved from the bar of limitation under the second proviso to section 34(3)?" It is true that the impact of the Amending Act, 1959 (Act 1 of 1959) was not raised before the Appellate Tribunal or before the High Court, but it is not a separate question by itself and is only an aspect of the question of limitation which has already been referred by the Appellate Tribunal to the High Court.
As pointed out in CI.T. Bombay V. Scindia Steam Navigation Co. Ltd.,(1) the question of law referred to the High Court under section 66 may be a simple one having its impact on one point, or it might be a complex one, involving more than one aspect and requiring to be tackled from different standpoints.
All that section 66(1) requires is that the question of law which is referred to the High Court and which the High Court is to decide must be the question which was in issue before the Tribunal.
Where the question itself was under issue, there is no further limitation imposed by the section that the reference should be limited to those aspects of the question which had been argued before the Tribunal, and it will be an over refinement of the position to hold that each aspect of a question is itself a distinct question for the purpose of section 66(1) of the Act.
In our opinion, the argument of the respondent with regard to the legal effect of the Amending Act of 1959 (Act 1 of 1959) is within the frame work of the question already referred to the High Court and it is therefore competent to this Court, in a case of this description, to allow a new contention to be advanced.
It is, however, necessary that the case should be remanded to the High Court for examining the question of law referred to it after 'considering the impact of the Amending Act of 1959 (Act 1 of 1959).
For these reasons we allow this appeal, set aside the judg ment of the High Court dated January 2, 1964 and remand the case to it for further hearing and answering the reference in light of the Income tax Amending Act 1 of 1959.
In the circumstances of the case we direct that the respondent should pay the cost of this appeal in this Court, Appeal allowed.

dataset_name: IN-Abs

summary:
There was a cash credit in November 13, 1947, in the capital, account of the Appellant assessee whose accounting period was from November 13, 1947 to November 1, 1948.
The Income tax Officer assessed the said credit as income from undisclosed sources in the assessment for the assessment year 1949 50.
The Appellate, Assistant Commissioner relying on C.I.T. vs Darolia & Sons.
held that the amount was not taxable in the assessment year 1949 50.
The Income tax Officer thereupon assessed the amount in 1948 49 after having issued in November 1958 a notice under section 34(1) (a) of the Indian Income ' tax Act, 1922.
He rejected the appellant 's contention that notice under the said section was timebarred.
In appeal the Appellate Assistant Commissioner held that in the earlier appeal there was no finding that the credit represented the assessee 's income or that it should be assessed in the year 1948 49 and that consequently the notice under section 34 issued in November 1958, was not saved by the second proviso to section 34(3) of the Act.
The appeal filed by the Revenue was allowed by the Tribunal and in reference the Madras High Court relying on its own ruling in A.S. Khader Ismail vs Income tax Officer, upheld the order of the Tribunal.
The appellant came to this Court and relied on this Court 's decision in Income Tax Officer A Ward Sitapur vs Murlidhar Bhagwandas in which the aforesaid Madras decision had been overruled.
The Revenue urged that in answering the reference the effect of section 2 of the Income tax (Amendment) Act 1959 must be taken into consideration.
To this the appellant objected that the point was outside the scope of the questions of law referred by the Appellate Tribunal to the High Court.
HELD:(i) The view taken by the Madras High Court as to the scope of the word 'finding ' in A. section Khader Ismail 's case and followed by it in the present case had been overruled, by this Court.
Accordingly the department could not take advantage of the second proviso to section 34(3).
[20E F] Income Tax Officer, A Ward Sitapur vs Murlidhar Bhagwan Das, , applied (ii)However, the impact of section 2 of the Amending Act of 1959 had to be considered before the reference could be properly answered.
Although the question had not been raised before the Tribunal or the High Court it was only an aspect of the question of limitation which had been referred.
All that section 66(1) requires is that the question of law which is referred to the High Court and which the High Court is to decide must be the question which was in issue before 18 the Tribunal.
When the question itself was under issue there is no further limitation imposed by the section that the reference should be limited to those aspects of the question which had been argued before the Tribunal and it will be an over refinement of the position to hold that each aspect of a question is itself a distinct question for the purpose of section 66(1) of the Act.
[22B D] C.I.T. Bombay vs Scindia Steam Navigation Co. Ltd. 42 I.T.R. 589, applied.
Onkarmal Mehraj vs C.I.T., Bombay 1, , and section C. Prashar vs Vasantsen Dwarkadas, ; , referred to.
[On the above view the case was remanded to the High Court for examining the question of law referred to it after considering the impact of the Amendment Act of 1959.]


judgement:
Appeal No. 2162 of 1966.
Appeal from the judgment and order dated September 6, 9, 1963 of the Gujarat High Court in Income tax Reference No. 9 of 1963.
B. Sen, A. N. Kirpal, R. N. Sachthey and section P. Nayar, for the appellant.
I. N. Shroff, for the respondent.
The Judgment of the Court was delivered by Shah, J.
By an agreement dated October 29, 1928 Ciba (India) Ltd. hereinafter called 'the principals ' appointed one Tejaji Farasram Kharawalla selling agent for the District of Ahmedabad in respect of certain kinds of dyes and dye stuffs, and agreed to pay him commission at the rate of 12 1/2% on sales by him of dyes and dye stuffs of the principals.
The commission was to include " all charges in connection with the upkeep of offices and godown, turnover rebates and contingency expenses etc.
" The terms relating to commission were modified by agreement dated August 20, 1935 and out of the commission agreed to be paid, 71% was to be treated as the selling commission and 5% was to be treated as compensation in lieu of the contingency expenses which the selling agent had to meet, "such as commission to Dyeing Masters, agents etc.".
The rights of the selling agent were assigned with the consent of the principals to the respondent Company with effect from October 27, 1947.
In assessing the income of the Company for the assessment year 1949 50, the Income tax Officer included in the taxable income Rs. 58,025/ being the difference between Rs. 1,90,538/ received by the Company as "5% commission" and Rs. 1,32,512/ spent by the Company for meeting the charges which the selling agent was to meet.
The Income tax Appellate Tribunal, however, upheld the contention of the Company that in the computation of the income of the Company, the "5% commission" was wholly exempt by virtue of section 4 (3)(vi) of the Income tax Act, 1922.
The Commissioner then moved the Tribunal to draw up a statement of the case and to refer the following question to the High Court of Judicature at Bombay: "Whether on the facts of the case, a portion viz. 5 of the selling agency commission of 12 1/2% received by the assessee company from M/s Ciba Ltd. in the course of carrying on the selling agency business is exempt from tax under section 413(vi) of the Act?" But the Tribunal only referred the following question: "Whether the assessee company held an office or employment of profit within the meaning of section 4(3)(vi) of the Indian Income tax Act?" 39 The application preferred by the Commissioner to the High Court for calling upon the tribunal to submit a statement on the question originally submitted was rejected, and the High Court answered the question referred by the Tribunal in the affirmative, observing that it had been conclusively determined by their earlier decision in Tejaji Farasram Kharawalla vs Commissioner of Income tax, Bombay (Mofussil)(1) which arose out of a proceeding for assessment to tax of the income of the original selling agent under the same agency agreement.
It appears that in so observing the Court was under some misapprehension, for the question referred by the Tribunal had not been decided in the earlier judgment.
Against the order passed by the High Court recording an answer in the affirmative on the question referred by the Tribunal and against the order dismissing the notice of motion, the Commissioner appealed to this Court.
This Court set aside the order passed by the High Court dismissing the application of the Commissioner and without expressing any opinion on the correctness or otherwise of the answer recorded by the High Court on the question referred by the Tribunal, remanded the case to the High Court with a direction that the Tribunal be called upon to state a case on the question raised in the application of the Commis sioner.
The case was then heard by the High Court of Gujarat to which it stood transferred because of the reorganisation of the State of Bombay.
The High Court of Gujarat held that the "5% commission" received by the Company represented a special allowance to meet expenditure "such as commission to Dyeing Masters, agents etc.", and was on that account exempt from tax.
The High Court also held that the Company held an office or employment of profit.
The Commissioner has again appealed to this Court against the answers recorded by the High Court on the original and supplementary question.
Section 4(3)(vi) of the Indian Income tax Act, 1922, as it stood in the year of assessment read as follows: "Any income, profits or gains failing within the following classes shall not be included in the total income of the person receiving them: (vi) Any special allowance, benefit or perquisite specifically granted to meet expenses wholly and necessarily incurred in the performance of the duties of an office or employment of profit.
" The clause grants exemption in respect of expenses "incurred": but on that account an allowance granted to meet expenses to be incurred in future in the performance of the duties of an (1) 40 office or employment of profit is not outside the exemption claimed.
In the context in which the expression "incurred" occurs, it undoubtedly, means "incurred or to be incurred".
To qualify for exemption the allowance must it is clear be granted to meet expenses incurred or to be incurred wholly and necessarily in the performance of the duties of an office or employment of profit.
But the purpose for which the allowance is granted, in our judgment, is alone not determinative of the claim to exemption.
An allowance though made to a person holding an office or employment of profit intended for appropriation towards expenditure incurred or to be incurred in the discharge of the duties, does not constitute any real income of the grantee.
It is in truth expenditure incurred by the employer through the agency of the grantee.
The intention of the framers of the Act was to grant exemption in respect of amounts received by the assessee, not for his own benefit, but for the specific purpose of meeting the expenses wholly and necessarily incurred or to be incurred in the performance of his duties as an agent.
It would, therefore, be reasonable to hold that the allowance granted to meet the expenses wholly and necessarily incurred or to be incurred in the performance of the duties of the office or employment of the grantee alone qualifies for exemption under the Act, and any surplus remaining in the hands of the grantee after meeting the expenses does not bear the character of the allowance for meeting expenses but for performing the duties of the office or employment.
This would be so even if the employer has disabled himself from demanding refund of the amount not expended for meeting the expenses incurred or to be incurred in the performance of the duties of an office or employment of profit, and the surplus remaining in the hands of the grantee acquires for the purpose of the Incometax Act the character of additional remuneration.
We are unable to agree with the decision of the Bombay High Court in Tejaji Farasram Kharawalla 's case(1) that the object with which the grant is made by the employer determines the claim to exemption under section 4(3)(vi) of the Income tax Act.
The observations made by Chagla, C.J., at p. 267 that "what is emphasized in this sub clause section 4(3)(vi) is the purpose of the grant, the object with which the grant was made.
Once it is established that the grant was for that particular purpose, it is no longer necessary for the assessee to prove that in fact he expended that grant for the purpose for which it was given.
He may spend more, or he may spend less, but qua that grant which is given.
for a particular purpose, he is entitled to the exemption", do not, in our judgment, give due effect to the key words "to meet expenses wholly and necessarily incurred in the performance of the duties of an office or employment of profit.
" What is exempted is not the consideration paid for meeting the expenditure incurred ' or to be incurred in the performance of the duties of an office or (1) 41 employment:the exemption operates only in respect of a special allowance or benefit specifically granted to meet expenses wholly and necessarily incurred in the discharge of the duties of the office or employment.
The judgment of the Allahabad High Court in Commissioner of Income tax, U. P. vs Sharma & Company(1) and especially the observations of Pathak, J., on which reliance was placed by counsel, for the Company may also be referred to.
In Sharma & Company 's case(1) the assessee firm which was the sole selling agent of a "cotton mill", received a sum exceeding Rs. 67,000/ from the owners of the mills for the purpose of meeting the expenses in connection with the management of a retail cloth shop on behalf of the mill and actually spent only Rs. 12,641/ .
The claim of the firm that it was entitled to exemption from liability to pay tax under section 44(3)(vi) of the Act (before it was amended in 1955) even in respect of the balance retained by it was upheld by the High Court of Allahabad.
Pathak, J., observed that section 4(3)(vi), as it then stood, required the Income tax Officer to enquire whether the purpose of the grant was covered by the language of the clause, and he was not concerned to determine whether the amount granted was actually expended by the recipient.
The learned Judge in so holding was impressed by two considerations: that the expression "incurred" means incurred already, or to be incurred in future; and that income tax being an annual tax in a case where the allowance is an ad hoc allowance which is to cover a period longer than or ending after the year of account, or is a periodical allowance, the Income tax Officer may under the Act exempt expenditure incurred in the year of account and no more, and thereby the intention of the employer would be wholly frustrated and the employee may be called upon to pay tax on a receipt which is not his income.
The expression "incurred" means for reasons already set out incurred or to be incurred.
But that has no bearing on the question whether the unexpended surplus in the hands of the employee is taxable.
And we do not feel impressed by the second consideration.
The allowance may be in respect of a period longer than the accounting year or which runs into the succeeding accounting year or years.
But on that account the whole receipt reduced by the expenses actually incurred in the year of account is not liable to be brought to tax.
If it appears from a review of the circumstances that a special allowance is made for a period longer than the year of account, or that the period covered by the grant of a special allowance extends beyond the close of the account year, it would, in our judgment, be the duty of the income tax Officer to determine the amount allowed in respect of the year of account in which the expenditure has been incurred, and the difference between the amount so determined and the amount actually expended would alone be brought to tax.
(1) 42 It may be noted that the Parliament has by the Finance Act, 1955, with effect from April 1, 1955, recast cl.
(vi) of section 4(3) of the Income tax Act, 1922 and has expressly provided that the special allowance granted to meet expenses wholly and necessarily incurred in the performance of the duties of an office or employment of profit to the extent to which such expenses are actually incurred for that purpose, was exempt from tax.
The Legislature, by the amendment made it clear that only the expenses actually incurred by the assessee will be exempted under section 4(3)(vi).
But the principle that an amount granted to cover expenses to be incurred for a period which extends beyond the year of account in which the grant is received will be allocated between the year of account and the period outside the year of account will apply to the Act as amended.
There is no doubt that the selling agent under the agreement with the principals holds an employment for profit.
No argument to the contrary was advanced before us.
It is unnecessary therefore to consider the elaborate judgment of the High Court on the question whether the selling agent holds an office within the meaning of section 4(3) (vi) of the Act.
The appeal is therefore allowed and the answer recorded by the High Court to the supplementary question is discharged, and the following answer to the supplementary question is recorded: "That portion of 5 per cent of the selling agency commission received by the assessee company is exempt under section 4 (3) (vi) of the Income tax Act, 1922, which is wholly and necessarily incurred in the year of account in the performance of the duties of the company as selling agent.
" There will be no order as to costs in this appeal in this Court and in the High Court.
G.C. Appeal allowed.

summary:
The respondents were selling agents for the goods manufactured by another company.
They were paid 7 1/2% on the sales as selling commission and 5% as contingency expenses.
The question in income tax proceedings was whether the amount not spent out of the grant for contingency expenses was exempt from taxation by virtue of s, 4(3) (vi) of the Indian Income tax Act, 1922.
The High Court in reference held that the "5% commission" received by the respondents represented a special allowance to meet expenditure and was on that account exempt from tax.
The Revenue appealed.
HELD,: (i) In the context in which: the expression 'incurred ' occurs in section 4(3) (vi) it undoubtedly means 'incurred or to be incurred '.
To qualify for exemption the allowance must be granted to meet expenses incurred or to be incurred wholly and necessarily in the performance of the duties of an office or employment of profit.
[41A] (ii) In framing section 4(3) (vi) the intention of the framers of the Act was to grant exemption in respect of amounts received by the assesses, not for his own benefits but for the specific purpose of meeting the expenses wholly and necessarily incurred or to be incurred in the performance of his duties as agent.
It would therefore be reasonable to hold that the allowance granted to meet the expenses wholly and necessarily incurred or to be incurred in the Performance of the duties of the office or employment of the grantee alone qualifies for exemption under the Act, and any surplus remaining in the hands of the grantee after meeting the expenses does not bear the character of the allowance for meeting expenses.
This would be so even if the employer has disabled himself from demanding refund of the amount not expended for meeting the expenses incurred or to be incurred in the performance of the duties of an office of employment or profit, and the surplus remaining in the hands of the grantee acquires for the purpose of the Income tax Act the character of additional remuneration.
[40C E] Tejaji Farasram Kharawala vs Commissioner of Income tax.
Bombay (Mofussil), , disapproved.
(iii) The allowance may be in respect of a period longer than the accounting year or years.
But on that account the whole receipt reduced by the expenses actually incurred in the year of account is not liable to be brought to tax in that year.
In such a case it will be the duty of the Income tax Officer to determine the amount allowed in respect of the year of account in which the expenditure has been incurred and the difference between the amount so determind and the amount actually expended would alone be brought to tax.
[41G] The position in this respect remains the same even after the amendment of section 4(3) (vi) by the Finance Act, 1955.
[41B] 38 Commissioner of Income tax, U.P. vs Sharma & Company. , disapproved.


judgement:
Appeal No. 596 of 1966.
Appeal by special leave from the judgment and order dated January 27, 1964 of the Allahabad High Court in Special Appeal No. 270 of 1958.
section T. Desai and C. P. Lal, for the appellant.
C. B. Agarwala and J. P. Agarwal, for the respondent.
The Judgment of the Court was delivered by Sikri, J.
This appeal by special leave is directed against the judgment of the High Court of Allahabad accepting a petition under article 226 of the Constitution and directing the District Board, Moradabad, not to levy upon M/s Nundan Sugar Mills,, Amroha, respondent before us, circumstances and property tax for any one year exceeding the sum of Rs. 200.
The High Court held that no special resolution of the Board had been passed, nor had a notification been made imposing the tax, under section 119 and section 120, respectively, of the United Provinces District Boards Act, 1922 (U. P. Act of 1922) hereinafter referred to as the Act.
The relevant facts out of which this appeal arises are these On July 28, 1925, it was notified under sub section
(2) of section 120 of the Act that the District Board of Moradabad, in exercise of the powers conferred by section 108, sub section
(2), of the Act has imposed the following tax, with effect from September 1, 1925: "A tax on.
all persons ordinarily residing or carrying on business in the rural area of the Moradabad District according to their circumstances and property, at the rate of four pies per rupee on the total taxable income; provided that the total amount of tax imposed on any person shall not exceed Rs. 200.
Provided also that no income once assessed shall be reassessed".
On May 28, 1927, the District Board took action upon a memo randum prepared by the Chairman of the District Board.
The memorandum of the Chairman pointed out: ". . the maximum amount of tax recoverable from an assessee should be raised from Rs. 200/ to Rs. 500/ P.A. Hence proposal (c) framed under section 115 sanctioned by G. 0.
No dated 28 7 25 so be modified as to read as under: "That there shall be a rate of tax 4 pies in the rupee. provided that the total amount of tax imposed on any person shall not exceed Rs. 5001 The resolution of the Board was in these terms: "The bye laws be modified accordingly after necessary publication and sanction.
The assessing officer to assess them at 2 pies (sic) in anticipation of final sanction".
3 On January 11, 1928, the Government of United Provinces issued a, notification amending the rules for the assessment and collection of a tax on circumstances and property in the rural areas of the Moradabad District.
The following rule 16 was added: "16.
The total amount of tax imposed on any person shall not in any year exceed the sum of Rs. 5001 .
" On August 31, 1931, the Board passed another resolution approving the following memorandum: ". .
The words and figures 'Rs. 500 ' be substituted by 'Rs. 2,000 ' in rule 16 of the rules for the assessment and collection of a tax on circumstances and property in the rural area of the Moradabad district published with Government Notification No. . dated 11 1 1928".
The exact terms of the resolution were: "Resolved unanimously that thememo.
be approved and necessary action be taken on it.
If publication is required, it be done and Government be moved to accord sanction for the same".
On March 18, 1932, the Government of United Provinces issued a notification amending rule 16.
The amendment it was in the following terms: "In Rule 16 published with notification No. 33/IX185(14 24) dated January 19, 1928 'Rs. 2,000 ' shall be substituted for 'Rs. 500".
It appears that no further action was taken by the District Board to enforce this amendment in rule 16 or the amendment dated January 11, 1928.
Further action is contemplated by sections 119 and 120, read with section 12 1, of the Act.
These sections may be reproduced in full.
" 119.
Resolution of board directing imposition of tax Upon receipt of the copy of the rules sent under the preceding section, the board shall by special resolution direct the imposition of the tax with effect from a date (to be specified in the resolution) not less than six weeks from the date of such resolution".
" 120.
Imposition of tax (1) A copy of the resolution passed by the board under Section 119 shall be submitted to the State Government.
(2) Upon receipt of the copy of the resolution the State Government shall notify in the official Gazette the imposition of the tax from the appointed date, and the imposition of a tax shall in all cases be sub ject to the condition that it has been so notified.
(3) A notification of the imposition of a tax Linder sub section (2) shall be conclusive proof that the tax has been imposed in accordance with the provisions of this Act".
4 "121.
Procedure for altering taxes The procedure for abolishing or suspending a tax, or for altering a tax in respect of the matters specified in clauses (b) and (c) of sub section (1) of Section 115 shall, so far as may be, be the procedure prescribed by Sections 115 to 120 for the imposition of a tax".
Clauses (b) and (c) of sub section (1) of section 115, referred to in section 121, read: "(b) the persons or class of persons to be made liable and the description of the property or other taxable thing or circumstances in respect of which they are to be made liable, except where and in so far as any such class ,or description is already sufficiently defined under clause (a) or by this Act , (c) the amount or rate leviable from each such person or class of persons;" It is common ground that the procedure laid down in sections II 5 to 118 has been followed by the Board.
The only dispute between the parties is whether it is necessary that a resolution should be passed under section 119 and a notification issued under section 120 before effect can be given to a notification made under section 118 altering the rules.
In other words, was it necessary to pass a resolution under section 119 after the issue of the notification dated March 18, 1932, or the notification dated January 11, 1928, referred to above? Both the learned Single Judge, and the Division Bench who heard the appeal from the learned Single Judge, have come to the conclusion that without a resolution under section 119 and a notification under section 120, no tax can be levied in pursuance of the notification dated March 18, 1932, or notification dated January 11, 1928.
It may be mentioned that the High Court directed the District Board not to levy upon the petitioner circumstances and property tax for any year exceeding the sum of Rs. 200/ .
There is no dispute that the Board could levy upon the petitioner tax up to the sum of Rs. 200/ .
The learned counsel for the appellant contends that if the procedure laid down in sections 115 to 118 has been followed, it is not necessary that there should be a resolution under section 119 and a notification under section 120.
He says that rules can be made under section 172, read with section 1.76, of the Act, and once rules are made there is nothing more to be done.
But there is one fallacy underlying the argument of the learned counsel, and that is that it misses the object of sections 119 and 120 which is to fix the date from which the tax can be imposed.
If no date is fixed, no tax can be imposed.
Once the Board passes a special resolution under section 119, it has to go to the Government under section 120, and then the Government notifies the imposition of tax from the appointed date.
It is then that the notification becomes conclusive proof of the fact that the 5 tax has been imposed in accordance with the provisions of this Act.
Sub clause (3) of section 120 clearly proceeds on the basis that the imposition of tax takes place on a notification issued under section 120 and not on the issue of a notification under section 118.
The learned counsel invited our attention to Raza Buland Sugar Co. Ltd. vs Municipal Board, Rampur(1) but we are unable to see how that case assists him.
No question of sections 119 and 120 being directory arises in this case because, in our view, without a resolution under section 119 and a notification under section 120, no tax can be imposed.
The learned counsel also urges that: (a) no writ petition is maintainable challenging a preConstitution matter, and (b) the respondent not having appealed under section 128 of the Act, the petition was not maintainable.
In our view, there is no merit in these contentions.
The respondent is being charged tax now.
He is entitled not to be taxed except under the authority of law, vide article 265 of the Constitution.
There is no question of challenging any pre Constitution matter.
The respondent is challenging a post Constitution action on the ground that there is no authority of law for the action.
Regarding the second point, the High Court held that an appeal to the District Magistrate under section 128 was not likely to be of much assistance to the petitioner and rejected the contention.
It is well settled that a, provision like section 128 does not oust the jurisdiction of the High Court to entertain a petition under article 226 and it is for the High Court to exercise its discretion whether to entertain the petition or not.
The learned counsel has not pointed out anything to us to show that the discretion has not been properly exercised.
In the result the appeal fails and is dismissed with costs.

summary:
In July 1925 it was notified under section 120(2) of the U. P. District Boards Act, 1922 that the District Board of Moradabad in exercise of powers conferred by section 108(2) of the Act had imposed a tax with effect from September 1, 1925, on the residents of the District according to their circumstances and property at the rate of 4 pice per rupee on the total taxable income subject to a maximum of Rs. 200.
In May 1927 the District Board passed a resolution increasing the maximum from Rs. 200 to Rs. 500 and thereafter the State Government issued a notification in January 1928, amending the rules for the assessment and collection of tax so as to increase the maximum to Rs. 500.
In August 1931, the Board passed another resolution in creasing the maximum further to Rs. 2,000 and the State Government issued a notification in March 1932 further amending the rules so as to incorporate the new maximum.
No further action was taken by the District Board to enforce these amendments of the rules.
Upon a writ filed by the respondents under Act, 226 of the Constitution, the High Court directed the District Board, Moradabad, not to levy upon the respondent a tax in excess of Rs. 200 per year on the ground that no special resolution of the Board had been passed nor a notification issued by the State under sections 119 and 120 respectively of the Act imposing the tax with revised maximum limits.
In appeal to the Supreme Court it was contended on behalf of the appellant that when the procedure laid down in sections 1.15 to 118 had been followed whereby the amendments had been approved by resolutions and notified, it was not necessary that there should be a further resolution and notification under section 119 and section 120 respectively.
Held: The tax with the revised maximum limits introduced in 1928 and 1932 could not be imposed without a resolution under section 119 and a notification under section 120.
[5B] The object of sections 119 and 120 is to fix the date from which the tax can be imposed.
If no date is fixed, no tax can be imposed.
Once the Board passes a special resolution under, section 119, it has to go to the Government under section 120, and then the Government notifies the imposition of tax from the appointed date.
It is then that the notification becomes conclusive Proof of the fact that the tax has been imposed in accordance with the provisions of this Act Sub clause (3) of section 120 clearly proceeds on the basis that the imposition of tax takes place on a notification issued under section 120 and not on the issue of a notification under section 118.
[4G 5A] Raza Buland Sugar Co. Ltd. vs Municipal Board, Rampur, ; ; referred to.
N)1SCI 2


judgement:
il Appeals Nos.
83 85 of .1965.
Appeals by special leave from the judgment and decree dated February 9, 1962 of the Andhra Pradesh: High Court in Tr.
Appeal No. 558 of 1957 and A. section Nos. 89 and 157 of 1957 respectively.
P. Ram Reddy, A. V. V. Nair, B. Parthasarathy, and 0.
C. Mathur, for the appellant (in all the appeals).
C. R. Pattabhiraman and R. Ganapathy Iyer, for the respon dents (in C.As.
Nos. 83 and 84 of 1965) and respondents Nos. 15 (in C.A. No. 85 of 1965).
The Judgment of the Court was delivered by Bachawat, J.
One Venkatacharyulu was the Karta of a joint family consisting of himself and his four sons.
The appellant was his concubine since 1945 until his death on February 22, 1949.
By two registered deeds purporting to be sale deeds dated April 15, 1946, (Exbts.
A 1 and A 2), he transferred to the appellant certain properties belonging to the joint family.
In 1947 after the execution of exhibit A 1 and A 2 there was a disruption of the joint family and a severance of the joint status between Venkatacharyulu and his sons.
In 1954 his widow and sons instituted O.S. No. 12 of 1954 against the appellant for recovery of possession of the properties alleging that the documents dated April 15, 1946, were executed without consideration or for immoral purposes, and were void.
The appellant instituted against his widow and sons O.S. No. 63 of 1954, asking for general partition of the joint family properties and for allotment to her of the properties conveyed by the two deeds.
She also instituted O.S. No. 62 of 1954 against one of his sons and another person asking for damages and mesne profits for wrongful trespass on the properties.
The trial court dis missed O.S. No. 12 of 1954 and O.S. No. 62 of 1954 and decreed O.S. No. 63 of 1954.
From these decrees appeals were preferred in the High Court of Andhra Pradesh.
The High Court confirmed the decree in O.S. No. 62/54, allowed the two other appeals, dismissed O.S. No. 63/54 and decreed O.S. No. 12/54, the decree for possession in respect of the properties covered by exhibit A 1 being conditional on payment by the respondents of the value of improvements made by the appellant to the properties.
From the decrees passed by the High Court, the present appeals have been filed by special leave.
The High Court found that the transfers under exhibit A 1 and exhibit A 2 were not supported by any consideration by way of cash or delivery of jewels.
This finding is not challenged before us.
The High Court held that the transfers were made by Venkatacharyulu in favour of the appellant in view of past illicit cohabitation 45 with her, such past cohabitation was the motive and not the consideration for the transfers and the two deeds though ostensibly sale deeds, were in reality gift deeds.
It held that Venkatacharyulu had no power to make a gift of the joint family properties, the two deeds were invalid and the subsequent severance of joint status in 1947 could not validate them.
In this Court, it is common case that future illicit cohabitation was not the object or the consideration for the transfers under exhibit A 1 and exhibit A 2.
The appellant contends that Venkatacharyulu agreed to make the transfers in consideration of past cohabitation, having regard to section 2(d) of the , her past service was a valuable consideration and Venkatacharyulu was competent to alienate for value his undivided interest in the coparcenary properties.
The respondents contend that the transfers were by way of gifts and not in consideration of the past cohabitation, and Venkatacbaryulu was not competent to make a gift of the coparcenary properties.
In the alternative, the respondents contend that assuming that the transfers were made in consideration of past cohabitation, they were hit by Sec. 6(h) of the .
Our findings are as follows: Venkatacharyulu and the appellant were parties to an illicit intercourse.
The two agreed to cohabit.
Pursuant to the agreement each rendered services to the other.
Her services were given in exchange for his promise under which she obtained similar services.
In lieu of her services, he promised to give his services only and not his properties.
Having once operated as the consideration for his earlier promise, her past services could not be treated under section 2(d) of the as a subsisting consideration for his subsequent promise to transfer the properties to her.
The past cohabitation was the motive and not the consideration for the transfers under exhibit A 1 and A 2.
The transfers were without consideration and were by way of gifts.
The gifts were not hit by sec.
6(h) of the , by reason of the fact that they were motivated by a desire to compensate the concubine for her past services.
In Balo vs Parbati(1) the Court held that the assignment of mortgagee 's rights to a woman in consideration of past cohabitation was not hit by sec.
6(h) of the and, was valid.
Properly speaking, the past cohabitation was the motive and not the consideration for the assignment.
The assignment was without consideration by way of gift and as such was not bit by section 6(h).
(1) I.L.R. [1940] All.
370. 46 In Istak Kamu Musalman vs Ranchhod Zipru Bhate(1) the court rightly held that past cohabitation was the motive for the gift under Exhibit 186, and the gift was valid but in holding that the promises to make the gifts under other exhibits were made in consideration of past illicit cohabitation and consequently those gifts were invalid, the Court seems to have too readily assumed that past cohabitation was the consideration for the subsequent promises.
Venkatacharyulu was free to make a gift of his own property to his concubine.
The gifts,, under Exs.
Al 'and A 2 were not hit ' by section 6(h) of the .
But the properties gifted under exhibit A 1 and A 2 were coparcenary properties.
Under the Madras school of Mitakshara law by which Venkatacharyulu was governed, he had no power to make a gift of even his undivided interest in the coparcenary properties to his concubine.
The gifts were therefore invalid.
The invalid gifts were not validated by the disruption of the joint family in 1947.
After the disruption of the joint family, Venkatacharyulu was free to make a gift of his divided interest in the coparcenary properties to the appellant, but he did not make any such gift.
The transfers under Exs.
A 1 and A 2 were and are invalid.
We find no ground for interfering with the decrees passed by the High Court.
In the result, the appeals are dismissed.
There will be one set of costs and one hearing fee.
Y. P. Appeals dismissed.
(1) I.L.R. , 217.

summary:
V the karta of a joint Hindu family, transferred in 1946 certain properties, of the joint family to the appellant, who was his concubines since 1945.
The joint family disrupted in 1947, and after V 's death, the respondents his widow and sons, filed a suit against the appellant for recovery of possession of the properties alleging that the documents were executed without consideration or for immoral purposes.
and were void.
The appellant instituted suits for partition of the joint family properties and for allotment to her the properties conveyed by the deeds.
The trial court dismissed the respondents ' suit and decreed the appellant 's suit, which the High Court reversed.
In appeal to this Court, the appellant contended that V. agreed to make the transfers in consideration of past cohabitation, having regard to section 2(d) of the her past service was a valuable consideration and V was competent to alienate for value his undivided interest in the coparcenary properties.
The respondents contended that the transfers were by way of gifts and not in consideration of the past cohabitation, and V was not competent to make a gift of the coparcenary properties and even assuming that the transfers were made in consideration of past cohabitation, they were hit by section 6 (h) of the .
HELD: Under the Madras School of Mitakshara law by which V was governed.
he had no power to make a gift of even his undivided interest in the coparcenary properties to his concubine.
[46C] V and the appellant were parties to an illicit intercourse.
The two agreed to cohabit.
Pursuant to the agreement each rendered services to the other.
Her services were given in exchange for his promise under which she obtained) similar services.
In view of her services, he promised to give his services only and not his properties.
Having once operated as the consideration for his earlier promise.
her past services could not be treated under section 2(d) of the as a subsisting consideration for the properties to her.
The past cohabitation was the motive and not the consideration for the transfers which were without consideration and were by way of gifts.
The gifts were not hit by section 6(h) of the Transfer of property Act, by reason of the fact that they were motivated by a desire to compensate the concubine for her past services.
[45E G] The invalid gifts were not validated by the disruption of the joint family in 1947.
After the disruption of the joint family, V was free to make a gift of his divided interest in the coparcenary properties to the appellant, but he did not make any such gift.
[46D] Balo vs Parbati, I.L.R. [1940] All. 370 and Istalk Kamu Musalman vs Ranchhod Zipru Bhate, I.L.R. , 217 referred to. 44


judgement:
Appeal No. 1975 of 1966.
Appeal by special leave from the judgment and order dated July 11, 1962 of the Madras High Court in Tax Case No. 84 of 1960.
section Swaminathan and R. Gopalakrishnan, for the appellant.
Veda Vyasa, A. N. Kirpal, R. N. Sachtliey and section P. Nayar, for the respondent.
The Judgement of the Court was delivered by Shah, J. This is an appeal with special leave.
The appellant is a Society registered under the .
The following table sets out the data relating to the earnings, investments, working capital, outgoings and expenditure of the Society for the year ending June 30, 1955, relevant to the assessment year 1956 57: (i)Interest from Government securi ties.
Rs.4,310,453.00 (ii) Total gross earnings. .
Rs.21,00,99(4.00 (iii) Investments in Government securities. .
Rs.130,60,653 00 (iv) Total working.
capital.
Rs.473,42,603 00 (v) Interest paid on debentures, depo sits and other accounts Rs. 15,09,490 00 (vi) Total overhead expenses and es tablishment overhead charges Rs. 3,01,102 00 32 In a proceeding for assessment of the total income of the Society to tax for the year 1956 57 it was claimed that under section 14 (3) of the Indian Income tax Act, 1922 (as added by section 10 of the Finance Act, 1955, with effect from April 1, 1955) the income of the Society from business was exempt from payment of tax, and that in accordance with the instructions issued under section 60 of the Act, out of the gross income from securities amounting to Rs. 4,30,053/ , Rs. 4,16,475/ being income attributable to the assets utilized in the business, only the balance of Rs. 13,578/was chargeable to tax.
In support of its claim the 'Society 'relied upon the instructions published in the Income tax Manual, 1946.
In the view of the Income tax Officer the Society could not claim the benefit of the Departmental Instructions, since in the relevant year of assessment those instructions had ceased to operate, and the Society 's claim was governed by the Explanation to section 8 of the Income tax Act as incorporated by the Finance Act of 1956, with effect from April 1, 1956.
He accordingly computed the taxable income under the head "interest on securities" in the sum of Rs. 59,498/ .
The Appellate Assistant Commissioner modified the order of the Income tax Officer and reduced the taxable income under the head "interest on securities" to Rs. 13,578/ applying the Departmental Instructions.
He held that the Explanation to section 8 of the Act applied to Banking Companies and not to Co operative Societies.
In appeal by the Commissioner of Income tax the Appellate Tribunal reversed the order of the Appellate Assistant Commissioner, and restored the order of the Income tax Officer.
In the view of the Tribunal, the Explanation to section 8 of the Act cannot be invoked as the Society was not a Banking, Company, but the principle of the Explanation may well be called in aid and that the relief granted by the Income tax Officer was the only relief to which the Society was entitled.
The following question of law was submitted by the Tribunal to the High Court of Madras: "Whether the Tribunal is justified in law in holding that the taxable income of the assessee from interest on securities is Rs. 59,498/ ?" The High Court reframed the question to read: "Whether the taxable income of the assessee from interest on securities is Rs. 13,578/ as contended by the assessee and as worked out on the basis of the Departmental instructions contained at pages 248 and 249 in Part III of the year 1946?", and answered it in favour of the Commissioner.
33 Counsel for the Society in the first instance, contended relying upon the judgment of this Court in Commissioner of Incometax Andhra Pradesh vs Cocanada Radhaswami Bank Ltd.,(1) contended that no part of the income of the Society, even if it be earned from Government securities, was liable to be taxed.
It may be recalled that the Society had claimed before the Departmental authorities and the Tribunal that according to the instructions issued by the Central Government under section 60 of the Income tax Act only Rs. 13,578/ out of the income from Government securities were chargeable to tax.
The Income tax Officer and the Tri bunal held that Rs. 59,498/ were chargeable to tax.
The decision in Cocanada Radhaswami Bank 's case(1) relates to the right of a Bank to carry forward the net loss incurred by a Banking Company and to set it off in subsequent years against income from securities held as part of its trading assets.
It is not a decision under section 14(3) of the Act.
Again it is not open to the Society in this reference to contend that the amount of Rs. 13,578/ itself is not taxable.
Such a question was never raised before the Tribunal and cannot be permitted to be raised in this Court.
The Income tax Act, 1922, as originally enacted, did not give to a Co operative Society exemption from payment of tax in respect of income from its business activities.
But by Departmental Instructions issued under section 60 of the Act, certain exemptions were given by a notification issued on August 25, 1925 and modified by notifications dated June 25, 1927, October 20, 1934 and August 18, 1945.
Among the classes of income exempt from liability to pay tax under the notification was: "(2) The profits of any cooperative society other than .
or the dividends or other payments received by the members of any such society out of such profits.
Explanation For this purpose the profits of a cooperative society shall not be deemed to include any income, profits or gains from: (1) investments in (a) securities of the nature referred to in section 8 of the Indian Income tax Act, or (b). . (2) dividends, or (3) the 'other sources ' referred to in section 12 of the Indian Income tax Act".
By the notification, profits of a Co operative Society were exempt from tax, but those profits were not to Include any income, profits or gains from securities of the nature referred to in section 8 of the (1)157 I.T.R. 306.
N)ISCI 4 34 Indian Income tax Act.
The Legislature by section 10 of the Finan Act of 1955 added sub sec.
(3) to section 14, whereby it was enacted.
inter alia, that: "The tax shall not be payable by a co operative society, including a, co operative society carrying on the business of banking (i) in respect of profits and gains of business carried on by it, (ii) in respect of interest and dividends derived from its investments with any other cooperative society; A co operative society since the enactment of the Finance Act, 1955, with effect from April 1, 1955, was therefore not liable, by the express provisions in the Act, to pay tax in respect of the profits and gains of business carried on by it.
Under section 8 of the Incometax Act, 1922, tax is payable by an assessee under the head "Interest on securities" in respect of the interest receivable by him on any security of the Central Government or of a State Government, or on debentures or other securities for money issued by or on behalf of a local authority or a company, subject to exemption, inter alia, in respect of any sum deducted from such interest by way of commission by a banker realizing such interest on behalf of the assessee, or in respect of any interest payable on money borrowed for the purpose of investment in the securities by the assessee.
The Parliament by the Finance Act, 1956 amended the first proviso, and added an Explanation to section 8 providing for the computation of the sum reasonably spent for the purpose of realising interest and of interest paid on sums borrowed for the purpose of investment by a Banking Company.
The Explanation provides: "Explanation In the case of a banking company, (a) the amount which bears to the aggregate of its expenses as are admissible under sub section (2) of section 10, other than clauses (iii), (vi), (vi a), (vi b), (vii), (viii), (xi), (xii), (xiii) and (xiv) th ereof, the same proportion as the gross receipts from interest on securities inclusive of tax deducted at source) chargeable to tax under this section bears to the gross receipts from all sources which are included in the profit and loss account of the company, shall be deemed to be the sum reasonably expended by it for the purpose of realising such interest,, and the amount for which allowance is admissible under sub section (2) of section 10 shall be reduced correspondingly; and (b) money borrowed shall include moneys received by way of deposits; and that amount which bears to the amount of interest payable on moneys borrowed the same proportion as the gross receipts from interest on securities (inclusive of tax deducted at source) chargeable to tax under this section bears to the gross receipts from all sources which are included in the profit and loss account of the company, shall be deemed to be interest payable on money borrowed for the purpose of investment in the securities by the assessee, and the amount of such interest for which allowance is due under sub section (2) of section 10 shall be reduced correspondingly." and 35 (b) money borrowed shall include moneys received by way of deposits; and that amount which bears to the amount of interest payable on moneys borrowed the same proportion as the gross receipts from interest on securities (inclusive of tax deducted at source) chargeable to tax under this section bears to the gross receipts from all sources which are included in the profit and loss account of the company, shall be deemed to be interest payable on money borrowed for the purpose of investment in the securities by the assessee, and the amount of such interest for which allowance is due under sub section (2) of section 10 shall be reduced correspondingly.
" Broadly stated, under cl. (a) the sum reasonably spent is computed as that proportion of the aggregate of the expenses admissible under the various clauses of sub section
(2) of section 10 mentioned therein which the gross receipts from interest on securities bear to the gross receipts from all sources included in the profit and loss account of the banking company.
Similarly under cl.
(6) interest payable on money borrowed for the purpose of investment in Government securities is that proportion of the total interest paid on borrowings which gross receipts from securities bear to gross receipts from all sources.
Income of the Society from its trading activity being exempt from tax, its income from Government securities had, it was common ground, to be apportioned between income earned from investments for trading purposes and for non trading purposes.
The Income tax Officer applied the first proviso read with the Explanation to section 8 of the Income tax Act.
The Income tax Appellate Tribunal held that in terms, the Explanation to section 8 did not apply because the Society was not a banking company, but the principle of the Explanation furnished, after the Departmental Instructions had been withdrawn, a reasonable basis for apportionment.
In the view of the Tribunal, the principle embodied in the Explanation was an "improvement on the instructions", since it co related the income chargeable under the head with the expenditure and also provided for proportionate allocation of overhead charges.
The High Court held that the benefit of the departmental notification was not available to the Society in the year of assessment, because it must be deemed to be withdrawn and the Explanation to section 8 did not in terms apply to the Society.
It was common ground between the parties in this Court and the High Court that Explanation to section 8 has no application to a co operative society which does not carry on the business of a banking company.
There is also no dispute that the departmental notification relied upon by the company was withdrawn before the relevant assessment year.
There is, therefore, no statutory rule, and nor there are departmental instructions, governing the apportionment of income from Government securities between business 36 and non business sources of income.
It was never urged, and it cannot be urged, that in the absence of a specific rule for apportionment, the entire income from Government securities should be brought to tax.
Any attempt to bring the entire income from Government securities would infringe section 14(3) of the Act.
A rule of apportionment consistent with commercial accounting must be evolved for determining the income from Government securities attributable to business activity of the Society.
The rule contained in cl.
(a) of the Explanation to section 8 has specially been evolved for determining the appropriate outgoings for the purpose of realizing interest from securities held by a Banking Company in computing income ' chargeable to tax; it seeks to exempt, on the footing that it is deemed to be the sum reasonably expended for the purpose of realizing interest, a part thereof which is equal to the proportion which the gross receipts from interest on securities chargeable to tax, bear to the gross receipts from all sources.
The rule is an artificial rule for allocating business expenditure between different sources of income of Banking Companies.
It is not a rule for apportionment for the purpose of taxation of composite income which is partly taxable and partly not.
Clause (b) provides for allocation of outgoings in respect of "money borrowed", which expression includes money deposited with the Bank.
Interest payable on borrowings is directed to be allocated in the proportion in which income is received from investments from securities and from other sources.
This clause also deals with the proportion in which the outgoings are allocable.
The problem arising under section '14(3) is of apportionment of income under heads taxable and nontaxable: it is not a problem relating to allocation of outgoings to determine taxable income.
In our judgment, a rule of apportionment which dismembers income in proportion to the business and non business components of the single source from which it arises would be more consistent with principles of commercial accounting.
The proportion of income from securities which is exempt from taxation under section 14 (3) of the Act will be that proportion which the capital of the Society used for the purpose of the business bears to the total working capital.
It is admitted that Rs. 13,578/ is the gross income from securities which is, according to that rule, liable to tax.
No question was raised in the High Court about any deduction to be made in respect of expenses for collection of that amount, and admissibility of deduction on that score does not fall to be considered.
The appeal is allowed.
Answer to the question as reframed by the High Court is that Rs. 13,578 / are taxable as income of the Society received from Government securities under section 8 of the Income tax Act.
The Commissioner will pay the costs of the Society in this Court.
V.P.S. Appeal allowed.

summary:
The Income tax Act, 1922, as originally enacted did not give to a cooperative society any exemption from payment of tax in respect of income from its business activities.
By departmental instructions issued under section 60 of the Act, exemption from payment of tax in respect of certain receipts of a co operative society were given.
The notification provided inter alia that as regards interest received by it from government securities, an amount which bears the same proportion to the total interest paid on debentures etc.
as the capital invested in government securities bears to the total working capital, shall be deducted from the interest on government securities as being exempt from tax.
The departmental instructions were later withdrawn and sub section
(3) was added to section 14 of the Act, by which, with effect from April 1, 1955, a cooperative society was not liable to pay tax in respect of the profits and.
gains of business carried on by it.
In 1956, an Explanation, applicable to banking companies, was added to section 8.
Clause (a) of the Explanation provided for the allocation of business ex penditure between different sources of income of banking companies; and cl.
(b) provided for allocation of outgoings in respect of " money borrowed" including money deposited with the bank [33BH; 34C F] Thus, in spite of section 14(3), for the assessment year 1956 57, there were no departmental instructions governing the apportionment of income from government securities between business and non business sources of income; and, in the case of a cooperative society which did not carry on the business of a banking company.
there was no statutory rule for such apportionment, the Explanation to section 8 not being applicable.
Therefore, in the case of a cooperative society which was not carrying on the business of a banking company a rule of apportionment consistent with commercial accounting for determining the income from government securities attributable to the business activity of the society had to be evolved.
[35H; 35A B] The appellant was a cooperative society not carrying on business of banking and for the assessment year 1956 57; it claimed that out of its gross income from securities, only Rs. 13,578 was chargeable to tax on the principle of the departmental instruction.
The Appellate Tribunal applied the principle of the Explanation to section 8 and computed the taxable income at Rs. 59,498.
The High Court held that the benefit of the departmental notification was not available to the appellant, because it must be deemed to have been withdrawn and that, the Explanation to section 8 did not in terms apply to the appellant.
31 In appeal to this Court, Held:In the absence of a statutory rule and departmental in structions, a rule of appointment which dismembers income in pro"portion to the business and non business components of the source from which it arises would be more consistent with principles of commercial accounting.
The proportion of income from securities which is exempt from taxation under section 14(3) will be that proportion which the capital of the Society used for the purposes of the business bears to the total working capital, and according to this rule, the gross income from securities which would be liable to tax was only Rs. 13,578.
It was not open to the appellant to contend that even this amount was not taxable.
Such a question was never raised either before the department or the Tribunal.
[33C D; 36F H] The principles laid down in cls.
(a) and (b) of the Explanation to s, 8 are not Applicable.
The rule in cl.
(a) is not a rule of apportionment for the purpose of taxation of composite income which is partly taxable and partly not.
It is an artificial rule, specially evolved for determining the appropriate outgoings for the purpose of realising interest .,from securities held by a banking company in computing income chargeable to tax.
Clause (b) deals with the proportion in which the outgoings are allocable.
The problem arising under section 14(3) is not one relating to allocation of outgoings to deter.
mine taxable income, but of apportionment of income under the taxable and non taxable heads.
[36C E]