judgement:
vil Appeal No. 636 of 1964.
Appeal from the judgment and decree dated September 1, 1959 of the Madras High Court in O. section Appeal No. 104 of 1955.
T. V. R. Tatachari, for the appellants.
R. Thiagarajan, Jayaram and M. R. K. Iyer, for respondents, Nos. 1 and 9. 722 The Judgment of the Court was delivered by Mitter, J.
This is an appeal from a judgment of the High .Court at Madras on a certificate granted by it.
The main question in this appeal relates to the rate of interest payable in respect of four mortgages executed in between March 20, 1936 and January 2, 1938.
Both the learned trial Judge, Ramaswami J. of the Madras High Court and the Bench of two Judges in appeal were of the view that the provision for interest in the impugned mortgages should be reduced; but whereas the learned trial Judge reduced the rate of interest from 15 pet cent compoundable every quarter to 15 per cent compoundable with yearly rests, the Judges in appeal after taking all the circumstances into consideration held that 10 per cent compound interest with yearly rests would not be excessive and they reduced the rate accordingly.
They also scaled down the rate of interest to 6 per cent from the date of the institution of the suit.
The creditor has come up before this Court in appeal and his substantial complaint is that the rate of interest should not have been cut down by the Division Bench of the Madras High Court.
The power of the court to reduce interest in a case like this is derived from section 3 of the Usurious Loans (Madras Amendment) Act VIII of 1937.
Sub section (1) of that section gives the court the power to give relief in various ways if it has reason to believe that the transaction as between the parties thereto was substantially unfair.
One of such reliefs is the reopening of the transaction and relieving the debtor of all liability in respect of any excessive interest.
Explanation I to the section lays down that "if the interest is excessive, the court shall presume that the transaction was substantially unfair; but such presumption may be rebutted by a number of special circumstances justifying the rate of interest.
" Sub section (2) of section 3 provides by clause (a) that the word "excessive" in the section means in excess of that which the court deems to be reasonable having regard to the risk incurred as it appeared or must be taken to have appeared, to the creditor at the date of the loan.
Under clause (b) of the said sub section the court has also to take into account any amounts charged or paid etc.
and if compound interest is charged, the period at which it is calculated and the total advantage which may reasonably be taken to have been expected from the transaction.
Clause (c) of sub section 2 provides that in considering the question of risk, the court shall take into account the presence or absence of security and the value thereof, the financial condition of the debtor and the result of any previous transactions of the debtor, by way of loan, so far as the same were known, or must be taken to have been known, to the creditor.
Clause (d) of the said sub section enjoins upon the court to consider also all circumstances materially affecting the relations 723 the parties at the time of the loan or tending to show that the transaction was unfair, including the necessities or supposed necessities of the debtor at the time of the loan so far as the same were known, or must be taken to have been known, to the creditor.
In effect the provisions of the section which are relevant for the purpose of this appeal are as follows: (a)If the Court has reason to believe that the transaction was unfair it will exercise the powers given by subsection, (1).
(b)The court shall presume the transaction to be sub stantially unfair if the interest is excessive, such pre sumption being a rebuttable one by the special circumstances of the case; (c)In order to find out whether the interest is excessive the court must examine the circumstances of the case in the light of the risk incurred or the risk as would be apparent to the creditor at the date of the loan, and then judge whether compound interest at the rate prescribed and with therests provided for was justifiable keeping also in view thesecurity given by the mortgagor, the value of such securityand the condition of the debtor including the result of any previous transaction.
The net result of the above seems to be that the Court must go back to the date of the original transaction and form an opinion as to the rate of interest which would be reasonable after considering (a) the value of the security offered; (b) the financial condition of the debtor including the result of any prior transaction; (c) the known or probable risks in getting repayment, (d) whether compound interest was provided for and if so the frequency of the period of calculation of interest for being added to the principal amount of the loan.
The facts of the case may now be briefly stated.
The original mortgagor Dhanakoti Ammal had succeeded to the properties of her father along with her sisters under a will executed by him on the basis that the properties were his self acquired properties.
Her brother Alavandar filed a suit in the year 1919 through a next friend claiming that the properties were not the self acquired properties of his father and as such not capable of bequest under a will.
This suit was dismissed as also the appeal therefrom to 724 the Madras High Court preferred in 1922.
By the year 1936 when the first mortgage in favour of Srinivasavaradachariar, the appellant, before us, was executed, Dhanakoti Ammal was involved in debts.
The most important item of her properties was a market on the outskirts of the city of Madras which had become dilapidated and the Corporation of Madras was refusing to renew the licence unless it was put in good order.
She had further borrowed a sum of money repayable with interest at 20 per cent compoundable monthly.
Her brother Alavandar who was due to attain majority very soon threatened to file another suit impeaching the decree in the earlier suit.
As a matter of fact, the first two mortgages were executed in 1936 before Alavandar had filed his suit and the last mortgage was executed in January 1938.
Dhanakoti Ammal got more and more involved in debt and was adjudicated an insolvent in 0.
P. 148 of 1949.
Her properties got vested in the Official Assignee of Madras.
The Official Assignee brought the properties to sale which were ultimately purchased by Dr. Gopala Menon for Rs. 5,0001 .
Dr. Gopala Menon tried to come to an arrangement with Srinivasavaradachariar but nothing came out of it and the suit out of which this appeal has arisen was filed in the year 1950.
Other aliences were involved in the suit but we are not concerned with them.
According to the learned trial Judge the risks which the creditor ran in advancing the money were considerable in that the adequacy of the security was questionable in view of the threat of suit by Dhanakoti Ammal 's brother and the condition of the property in an undeveloped area of Kodambakkam.
The learned trial Judge could not find anything unfair in the transaction, but nevertheless he thought that the rate of interest should be scaled down to 15 per cent compoundable at the end of each.
The learned Judges of the Division Bench of the Madras High Court found that the amount advanced under the old mortgages came to nearly Rs. 48,000/ that there was already a prior mortgage in respect of which nearly Rs. 8,000/ was due and the value of the security though not very ample could not be said to be markedly inadequate and there was a shadow on the title of the mortgagor by reason of the threat of suit by her brother.
On a consideration of the entire evidence bearing on the point revealing the circumstances in which the loan transaction came into existence the appellate bench held that 15 per cent compound interest calculated with quarterly rests was certainly excessive.
Taking note of several decisions of the Madras High Court to which we shall presently refer, the learned Judges thought that the rate of interest to be allowed was 10 per cent compound interest with yearly rests.
It is difficult to predicate of any rate of interest as being excessive divorced from the circumstances of the case unless the rate 725 fixed is so high as to be suggestive of an unfair transaction on the face of things.
It is not for us to speculate as to why the Legislature of the State of Madras proceeded in such a round about way in making amendments to the Usurious Loans Act of 1918 for the purpose of giving relief to borrowers when it is well known that at or about the time of the Madras amendment the Legislatures of other States in India had fixed certain rates as being the maximum beyond which the courts of law were not competent to go.
So far as we are aware difference was made in the treatment of unsecured loans and secured loans and even in the case of the former the rate allowed was not to exceed 12 per cent simple in most of the States.
With regard to the rate of interest allowed by the Madras High Court after 1937 we find that in Venkatarao vs Venkataratnam(l) a bench consisting of Govinda Menon and Ramaswami JJ.
observed, "that anything above 12 per cent per annum simple interest is excessive, considering the nature of transaction in this State.
" There the suit was on a mortgage which provided for payment of interest at 12 1/2 per cent per mensem with annual rests.
In Sri Balasaraswati vs A. Parameswara Aiyar(2) a Division Bench consisting of Rajamannar C. J. and Panchapekesa Ayyar J. observed, "in normal cases where the security is ample to cover the loan and there is no danger at all to the principal and interest the court will hold more than 12 per cent simple interest to be excessive, as held in A.I.R. 1952 Madras 872 and by us in A.S. 348 and 361 of 1948".
According to the learned Judges "Where the security is not sound, 10 per cent compound interest can be allowed as in In the result the learned Judges only allowed simple interest at 12 per cent per annum.
In the instant cases the learned Judges in appeal also referred to a judgment, of Subba Rao J. (as he then was) in C. section 163 of 1949 as containing an observation that the dictum in Venkatarao vs Venkatratnam(l) that "anything above 12 per cent simple interest was excessive would not be taken as a principle of law applicable to all cases irrespective of the circumstances obtaining at the time of the transaction".
That transaction also related to Dhanakoti Ammal the original debtor in this case and Subba Rao J. (as he then was) reduced the rate of interest from 15 per cent compound interest to 12 per cent per annum simple.
We have not had the benefit of reading the judgment of his Lordship, but we take it that the result of it is as indicated in the judgment in appeal before us.
It appears to us therefore that in the opinion of a number of Judges of the Madras High Court who were cognizant of the state of affairs prevailing in the State interest beyond the rate of 12%.
per annum simple would be considered excessive by court of law where the security was not inadequate and the risk run by the creditor was not abnormal.
There can be no dispute that (1) A.I.R. 1952 Madras 872.
(2) A.I.R. 1957 Madras 122, 129.
726 interest payable at the rate of 10 per cent compoundable annually over a number of years would be more in the interest of the creditor than 12 per cent per annum simple for the same period.
In our opinion the learned Judges of the Division Bench of the Madras High Court were right in holding that 10 per cent compound interest with yearly rests would meet the justice of the case.
The security was not inadequate and the threat of suit by Alavandar in view of the fact that his earlier suit which had been taken in appeal to the Madras High Court and subsequently lost, was never regarded seriously.
This is corroborated by the fact that even after the institution of that suit in 1937 the appellant before us advanced further sums of money to Dhanakoti Ammal at the same rate of interest as before; if he had thought that his security was put in jeopardy by the institution of the suit he would have been careful not to advance any further amounts and would in any case have insisted on the rate of interest being higher than that provided for in the earlier mortgages.
In our opinion the Division Bench of the Madras High Court made a correct assessment of the situation and their pronouncement with regard to the rate of interest prior to the date of the suit ought not to be disturbed.
We also find no reason to interfere with the scaling down of the rate of interest to 6 per cent from the date of the filing of the suit.
Although the reasons are not indicated, it seems fairly plain that their Lordships were using their discretion as regards interest pendente lite.
We cannot overlook the fact that the mortgages were executed as far back as 1936 and 1938 and that the creditor who had waited till 1950 for the institution of the suit would, in any event, get interest substantially exceeding the principal amount of the loans.
In this view of things we are not prepared to interfere with the exercise of the discretion exercised by the learned Judges of the Madras High Court even though they have given no reasons for the reduction of rate of interest pendente lite.
In the result the appeal fails and is dismissed with costs.
G. C. Appeal dismissed.

dataset_name: IN-Abs

summary:
The first appellant advanced monies to D against mortgages of her property.
D was adjudicated an insolvent in 1949 and her properties got vested in the Official Assignee of Madras.
The Official Assignee brought the properties to sale which were ultimately purchased by the first respondent.
The Trial Court decreed the appellants ' suit for enforcement of the mortgages against the property and awarded interest at the rate of 15 per cent compoundable with yearly rests.
In appeal the Division Bench of the High Court found that in the circumstances of the case a rate of 10, per cent compound interest with yearly rests was just.
With certificate the appellants came to this Court.
Section 3 of the Usurious Loans (Madras Amendment) Act, 1937 fell for consideration.
HELD : The net result of the various clauses of section 3 to be that the court must go back to the date of the original transaction and form an opinion as to the rate of interest which would be reasonable after considering (a) the value of the security offered; (b) the financial condition of the debtors including the result of any earlier transaction; (c) the known and probable risks in getting repayment; (d) whether compound interest was provided for and if so the frequency of the Period of calculation of interest for being added to the principal amount of the loan.
[725 E G] In the circumstances of the case the Division Bench rightly held that 10 per cent compound interest with yearly rests would meet the justice of the case.
The security was not inadequate and the threat of a suit by the brother of the mortgagor was not serious.
[726 A B] Venkatarao vs Venkatratnam, A.I.R. 1952 Madras 872 and Sri Balasaraswati vs A. Parameswara Aiyar, A.I.R. 1957 Mad. 122 referred to.
There was also no reason to interfere with the scaling down of the rate of interest to 6 per cent from the date of filing of the suit.
Although the reasons were not indicated it was fairly clear that the High Court was, using its discretion as regards interest pendente lite.
[726 E]


judgement:
Appeals Nos. 702 and 768 of 1964.
Appeals by certificate/special leave from the judgment and decree dated June 7, 1962 of the Jammu and Kashmir High Court in Civil First Appeals Nos.
I of 1957 and 15 of 1961 respectively.
Naunit Lal, for the appellant (in both appeals).
K. R. Chaudhuri, for the respondent (in C. A. No. 768/64).
793 The Judgment of the Court was delivered by Wanchoo J.
These are two connected appeals on certificates granted by the Jammu and Kashmir High Court and raise a common question of law.
We shall therefore give the facts of one appeal (No. 702) in order to appreciate the question of law which calls for decision.
Sultan Mohd. Matawali Khan (hereinafter referred to as Sultan Mohd.), Ilaqadar of Kathai was the predecessor in interest of the respondents.
He had borrowed a sum of Rs. 40,000/ from the apperant bank on the basis of a promissory note on November 5, 1941.
Before the bank advanced the loan, the Government of the then State of Jammu and Kashmir was approached and it was arranged that the debt would be liquidated through Government.
For that purpose, an order was issued by the Government that land revenue of certain villages from the jagir of Sultan Mohd. amounting to Rs. 5076/9/6 would be collected by Government and the amount credited in the treasury to the credit of the bank tin the sum of Rs. 40,000/ along with interest due thereon was liquidated.
It was in consequence of this arrangement that the bank advanced the sum of Rs. 40,000/ to Sultan Mohd.
After the loan had been taken and the pro note executed the bank opened an account in the name of Sultan Mohd. which started with a debit of Rs. 40,000 on November 5, 1941.
Thereafter whatever sum became due to the bank as interest and incidental charges was debited to the account of Sultan Mohd. and the amount received from Government was credited to the account.
This went on till 1953 when the jagir of Sultan Mohd. was resumed.
The account of Sultan Mohd. with the bank showed a debit of Rs. 2,995/12/ on June 3, 1953.
On June 4, 1953, the bank filed the suit out of which this appeal has arisen against the respondents as legal representatives of Sultan Mohd. for a sum of Rs. 31,025/1 1/ .
To "plain the large discrepancy between the amount shown due in the account and the amount for which the suit was filed, the bank stated that a sum of Rs. 28,029/15/ had been erroneously credited to the account of Sultan Mohd. Consequently the erroneous entries with respect to this credit were corrected and after such correction the amount due came to be Rs. 31,025/1 I/ , for which the suit was filed.
The suit was resisted by the respondents on various grounds, but in the present appeals we are concerned only with one ground, namely, that it was not open to the bank to reverse the credit entries in the account of Sultan Mohd. after they had been made in the manner in which it was done at the instance of the Accountant General of the State of Jammu and Kashmir.
Therefore, the bank would be only entitled to recover Rs. 2,995/12/ , which was the amount shown as due from Sultan Mohd. in the account on June 3, 1953.
Sup C.I./66 6 794 The main question that arose in the trial court therefore was whether the bank was entitled to reverse the entries with respect to Rs. 28,029/15/ in the manner in which that was done.
The facts with respect to what happened in connection with this sum are not now in dispute and may be briefly narrated.
The procedure which was followed, after money was realised by Government from the villages mentioned in the Council Order of October 28, 1941, was that after deducting the collection charges, the amount used to be credited in the State 's accounts and thereafter transferred by Government to the bank for credit to the account of Sultan Mohd. The transfer used to be made by hundis or treasury bills and on receipt of necessary hundis or treasury bills the bank used to credit the amount shown in them to the account of Sultan Mohd.
It appears however that for about five years what happened was that hundis or treasury bills used to be sent to the bank both by the treasury and by the Accountant General with the result that for this period double the amount realised by Government was credited to the account of Sultan Mohd. on the basis of the hundis or treasury bills sent to the bank.
In consequence, there was an over payment by Government to the bank to the tune of Rs. 28,029/15/ and this over payment was credited to the account of Sultan Mohd. in the bank.
This mistake was realised by the Accountant General after about five years and thereupon the Accountant General asked the bank to reverse the entry and debit this amount to the account of Sultan Mohd.
Apparently, the bank was unwilling to do so and it appears that the bank was then threatened that if the bank did not do so the amount would be realised from the subsidy given to the bank by Government.
The bank thereupon reversed the entries and debited this amount to the account of Sultan Mohd., with the result that the figure of Rs. 2,995/12/ shown as debit balance against Sultan Mohd. was increased by this sum.
The trial court held that the amount was paid twice over by mistake and therefore the bank was entitled to reverse the entries at the instance of the Accountant General without reference to Sultan Mohd.
It therefore decreed the suit in full.
The respondents then went in appeal to the High Court and contended that the entries could not be reversed in this manner by the bank without the consent of Sultan Mohd.
The High Court accepted this contention and rejected the argument on behalf of the appellant that the bank was justified under section 72 of the Indian Contract Act, No. 9 of 1872, to reverse the entries.
The High Court therefore allowed the appeal and disallowed the claim of the bank for Rs. 28,029/15/ and decreed the suit for the balance (namely, Rs. 2,995/12/ ).
Thereupon the appellant obtained certificates from the High Court in both cases, and that is how the matter has come before us.
796 of the third person, who is a constituent of the bank, the money becomes the money of the constituent, and it is not open to the bank in such circumstances to reverse the entry of credit made in the account of the constituent and in effect pay back the money to the person who had deposited it even though might if have been deposited by mistake.
As soon as the money is credited into the account of the constituent, even though the person paying in may have paid it by mistake, it becomes the money of the constituent, and the bank cannot pay it back to the person who paid it to the account of the constituent on his representation that it was paid by mistake, without obtaining the consent of the constituent.
As we have already said the legal position is that for the purpose of payment, Government was the agent of Sultan Mohd. and whatever money was paid to be credited to the account of Sultan Mohd even though it was paid through Government, became his money and it could not be paid out of his account which is in substance the effect of reversing the entries without his consent.
Section 72 could certainty have been availed of by Government against Sultan Mohd and the Government could have sued Sultan Mohd for return of the money which had been paid by mistake into his account.
But the Government could not ask the bank to reverse the entries and thus in effect ask it to pay out the money from the account of Sultan Mohd into which it had been deposited and the bank could not do so without taking the consent of Sultan Mohd. Further though Government was the agent of Sultan Mohd for the purpose of payment of the money for liquidating the debt, the Government had no further authority on his behalf to ask the bank to pay back any sum once it had been credited into his account by Government.
That could only be done on the authority of Sultan Mohd. and there was no authority in this case for paying back the sum paid in by mistake to Government, for the reversal of the entries in substance amounted to this.
It has been urged that on this view the bank would not be able to correct any mistake in the account of any constituent. 'Mat is not so.
If, for example, a bank credits a cheque in favour of A by mistake into the account of B, the bank can always correct that mistake, for it had received the money on behalf of A. Similarly if the bank receives (say Rs. 5,000/ on behalf of A from some person, but by mistake enters Rs. 50,000/ in as account, the bank can always correct that entry and mention the correct sum received.
But the present case is very different from corrections of such mistakes.
Here the bank had received certain moneys on behalf of Sultan Mohd. through treasury bills or hundis.
There is no dispute that money was received for credit to the account of Sultan Mohd. and was correctly credited to that account.
There was therefore nothing which the bank could correct, for the bank had 795 The only question in these circumstances is whether the bank was justified in reversing the entries and debiting the account of Sultan Mohd with this sum.
Now the legal position so far as this payment is concerned was this.
The bank had advanced the money to Sultan Mohd. and an account was opened in his name on November 5, 1941 with a debit entry of Rs. 40,000/ .
Into this account the bank went on debiting interest and incidental charges due to it from Sultan Mohd.
It also credited this account with the amounts received from Government through hundis or treasury bills.
Clearly therefore though the amounts to be credited to the account of Sultan Mohd. used to come by treasury bills or hundis from Government they were amounts received by the bank on behalf of Sultan Mohd. to be credited to his account, and the Government was agent of Sultan Mohd. for the purpose of depositing the income from villages, management of which was taken over by Government under the Council Order, in order to liquidate the loan taken by Sultan Mohd. from the bank.
The bank when it reversed the entries made no reference to Sultan Mohd. and did not take his consent thereto.
In these circumstances the contention of the respondents is that it was not open to the bank to reverse the entries and thus saddle Sultan Mohd. with the liability for this sum after it had been credited into his account on the basis of hundis or treasury bills received by the bank from Government.
We are of opinion that this contention of the respondents is correct, and the High Court was right in the view it took of the legal position.
It is true that on the facts shown there was double payment for a certain period due to mistake on the part of Government.
The question however is whether it was open to the bank to reverse the entries in the manner it did without reference to Sultan Mohd.
It has not been and cannot be disputed that it is not open to the bank to debit the account of a constituent like Sultan Mohd. with any sum without the, authority of the constituent.
What is however contended on behalf of the appellant is that Govern ment paid the sum twice over by mistake and it was entitled to ask the bank to return the money paid by mistake and reliance in this connection is placed on section 72 of the Contract Act.
There is no, doubt that section 72 of the Contract Act provides that a person to whom money has been paid or anything delivered by mistake or under coercion must repay or return it.
That section in our opinion will only apply when we are dealing with a case of two persons one paying the money and the other receiving the money on behalf of the person paying it.
In such a case if the payment is made by mistake the person receiving the money must return it.
But section 72 in our opinion has no application to a case where money is paid by a person to a bank with instructions that it should be deposited in the account of a third person who is a constituent of the bank. 'As soon as the money is so deposited in the account 797 made no mistake in making the entries.
The bank in our opinion in not concerned with any mistake made by the Accountant General or the treasury in sending the amounts to the bank for the credit of the same to the account of Sultan Mohd.
If the Accountant General or the treasury had made any such mistake it was open to them to recover the amount paid in by mistake from Sultan Mohd.
But the bank could not reverse the entries and thus pay out money from the account of Sultan Mohd. without his authority.
It is obvious that the bank hesitated to reverse the entries and only did it on the threat that the amount would be deducted from the subsidy paid to the bank by the Government.
We have no doubt that the High Court was right that in such circumstances where the amount had been paid even though by mistake into the account of a constituent of the bank it was not open to the bank to reverse the entries at the instance of the person paying in the money into the constituent 's account on the ground that the payer had made a mistake.
We agree with the High Court that section 72 has no application to the facts of this case.
Learned counsel 'for the appellant has referred us to Imperial Bank of Canada vs Bank of Hamilton (1) in this connection.
We are of opinion that that case has no application to the present cases, for the facts therein were different.
The payment had been made by one bank to another bank by mistake; there is nothing to show that the money had been paid into a constituent 's account and thereafter any entry had been reversed in that case.
We are therefore of opinion that the appeals must fail.
They are hereby dismissed.
As the respondents in C.A. 702 did not appear, we pass no order as to costs in that appeal.

summary:
S took a loan from the appellant bank on the strength of an arrange merit whereby the State Government of Jammu and Kashmir would repay it in instalments out of the land revenue to be collected by it from S 's lands.
Such payments on behalf of the Government were mistakenly made each year both by the Accountant General and by the Treasury so that the amount credited by the bank in S 's account represented an over payment by the State.
When the Accountant General realised the mistake he asked the bank to reverse the relevant entries in S 's account so as to cancel the over payment, which the bank after initial objection, did.
Thereafter, on the basis of the reversed entries the bank filed a suit for the recovery of its debt.
It was objected by the respondents (successors in interest to S) that it was not open to the bank to reverse the credit entries in the account of S after they had been made in the manner it was done.
The trial Court held that the amount was paid twice over by mistake and therefore the bank was entitled to reverse the entries at the instance of the Ac countant General without reference to section The High Court however, in appeal, rejected the argument on behalf of the bank that section 72 of the Indian Contract Act allowed it to reverse the entries.
In appeal to this Court, HELD : Section 72 of the Indian Contract Act will only apply when it is a case of two persons one paying the money and the other receiving the money on behalf of the person paying it.
The section has no application where money is paid by a person to a bank with instructions that it should be deposited in the account of a third person who is a constituent of the bank.
[795 G] In the present case, for the purpose of payment, Government was the agent of S and whatever money was paid to be credited to the account of S,, even though it was paid through Government, became his money and it could not be paid out of his account which was in substance the effect of reversing the entries, without his consent.
[796 C] Imperial Bank of Canada vs Bank of Hamilton, , distinguished.


judgement:
Appeal No. 127 of 1966 Appeal from the judgment and order dated December 11, 1962 of the Calcutta High Court in Income tax Reference No. 47 of 1962.
section T. Desai, A. N. Kirpal and R. N. Sachthey, for the appellant.
A. K. Sen and B. P. Maheshwari, for the respondent.
The Judgment of the Court was delivered by Bhargava, J.
This appeal arises out of proceedings for registration of the firm, Juggilal Kamalapat, Calcutta, under section 26A ,of the Income Tax Act (hereinafter referred to as "the Act") for the assessment year 1943 44.
Prior to this assessment year, the three Singhania brothers, Sir Padampat Singhania, Kamiapat Singhania and Lakshmipat Singhania, were carrying on a hosiery business in the name of Messrs. Juggilal Kamalapat with Head Office at Kanpur and a branch at Calcutta.
On November 29, 1939, these three brothers executed a deed of partnership, by which one Jhabbarmal Saraf was taken in as a partner, and under this deed, all the four partners had equal shares.
On October 27, .1941, the three brothers executed a trust deed known as the Kamla Town Trust, the principal object of which was the welfare of the employees of Juggilal Kamalapat Cotton Spinning and Weaving Mills Ltd. Under this deed, the three brothers became the first trustees.
On December 2, 1942, a Deed of Relinquishment was executed by the three brothers, relinquishing their rights and claims to all the properties and assets of the firm, Juggilal Kamalapat, in favour of Jhabbarmal Saraf and of themselves in the capacity of the three first trustees of the Kamla Town Trust.
This relinquishment deed purported to recognise an earlier oral relinquishment which was stated as having been operative with 786 effect from March 26, 1942.
On December 1, 1942, a Partnership Deed was executed between Jhabbarinal Saraf and the three trustees, by which they purported to constitute a partnership firm taking effect from March 27, 1942, the two partners in the firm being Jhabbarmal Saraf and the Kamla Town Trust represented by these three trustees.
The shares of the two partners in this partnership were: Kamla Town Trust . As. /12/ , and Jhabbarmal Saraf. As.
The firm, Juggilal Kamalapat, which had been carrying on the business of hosiery, owned both movable and immovable properties at Belur near Calcutta.
The immovable properties consisted of lands and buildings constructed for the use of the factory for manufacturing hosiery, and they were shown in their balance sheet as properties belonging to the firm.
The firm had also been showing expenses incurred for maintaining or making additions or alterations to these buildings in their accounts and had been claiming depreciation in respect of them.
It was in these circumstances that the new partnership, purporting to consist of the Kamla Town Trust and Jhabbarmal Saraf, applied for registration under section 26A of the Act for the assessment year 1943 44.
The Income tax Officer rejected this claim and, in doing so, also took notice of the fact that a sum of Rs. 50,000/ had been introduced into this partnership firm by the Trust.
The reason given by the Income tax Officer for not accepting the registration need not be mentioned here, because that reason was not accepted by the Tribunal and was not urged before the High Court or before this Court on behalf of the Commissioner.
On appeal, the Appellate Assistant Commissioner upheld the order of the Income tax Officer for reasons given by him which were different from those given by the Income tax Officer.
Those reasons are again immaterial because those reasons were not accepted by the Tribunal or the High Court and have not been relied upon before us.
The Income tax Appellate Tribunal upheld the order rejecting the application for registration under section 26A on the main ground that the Relinquishment Deed dated 2nd December 1942, being an unregistered document, could not legally transfer rights and title to the immovables owned by the firm in favour of the Kamla Town Trust, and that the transfer of the immovable properties being thus legally ineffective and they being not separable from the other business assets, the entire business of the firm was not legally transferred in favour of the Kamla Town Trust.
Two other reasons were also given that the constitution of the new firm was not notified to any of the Banks with which the old firm was dealing, and the new partnership was not got registered with the Registrar of Firms till May, 1946.
On these facts, at the request of the respondent firm, Juggilal Kamalapat, the following question was referred by the Tribunal or opinion to the Calcutta High Court: 787 "Whether on the above facts and in the circumstances of this case, the partnership, as evidenced by the Deed of 1 st December 1942, legally came into existence and as such should be registered?" When this reference came up before the High Court on two different occasions, the High Court sent back the case for submission of further statements of the case to the Tribunal, because the High Court felt that facts, necessary to hold whether the respondent firm claiming registration was a genuine firm or not, had not been properly found by the Tribunal in its appellate order.
On the first occasion, when submitting the supplementary statement of the case, the Tribunal purported to submit two different questions in lieu of the question which had been already submitted for opinion to the High Court.
The two questions thus newly suggested were: "(1) Whether in the facts and circumstances of this case, can the non registration of Relinquishment Deed invalidate the transfer of the business assets to the new partnership ?, and (2)Can the registration application be rejected merely on the ground that the business assets were not legally transferred to the new partnership ?" The High Court disposed of the reference by giving the following answer: "Regard being had to the admissions made on behalf of the department, the facts and circumstances mentioned in paragraph 6 of the statement of case dated 13th March 1952 do not show that there was any legal flaw in the consti tution of the partnership firm as evidenced by the deed of 1st December, 1942.
Upon such evidence, it must be concluded that it did come into existence and there is no impediment to its registration under Section 26A of the Income tax Act.
It is made clear that the question itself postulates the facts and circumstances and therefore, the conclusion is based upon them.
In view of the facts in this case, there will be no order as to costs.
" This appeal has been brought up by the Commissioner of Income tax against this answer returned by the High Court on certificate under section 66A(2) of the Act.
It appears from the judgment delivered by the High Court that when the reference came up before it, an argument was raised on behalf of the Commissioner of Income tax that the Tribunal had recorded a finding of fact that the firm seeking registration, consisting of the Kamla Town Trust and Jhabbarmal Saraf, was not a genuine firm and that this should be the answer returned by the 788 High Court to the Tribunal.
It was in view of this point raised before the High Court that the High Court considered it necessary to remand the case twice to the Tribunal to ask for supplementary .statements of the case under section 66(4) of the Act.
At the final hearing, however, the High Court held that it could not be accepted that the Tribunal had, as a question of fact, recorded the finding that this firm seeking registration was not genuine and had never come into existence, and, thereupon, proceeded to deal with the question referred as a question of law so as to determine whether the firm had come into existence as a legally valid firm.
In this appeal before us, again, it was urged by Mr. section T. Desai on behalf of the Commissioner that the High Court was wrong in holding that it was not bound to return the answer to the Tribunal that the partnership seeking registration was not genuine in fact.
In our opinion, the question sought to be raised on behalf of the Commissioner should not have been allowed to be raised by the High Court even at the earliest stage, and that it was the error .committed by the High Court in entertaining this question that has resulted in unnecessary proceedings and consequent delay.
When the case first came up before the High Court, the question that was referred in the statement of the case was, as we have mentioned above, whether the partnership legally came into existence and, as such, should be registered.
The existence of a firm could be challenged on two alternative grounds.
One was that, in fact, on the evidence, it could not be held that such a firm had at all been constituted and had come into existence.
The other was that even though it purported to come into existence as a fact, it could not claim to be a valid partnership because of some legal defect, or, in other words, whether its existence was valid in law.
On the face of it, the question that was referred to the High Court for opinion was the second question and not the first one.
The first question, in fact, could not have been referred to the High Court at all for opinion, because that would be a pure question of fact on which the decision of the Tribunal would be final and no reference to the High Court would lie under section 66.
A reference to the High Court lies only on a question of law.
The High Court, when requested to answer the question referred in the first statement of the case, should, therefore, have confined itself to the legal aspect of the existence of the partnership and should not have entered at all into the question whether the partnership had come into existence in fact or not.
The Tribunal which had passed the appellate order in these proceedings consisted of two Members, and the first statement of the case was submitted by those very Members.
It is clear that they themselves, when making the reference to the High Court, were of the view that they had not anywhere recorded a finding that the firm had not come into existence in fact, because, if they had come ,to such a finding, no question of law could possibly have been 789 referred by them to the High Court.
The existence in law of a firm, which does not exist in fact, could not possibly be found by the High Court on the question referred.
Consequently, we must reject the submission made on behalf of the Commissioner that, in this case, the High Court should have gone into the question of existence of the respondent firm as a question of fact; and in this appeal also, we must proceed on the basis that the respondent firm did in fact come into existence, and that all that the High Court was called upon to decide was whether it also came into existence It appears to us that, in this case, the submissions that were made on behalf of the Commissioner before the High Court and which have been made before us have ignored the effect of the important relevant documents and have unnecessarily placed too much reliance on the Deed of Relinquishment.
The Tribunal found that a Kamla Town Trust had been constituted of which the three Singhania Brothers were the Trustees.
The Tribunal also found that a deed of partnership was executed so as to constitute the firm Juggilal Kamalapat, consisting of two partners, the Kamala Town Trust, represented by the three trustees, and Jhabbarmal Saraf.
Their shares in the profits and losses were also specified in the deed of partnership.
There was the further finding by the Income Tax Officer that the Kamla Town Trust, which entered into the partnership, actually introduced a sum of Rs. 50,000/ as its capital ill this partnership firm.
On these facts by themselves, it should have been held that a valid partnership had come into existence.
So far as the deed of relinquishment is concerned, learned counsel appearing on behalf of the Commissioner has not been able to show to us any provision of law, or any decision of a Court laying down that a deed of relinquishment executed by partners of a firm in respect of their share and interest in a firm required registration, in case the firm owned immovable properties.
In this connection, learned counsel for the respondent firm brought to our notice a recent decision of this Court in Addanki Narayanappa and Another vs Bhaskara Krishnappa (dead) and thereafter his heirs, and Others(1) where the question that came up for consideration was whether the interest of a partner in partnership assets comprising of movable as well as immovable property should be treated as movable or immovable property for the purposes of section 17(1) of the .
The Court upheld the view of the Full Bench of the Andhra Pradesh High Court in Addanki Narayanappa & Anr.
vs Bhaskara Krishtappa & Ors.
() Mudholkar, J., speaking for this Court held: "It seems to us that looking to the scheme of the Indian Act, no other view can reasonably be taken.
The whole concept of partnership is to embark upon a (1) ; (2) I.L.R. 1959 A.P.p.
387 790 joint venture and for that purpose to bring in as capital money or even property including immovable property.
Once that is done, whatever is brought in would cease to be the exclusive property of the person who brought it in.
It would be the trading asset of the partnership in which all the partners would have interest in proportion to their share in the joint venture of the business of partnership.
The person who brought it in would, therefore, not be able to claim or exercise any exclusive right over any property which he has brought in, much less over any other partnership property.
He would not be able to exercise his right even to the extent of his share in the business of the partnership.
As already stated, his right during the subsistence of the partnership is to get his share of profits from time to time as may be agreed upon among the partners and after the dissolution of the partnership or with his retirement from partnership of the value of his share in the net partnership assets as on the date of dissolution or retirement after a deduction of liabilities ,ties and prior charges.
" On this basis, the ultimate decision was that a deed, evidencing the transfer of an interest of a partner in partnership assets, does not require registration even though the partnership assets are comprised of movable as well as immovable property.
A Full Bench of the Lahore High Court in Ajudhia Pershad Ram Pershad vs Sham Sunder and Others( ') held that the interest in a partnership of a partner is to be regarded as movable property when it is sought to be dealt with under 0 .
21 r. 49, Civil Procedure Code, notwithstanding that at the time when it is charged or sold, the partnership assets include immovable property.
The Deed of Relinquishment, in this case, was in respect of the individual interest of the three Singhania Brothers in the assets of the partnership firm in favour of the Kamla Town Trust, and consequently, did not require registration, even though the assets of the partnership firm included immovable property, and was valid without registration.
As a result of this deed, all the assets of the partnership vested in the new partners of the firm.
In the alternative, we think that, even if it had been accepted that this deed of relinquishment required registration, that would not lead to the conclusion that the partnership seeking registration was not valid and had not come into existence in law.
The deed of relinquishment could, at best, be held to be invalid in so far as it affected the immovable properties included in the assets of the firm; but to the extent that it purported to transfer movable assets of the firm, the document would remain valid.
The deed could clearly be divided into two separate parts, one relating to immovable properties, and the other to movable assets; and the part of the deed dealing with movable assets could not be held invalid for want (1) I.L.R 28 Lab.
791 of registration.
A deed of relinquishment is in the nature of a deed of gift, where the various properties dealt with are always separable, and the invalidity of the deed of gift in respect of one item cannot affect its validity in respect of another.
This view was expressed by the Madras High Court in Perumal Ammal vs Perumal Naicker & Anr.(1) A deed of relinquishment, or a deed of gift, differs from a deed of partition in which it is not possible to hold that the partition is valid in respect of some properties and not in respect of others, because rights of persons being partitioned are adjusted with reference to the properties subject to partition as a whole.
In the case before us, therefore, the deed of relinquishment was valid at least in respect of movable properties, and the partnership seeking registration, thus, became owner of all the movable assets of the,partnership in addition to having contributed a sum of Rs. 50,0001 as capital investment in it.
The Kamla Town Trust and Jhabbarmal Saraf constituted the partnership under a deed of partnership, which was properly executed, and in these circumstances, the partnership that came into existence was clearly valid in law.
There is, therefore, no force in this appeal and it is dismissed with costs.
V.P.S. Appeal dismissed.
(1) I.L.R 44 Mad.

summary:
Three brothers and J entered into a partnership business.
The firm owned both movable and immovable properties.
Later, the three brothers created a Trust, with themselves as the first three trustees.
They also executed an unregistered deed of relinquishment by which they relinquished their rights in and claims to all the properties and assets of the firm, in favour of J. and of themselves in the capacity of trustees.
A new partnership firm was constituted between J. and the Trust by means of a partnership deed which specified the shares of the two partners in the profits and losses.
The Trust introduced a sum.
of Rs. 50,000 as its capital in the new firm.
For the assessment year 1943 44 the new firm applied for registration under section 26A of the Indian Income tax Act, 1922 but the Income tax Officer, Appellate Assistant Commissioner 'and the Appellate Tribunal rejected the application.
The Tribunal relied mainly on the ground that the deed of relinquishment being unregistered could not legally transfer the rights and the title to the immovable properties owned by the original firm, to the Trust and that as the immovable properties were not separable from the other business assets there was no legal transfer of any portion of the business assets of the original firm in favour of the Trust.
On a reference to the High Court, as to whether the new partnership legally came into existence and, as such, should be registered, it was contended on behalf of the Commissioner that the Tribunal had recorded a finding of fact that the firm seeking registration was not a genuine one and had never come into existence.
The High Court, after calling for further statements, held that the Tribunal had not recorded any such finding of fact, that the firm did in fact come into existence, and that there was no impediment to its registration.
in appeal to this Court, HELD : (i) The existence of a firm could be challenged on two alternative grounds; (a) that a firm had not come into existence at all, and (b) that though it came into existence in fact, its existence was not valid in law.
In the present case it was only the second question that was referred to the High Court.
The first could not at all be referred to the High Court as it would be a pure question of fact; and if the Appellate Tribunal had in fact recorded a finding of fact that the firm had not come into existence, the question of law referred to the High Court, would not arise at all.
Therefore, the new firm did in fact come into existence.
[788 E H] (ii)The new partnership between the Trust and J. was constituted under a deed which was property executed, was valid in law, and so the firm should be registered.
[791 C D] 785 The deed of relinquishment was in respect of the individual interests of the three brothers in the assets of the original firm, in favour of the Trust, and consequently, did not require registration, even though the assets of that firm included immovable property.
The deed was therefore valid without registration.
[790 F] Addanki Narayanappa vs Bhakara Krishnappa, ; followed.
Even if the deed of relinquishment required registration, it could only be invalid insofar as it affected immovable properties, but to the extent that it purported to transfer movable assets of the original firm, it would be valid.
A deed of relinquishment is in the nature of a deed of gift where the various properties dealt with are separable.
In the present case, therefore, the deed of relinquishment was valid at least in respect of movable properties, and the partnership seeking registration thus became owner of all the movable assets of the first partnership in addition to the Rs. 50,000 contributed as a capital investment by the Trust.
[790 G; 791 A, C]


judgement:
l Appeal No. 11 29 of 1965.
Appeal from the judgment and order dated April 15, 16, 17, 1963 of the Bombay High Court in Wealth Tax Reference No. 2 of 1961.
R.J. Kolah, N. D. Karkhanis and 0.
C. Mathur, for the appellant.
B. Sen, R. Ganapathy Iyer and R. N. Sachthey, for the res pondent.
769 The Judgment of the Court was delivered by Shah, J.
For the assessment year 1957 58 the appellant Company claimed in proceedings for assessment of wealth tax that the following four amounts be deducted in the computation of its net wealth: (1)Rs.
29,44,421 in, respect of income tax liability relating to the assessment year 1957 58.
This amount included Rs. 2,95,869 representing the last instalment of advance tax under section 18A in respect of which a notice of demand had been issued.
(2)Rs.
3,70,083 in respect of business profits tax liability.
(3) Rs. 20,23,500 in respect of proposed dividend.
(4) Rs. 25,02,675 "on account of accrued liability for gratuity to workmen and staff as per the award of Industrial Court and Labour Appellate Tribunal.
" The claim was rejected by the Wealth tax Officer.
The Appellate Assistant Commissioner accepted the claim of the appellant Company in respect of the last instalment of the advance tax for which a notice of demand had been issued, and rejected the claim in respect of the rest.
The Income tax Appellate Tribunal upheld the claim of the appellant Company in respect of the 1st, 2nd and the 4th items and rejected the claim in respect of the 3rd item.
At the instance of the Commissioner, the following four questions were referred to the High Court of Judicature at Bombay under section 27(1) of the Wealth tax Act 27 of 1957: "(1) Whether on the facts and circumstances of this case the last instalment of advance tax in the sum of Rs. 2,95,869 paid by the assessee after the valuation date in accordance with the notice of demand dated 20 10 1956 is an admissible deduction under Sections 7(2) and 2(m) of the Wealth tax Act for the purpose of computation of the net wealth of the assessee for the assessment year 1957 58 ? (2)Whether on the facts and circumstances of the case in computing the net wealth of the assessee under Section 7(2) read with Section 2(m) of the Wealth tax Act the liability for income tax and business profits tax could be allowed as a deduction? (3) Whether on the facts and circumstances of the case the liability in the sum of Rs. 25,02,675 which arose as a result of the awards dated 28 10 1948, 28 11 1956 and 17 10 1954 before the valuation date or any part thereof is allowable as a deduction in determining the net wealth of the assessee under Section 7(2) read with Section 2(m) of the Wealth tax Act ? (4)Whether on the facts and circumstances of the case of the sum of Rs. 20,23,500 being the provision made for dividends and shown as a liability in the balance sheet of the assessee company could be allowed as a deduction in computing the net wealth of the assessee company?" At the hearing before the High Court, the fourth question was not pressed by the appellant Company.
The High Court answered the first question in the affirmative, the second question in the affirmative insofar as it related to the estimated liability of business profits tax subject to verification by the Wealth tax Officer, and in the negative insofar as it related to the estimated liability of income tax.
The third question was answered in the negative.
In this appeal the Company challenges the correctness of the answers to the second part of the second question and the third question.
The second question insofar as it relates to estimated liability for payment of income tax needs no detailed consideration, for the answer thereto will be governed by the judgment of this Court in Kesoram Industries and Cotton Mills Ltd. vs Commissioner of Wealth tax (Central, Calcutta( ').
It was held by this Court in that case that liability to pay income tax was a present liability though the tax became payable after it was quantified in accordance with ascertainable data: there was therefore a perfected debt at any rate on the last day of the accounting year and not a contingent liability, and the amount of the provision for payment of income tax in respect of the year of account was a "debt owed" within the meaning of section 2(m) on the valuation date and was as such deductible in computing the net wealth.
The view expressed by the High Court on the second question insofar as it relates to provision for income tax cannot therefore be sustained and that part of the question should be answered in the affirmative.
There remains the third question.
Counsel for the Company had conceded before the High Court that the liability to pay gratuity to the employees whose services were not terminated in the relevant year of account was merely contingent, since it arose on the happening of certain events such as death, physical incapacity, voluntary retirement, or resignation, and was on that account not a debt within the meaning of section 2(m) of the Act.
But it was contended before the High Court that the present value of the liability for payment of gratuity was a permissible deduction in valuing the assets of the business of the assessee under section 7(2)(a) of the Act.
The (1)[1966] 2 S.C.R. 688 : ; 772 2.
On voluntary retirement or resignation of an employee After 15 years ' continuous service in the company 15 months ' salary.
On termination of his service by the Company (a)After 10 years ' continuous service but less than 15 years ' service in the company 3/4th of one month 's salary for each year of service.
(b)After 15 years ' continuous service in the company 5 months ' salary.
A gratuity will not be paid to any employee who is dismissed for dishonesty or misconduct.
" The right to obtain gratuity under the awards arises only when there is determination of employment and not before.
The liability does not exist hi praesenti: it is contingent upon the determination of employment.
This Court pointed out in Kesoram Industries & Cotton Mills ' case( ') at p. 703: 'debt is a sum of money which is now payable or will become payable in future by reason of a present obligation: debitum in praesenti, solvendum in futuro. ' The said decisions also accept the legal position that :a liability depending upon a contingency is not a debt in praesenti or infuturo till the contingency happened.
But if there is a debt the fact that the amount is to be ascertained does not make it any the less a debt if the liability is certain and what remains is only the quantification of the amount.
In short, a debt owed within the meaning of section 2(m) of the Wealth tax Act can be defined as a liability to pay in praesenti or in futuro an ascertainable sum of money.
" Observations made by the High Court of Gujarat in Commis sioner of Wealth tax, Gujarat vs Ajit Mills Ltd.,(2) that deduction for an amount claimed on account of liability for gratuity for workers and employees based on awards of the labour courts and agreements will be admissible deductions in the computation of the net wealth are plainly obiter, and in our judgment are not correct.
The decision of the House of Lords in Southern Railway of Peru Ltd. vs Owen (Inspector of Taxes) (3) that the assessee company (1) ; (3) ; : (2) 771 High Court rejected that contention.
Counsel for the Company has in this appeal contended that no such concession as is recorded in the judgment of the High Court was made, and in any event, the concession being on a question of law was not binding upon the appellant Company.
Section 2(m) at the material time provided: .lm15 " net wealth ' means the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included in his net wealth as on that date under this Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date other than, (i)debts which under Section 6 are not to be taken into account; (ii)debts which are secured on, or which have been incurred in relation to any property in respect of which wealth tax is not chargeable under this Act; " By section 3 the wealth tax is charged for every financial year commencing on and from the first day of April, 1957 on the net wealth on the, corresponding valuation date of every individual, Hindu undivided family and company at the rate or rates specified in the Schedule.
Broadly speaking net wealth is the difference on the valuation date between the aggregate value computed in accordance with the provisions of the Act of the assets belonging to the assessee and the aggregate value of all the debts owed by the assessee.
If there is no debt owed on the valuation date, it can obviously not be deducted in determining the net wealth which is liable to tax under the Wealth tax Act.
Apart from the concession made by counsel for the Company there is little doubt on the plain terms of the awards that the liability to pay gratuity to the employees of the appellant Company on determination of employment is a mere contingent liability which arises only when the employment of the employee is determined by death, incapacity, retirement or resignation.
The relevant terms of the awards dated October 28, 1948, November 28, 1956 and October 17, 1954 are as follows: "Gratuity should be paid. . on the following, scale: 1.On the death of an employee, while in service of the company or on his becoming physically or mentally incapacitated for further service one month 's salary for each year of service . . . 773 was entitled to charge against each year 's receipts the cost of making provision for the retirement payments which would ultimately be payable as it had the benefit of the employees ' services during that year, provided the present value of the future payments could be fairly estimated, were a permissible deduction in the computation of income tax, have in our judgment no relevance in this case.
In Southern Railway of Peru Ltd 's case( ') under the legislation of Peru a Company operating a railway was bound to pay its employees compensation on the termination of their services.
The right to receive compensation arose on dismissal or on termination of the employment by the employer by proper notice, or on such termination by the death of the employee or on the expiry of the term of ' the employment.
The compensation was an amount equivalent to one month 's salary at the rate in force at the date of determination for every year of service.
The company claimed in the computation of taxable income, under the Income tax Act, 1918, to be entitled to charge against each year 's receipts the cost of making provision for the retirement payments which would ultimately 'be thrown on it, calculating what sum would be required to be paid to each employee if he retired without forfeiture at the close of the year and setting aside the aggregate of what was required in so far is the year had contributed to the aggregate.
It was held that the company was not entitled to make the deductions, but the company was entitled to charge against each year 's receipts the cost of making provision for the retirement payments which would ultimately be payable as it had the benefit of the employees ' services during that year, provided the present value of the future payments could be fairly estimated.
The question arose under the English Income tax Act of 1918.
Lord MacDermott observed at p. 345: say that, in computing his taxable profits for a particular year, a trader, who is under a definite obligation to pay his employees for their services in that year ail immediate payment and also a future payment in some subsequent year, may properly deduct, not only the immediate payment, but the present value of the future payment, provided such present value can be satisfactorily determined or fairly estimated.
" Similar observations were made in the judgment of Lord Radcliff.
But the House in that case was concerned to determine the deductibility of the present value of a liability which may arise in future in the computation of taxable profits for the relevant year under the Income tax Act.
The same considerations cannot, however, apply to a case under the Wealth tax Act, where the liability to pay wealth tax is charged upon the net wealth of an assessee.
; 774 In Commissioner of wealth tax, Gujarat vs New Rajpur Mills Ltd.( ') the assessee company claimed to deduct gratuity payable to employees under an agreement entered into with the labour associations before the valuation date.
The Court in that case observed that the liability was not a debt owed by the assessee on the valuation date since the gratuity was not payable on the valuation date, but was payable only on fulfilment of the ,contingencies set out in those agreements.
But the Court proceeded to observe that since contingent liabilities can be taken into account while computing the net wealth of the asseessee under section 7(2)(a) ,the liability for payment of gratuity under such agreements would 'have to be estimated and the estimated value of the contingent liability would be a permissible deduction in computing the net wealth of the assessee.
In our view the first observation of the Court :is correct, but the second is not.
We will presently set out the reasons for that view.
The alternative plea that under section 7(2)(a) of the Act the appellant Company is entitled to claim deduction even if it cannot do so ,under section 2(m) has, in our judgment, no force.
Section 7 deals with the manner of valuation of assets.
It provides insofar as it is material: "(1) The value of any asset, other than cash, for the purposes of this Act, shall be estimated to be the price which in the opinion of the Wealth tax Officer it would fetch if sold in the open market on the valuation date.
(2)Notwithstanding anything contained in subsection (1), (a)where the assessee is carrying on a business for which accounts are maintained by him regularly the Wealth tax Officer may, instead of determining separately the value of each asset held by the assessee in such business, determine the net value of the assets of the business as a whole having regard to the balance sheet of such business as on the valuation date and making such adjustments therein as the circumstances of the case may require;" Section 7 falls in Ch.
II which deals with the charge of wealth tax and assets subject to such charge: it is intended to provide machinery for determination of the value of assets.
It was observed in the minority judgment in Kesoram Industries & Cotton Mills ' case(2) at p.717 : "By the first sub section the Wealth tax Officer is authorised to estimate, for the purpose of determining the (1) (2) ; : ; 775 value of any asset, the price which it would fetch, if sold in the open market on the valuation date.
But this rule in the case of a running business may often be inconvenient and may not yield a true estimate of the net value of the total assets of the business.
The legislature has therefore pro vided in sub section (2)(a) that where the assessee is carrying on a business for which accounts are maintained by him regularly, the Wealth tax Officer may determine the net value of the assets of the business as a whole, having re gard to the balance sheet of such business as on the valua tion date and make such adjustments therein as the circum stances of the case may require.
But the power conferred upon the tax officer by section7(2) is to arrive at a valuation of the assets, and not to arrive at the net wealth of the assessee.
Section 7(2) merely provides machinery in certain special cases for valuation of assets, and it is from the aggregate valuation of assets that the net wealth chargeable to tax may be ascertained.
The power conferred upon the tax officer to make adjustments as the circumstances of the case may require is also for the purpose of arriving at the true valueof the assets of the business.
Sub section (2)(a) of section 7 contemplates the determination of the net value of the assets having regard to the balance sheet and after making such adjustment as the circumstances of the case may require.
It does not contemplate determination of the net wealth, because net wealth can only be determined from the net value of the assets by making appropriate deductions for debts owed by the assessee.
The argument raised by counsel for the assessee is that substantially section 7(2) is a definition section, which extends, for the purposes of the Act, the definition of the 'net wealth ' of assessees carrying on business.
There is no warrant for this argument in the language used in section 7(2).
Counsel was unable to suggest any rational explana tion why, if what he contends was the intention, Parliament should have adopted this somewhat roundabout way of incorporating a definition of net wealth in a section dealing with valuation of assets.
" The majority of the Court did not express any opinion on this question.
From the terms of section 2(m) it appears clear that the tax officer must first determine the aggregate value of all the assets belonging to the assessee on the valuation date, and then determine the aggregate value of all the debts owed by the assessee on the valuation date.
Excess of the aggregate value of the assets over the debts is the net wealth.
The aggregate value of the assets must be 776 computed in accordance with the provisions of section 7.
But in the aggregation of the value of all the debts owed by the assessee on the valuation date, section 7 has no operation.
In holding in New Rajpur Mills ' case() that a contingent liability can be taken into account while computing the net wealth of the assessee under section 7(2) (a), in our judgment, the true function of section 7(2)(a) of the Wealth tax Act was not appreciated.
Section 7 does not deal with the computation of net wealth.
It deals with the computation of the aggregate value of the assets.
Under section 7 the Wealth tax Officer is competent, where the assessee is carrying on business of which accounts are maintained regularly, to determine the net value of the assets of the business as a whole.
But in doing so he determines the value of the assets of the business as a whole, and not the net wealth of the business.
The appeal therefore is partially allowed.
Insofar as the claim relates to deduction of estimated income tax for the assessment year, the answer wilt be in favour of the appellant company, and in so far as the claim relates to deduction of gratuity payable to the employees of the company, the answer will be in the negative.
There will be no order as to costs in this appeal.
V.P.S. Appeal allowed in part.

summary:
In the computation of the net wealth of the appellant company under section 2(m) of the Wealth Tax Act 1957, two deductions were claimed the company : (i) the amount of estimated income tax for the assessment year and (ii) the amount of gratuity payable by the company to its employees under certain industrial awards.
HELD : The first claim was allowable but not the second.
[776 D] Under section 2(m) of the Act, the Wealth Tax Officer must first determine the aggregate value of all the assets belonging to the assessee on the valuation date, and then determine the aggregate value of all the debts owed by the assessee on the valuation date.
Excess of the aggregate value of the assets over the debts is the net wealth.
But on the terms of the awards the liability to pay gratuity did not exist in present : it was contingent upon the determination of employment by death, incapacity, retirement or resignation of the employee, and not before.
Therefore, it was not a debt owned by the assessee on the valuation date.
[772 C D; 775 H] Nor could the appellant company claim the deduction under section 7(2)(a) of the Act.
The aggregate, value of the assets must be computed in accordance with the provisions of section 7.
But in the aggregation of the value of all the debts owned by the assessee on the valuation date, section 7 has not operation.
Section 7 does not deal with the computation of net wealth but only with the determination of the not value of the assets as a whole.
[776 A C] Kesoram Industries and Cotton Mills Lid.
vs Commissioner of Wealth Tax (Central) (Calcutta), ; , followed.
Observations Contra in Commissioner of Wealth Tax, Gujarat vs Ajit Mills Ltd. and Commissioner of Wealth Tax Gujarat vs New Rajpur Mills , disapproved.
Southern Railway of Peru vs Owen (Inspector of Taxes) ; , explained.


judgement:
Appeal No. 674 of 1965.
Ml 7 Sup.
C. I/66 761 762 Appeal by special leave from the judgment and order dated March 14, 1962 of the Madras High Court in T. C. No. 209 of 1959.
B. Sen and R. N. Sachthey, for the appellant.
A. K. Sen, and R. Ganapathy Iyer, for the respondent.
The respondent is a public limited company incorporated under the Indian Companies, Act, 1913 in the year 1939 and was carrying on the business of manufacture of absorbent cotton wool.
In March 1955, the Board of Directors resolved to establish a new spinning unit under the name of Sudarsanan Spinning Mills for which a licence was obtained from the Government of India under the Industries (Development and Regulation) Act, 1951 in August 1955.
The respondent placed orders for purchase of necessary spinning machinery and plant in the months of January and February, 1956.
The construction of factory buildings was taken in hand in March, 1956, and these constructions were completed by December, 1957.
The erection of the spinning machinery and the plant in the buildings was completed in several stages commencing from June, 1957.
A licence from the Inspector of Factories for working the factory was obtained in June, 1958.
The statement of the case further mentioned that the time given to complete the project was extended by the Government up to 17th March, 1959.
The respondent was assessed to wealth tax for the assessment year 1957 58, and in that year the respondent claimed that, in computing the wealth on the valuation date which was 30th September, 1956, an amount of Rs. 1,43,727 should be deducted as being the amount laid out in setting up this new unit.
The Wealth Tax Officer disallowed the claim on the ground that the unit was set up prior to the date on which the Wealth Tax Act (hereinafter referred to as "the Act") came into force, i.e., 1st April 1957.
On the same basis, the Appellate Assistant Commissioner and the Income tax Appellate Tribunal upheld that order.
Thereupon, at the request of the respondent, the following question of law was referred for opinion of the High Court of Madras: "Whether the aforesaid asset of Rs. 1,43,727 is exempt under section 5(1)(xxi) read with the second proviso thereunder of the Wealth tax Act?" The High Court answered the question in favour of the respondent, and consequently, this appeal has been brought up to this Court by the Commissioner of Wealth Tax, Madras, by special leave.
The question that fell for determination depended on the interpretation of section 5(1)(xxi) of the Act read with the second proviso to that clause which are reproduced below: 763 .lm15 "5(1)(xxi) that portion of the net wealth of a company established with the object of carrying on an industrial undertaking in India within the meaning of the Explanation to clause (d) of section 45, as is employed by it in a new and separate unit set up after the commencement of this Act by way of substantial expansion of its undertaking: Provided that (a) (b) Provided further that this exemption shall apply to any such company only for a period of five successive assessment years commencing with the assessment year next following the date on which the company commences operations for the establishment of such unit.
" It has been urged before us by learned counsel for the Commissioner that the main provision of clause (xxi) should be interpreted in conjunction with the second proviso so as to give a harmonious construction to both parts of the provision with which we are concerned.
Relying on this principle, he urged that we should hold that a new and separate unit is set up only when the company commences operations for the establishment of such unit.
He relied on the principle stated by Maxwell in his book 'On Inter pretation of Statutes ' 11th Edn.
at P. 155 that there is no rule that the first or enacting part is to be construed without reference to the proviso.
"The proper course is to apply the broad general rule of construction, which is that a section or enactment must be construed as a whole, each portion throwing light, if need be, on the rest." "The true principle undoubtedly is that the sound interpretation and meaning of the statute, on a view of the enacting clause, saving clause, and proviso, taken and construed together is to prevail.
" The view taken by the High Court was challenged on the ground that the High Court had interpreted the principal clause without giving full effect to the language of the proviso.
The High Court held that unless a factory is erected and the plants and machinery installed therein, it cannot be said to have been set up.
The resolution of the Board of Directors, the orders placed for purchasing machinery, licence obtained from the Government for constructing the machinery, are merely initial stages towards setting up, however necessary and essential they may be to further the achievement of the end.
It is not, however, the actual functioning of the factory or its going into production that can alone be called setting up of the factory.
The setting up is perhaps a stage anterior to the commencement of the factory.
Thereafter, 764 the High Court referred to a decision of the Bombay High Court in Western India Vegetable Products, Limited vs Commissioner of Income tax, Bombay City,( ') and on its basis, concluded that the proper meaning to be assigned to the expression "set up" in section 5(1)(xxi) would be "ready to commence business.
" We are unable to agree with the learned counsel for the Commissioner that in arriving at this view, the High Court committed any error.
A unit cannot be said to have been set up unless it is ready to discharge the function for which it is being set up.
It is only when the unit has been put into such a shape that it can start functioning as a business or a manufacturing Organisation that it can be said that the unit has been set up.
The expression used in the proviso, under which the period for which the exemption is available is to be deter mined, is not the same as used in the principal clause.
In the proviso, the period of five successive years of exemption has to commence with the assessment year next following the date on which the company commences operations for the establishment of the unit.
Operations for the establishment of a unit, from the very nature of that expression, can only signify steps that have to be taken to establish the unit.
The word "set up" in the principal clause, in our opinion, is equivalent to the word "established", but operations for establishment cannot be equated with the establishment of the unit itself or its setting up.
The applicability of the proviso has, therefore, to be decided by finding out when the company commenced operations for establishment of the unit, which operations must be antecedent to the actual date on which the company is held to have been set up for purposes of the principal clause.
This is also the meaning that the Bombay High Court derived in the case of Western India Vegetable Products Ltd.(,) where that Court was concerned with the interpretation of the expression "set up" as used in section 2(l1) of the Income tax Act.
That Court held: "It seems to us that the expression 'settling up ' means, as is defined in the Oxford English Dictionary, 'to place on foot" or 'to establish ', and is contradistinction to 'commence. ' The distinction is this that when a business is established and is ready to commence business, then it can be said of that business that it is set up.
But before it is ready to commence business it is not set tip.
" This view was expressed when that Court was considering the difference between the meaning of the expression "setting up a business" and " commencing of a business.
" In the case before us, the proviso does not even refer to commencement of the unit.
The criterion for determining the period of exemption is based on the commencement of the operations for the establishment of the unit.
These operations for establishment of the unit cannot be simultaneous with the setting up of the unit, as urged on behalf of the Commis sioner, but must precede the actual setting up of the unit.
In fact, (1)26 I.T.R 15 1. 765 it is the operations for establishment of a unit which ultimately culminate in the setting up of the unit.
On this interpretation, it is clear that in this case, the claim put forward by the respondent for exemption has been rightly held to be allowable by the High Court.
In the statement of the case and in its appellate judgment, the Tribunal did not specifically record any finding as to the date when the unit was ready to go into business and to start production.
In the appellate order, it was mentioned that according to the respondent, the unit was set up only when the Inspector of Factories issued a licence to the respondent for working the factory, which was in June, 1958.
In the, statement of the case, the facts recited show that the construction of the factory buildings was completed by December, 1957 and the erection of the spinning machinery and plant was completed in several stages commencing from June, 1957.
On these facts, the High Court, and we consider rightly, proceeded on the basis that the unit was completed and became ready to go into business only after 1st April, 1957, when the Act had already come into force.
Consequently, the condition laid down in the principal clause of section 5(1)(xxi) was satisfied, and the company became entitled to exemption in respect of the value of the assets used up in setting up this unit.
Learned counsel for the Commissioner, however, challenged the right of the respondent to claim this exemption on another ground, viz., that the exemption was claimed in respect of money laid out in a period which was not covered by the period envisaged in the second proviso.
It was urged that if it be held that the unit was set up after the Act had come into force on the 1 st April, 1957, it must also be held that the operations for the establishment of the unit had been commenced by the company almost simultaneously with the unit having been set up, and that date would, therefore, be a date subsequent to the assessment year 1957 58 in which year the exemption was claimed.
This is a question which we do not think can be legitimately raised on behalf of the Commissioner at this stage.
The only contention before the Tribunal on behalf of the Commissioner was that the operations for the establishment of the unit had been commenced by the respondent before the Act came into force, and that it should be held that the unit was also set ;up at the same time when those operations were commenced.
There was no contention at any stage that the operations for the establishment of the unit were commenced at a subsequent stage.
In fact, it was only for the purpose of urging that the principal clause was not applicable to the case of the respondent that the position was taken up on behalf of the Commissioner that the operations for establishment of the unit had been commenced before 1st April, 1957, and the unit must be held to have been set up at the same time 766 when those operations were commenced.
That submission, as we have indicated above, has no force.
In any case, the judgments passed by all the Wealth tax Authorities show that it was at no stage in dispute that the operations for establishment of the unit had been commenced by the respondent prior to 1 st April, 1957.
Para 5 of the statement of the case mentions that the the wealth tax officer disallowed the claim on the ground that unit was set up prior to 1st April, 1957.
The Appellate Assistant Commissioner also in his judgment said: "In this view of the matter, the appellant set up the undertaking even prior to 1st April, 1957 as operations were carried out prior to that date for the establishment of the undertaking.
The operations consisted of the seeking of permission from the Government to install the unit, and placing of orders with manufacturers of machinery and advancing of moneys towards the purchase of machinery.
" The Tribunal also disallowed the claim on the basis that the respondent commenced operations for setting up the unit earlier than 1st April, 1957.
It does not appear to be necessary for us to express any opinion as to the particular stage at which it can be said that a company commences operations for the establishment of a unit.
In the present case, the Tribunal proceeded on the basis that, whatever be the exact date of commencement of the operations for establishment of this unit by the respondent, it was certainly before 1st April, 1957; and we consider that that fact, by itself, is sufficient to entitle the respondent to claim the exemption.
The Commissioner cannot, at this stage, be allowed to raise a new question and ask this Court to decide that the date of commencement of the operations for establishment of the unit by the respondent was different from that accepted by the Tribunal.
That question was not raised and dealt with by the Tribunal.
It is not even a question that might have been raised before the Tribunal and the Tribunal might have failed to deal with, nor is it a question which may not have been raised before the Tribunal and, yet, was dealt with by it.
On the principle laid down by this Court in Commissioner of Income tax, Bombay vs Scindia Steam Navigation Co., Ltd.,( ') such a question could not be canvassed before the High Court and cannot be allowed to be raised in this Court.
The question referred to the High Court had to be answered on the basis that the respondent did commence operations for establishing this unit before 1st April, 1957; and the further finding of fact recorded by the Tribunal is that a sum of Rs. 1,43,727/ had been invested in setting up the unit by 30th September, 1956, which was the valuation date for the assessment year 1957 58.
The very first assessment year after the commencement of the operations for establishment of the unit was this assessment year 1957 58, In the Wealth Tax Act, assessment (1) ; I.T.R. 589.
767 year has been defined to mean the year for which tax is chargeable under section 3 of that Act.
Since the Act came into force on the 1st April, 1957, the financial year 1957 58 was the first assessment year for which tax became chargeable, and consequently, for purposes of the second proviso to section 5(1)(xxi), the assessment year following the commencement of operations for establishment of the unit in the case of any company which commenced the operations any time before the 1st April, 1957, will be the assessment year 1957 58.
Prior to the year 1957 58, there was no assessment year as defined under the Act, and consequently, the first assessment year for which exemption could be claimed was this assessment year 1957 58.
The respondent which had commenced operations for establishment of its new unit prior to 1st April, 1957, was rightly allowed exemption in respect of the amount that had been invested by it upto the relevant valuation date.
The answer returned by the High Court was, therefore, correct.
The appeal fails and is Appeal dismissed.
dismissed with costs.

summary:
The respondent Company was assessed to wealth tax for the assessment year 1957 58 and the respondent claimed deduction of an amount laid out for setting up a new unit.
The licence for setting up the new unit was granted in 1955; the construction of the factory building was completed by December 1957; the erection of the machinery and plant was completed in several stages commencing from June 1957; the licence for working the factory was obtained in June 1958; and time given to complete the project also was extended by Government up to March 17, 1959.
The Wealth Tax Officer disallowed the claim on the ground that the unit was, set up prior to the date on which the Wealth Tax Act came into force, ie., April 1, 1957.
This order was upheld in appeals.
But in reference, the High Court answered the question in favour of the assessee, for, it proceeded on the basis that the unit was completed and became ready to go into business after the Act had come into force.
HELD : The assessee was entitled to the claim as it satisfied the condition laid down in cl.
(xxi) of section 5(1) of the Act.
The criterion for determining the period of exemption is based on the commencement of the operations for establishment of the unit.
These operations for establishment of the unit cannot be simultaneous with the setting up of the unit, but must precede the actual setting up of the unit.
[1764 G H] The word "set up" in clause (xxi) of section 5(1) of the Act, is equivalent to the word "established" but operations for establishment cannot be equated with the establishment of the unit itself or its setting up.
The applicability of the, proviso has, therefore, to be decided by finding out when the company commenced operations for establishment of the unit, which operations must be antecedent to the actual date on which the company is held to have been set up for purposes of the principal clause.[1764 D E] Western India Vegetable Products, Limited vs Commissioner of Income tax, Bombay City, referred to.
In the present case, the Tribunal proceeded on the basis that whatever be the exact date of commencement of the operations for establishment of Ibis unit,, it was certainly before April 1, 1957 and that fact by itself is sufficient to entitle the assessee to claim the exemption.
The Commissioner cannot be allowed to raise a new question and ask this Court to decide that the date of commencement of the operation for establishment of the unit by the respondent was different from that accepted by the Tribunal.
That question was not raised and dealt with by the Tribunal, [766 E] Commissioner of Income tax, Bombay vs Scindia Steam Navigation Co., Ltd., ; relied on.