judgement:
Appeal No. 475 of 1960.
Appeal by special leave from the Award dated March 31, 1960, of the Industrial Tribunal, Bombay, in Reference (I. T.) No. 227 of 1959.
M. C. Setalvad, Attorney General for India, G. B. Pal and J. B. Dadachanji, for the appellant.
I. N. Shroff, for the respondents.
December 15.
The Judgment of the Court was delivered by GAJENDRAGADKAR, J.
This appeal by special leave arises from an industrial dispute between the appellant, the Alembic Chemical Works Co. Ltd., and the respondents, its workmen.
The said dispute related to a single demand made by the respondents with regard to leave.
This demand consisted of three parts, (a) one month 's privilege leave with full salary and dearness allowance on completion of eleven months service in a year with a right to accumulate upto six months, (b) one month 's sick leave with full salary and dearness allowance for each year of service with right to accumulate for the entire period of service, and (c) every workman should be entitled to take leave in proportion to the number of days he is in service of the company at the time of his application for the same.
This dispute was referred by the Government of Bombay for adjudication before the Industrial Tribunal under section 10(1)(d) of the XIV of 1947.
The Tribunal considered the contentions raised by the appellant against the respondents ' demands, took into account awards or agreements between employers and their employees in comparable concerns and made its award.
In regard to privilege leave the Tribunal has ordered that leave should be granted to the staff members covered by the reference as follows: Privilege leave upto 3 . 16 days as at present completed years of service per year.
Up to 9 completed years. 22 days per year.
And thereafter .
One month for every 11 months of service.
299 The award allows accumulation of privilege leave upto three years.
As regards sick leave, the Tribunal has ordered that the appellant should give its staff covered by the present award 15 days sick leave in a year with full pay and dearness allowance with a right to accumulate upto 45 days.
It has also directed that no medical certificate should be demanded if sick leave for three days or less is asked for.
In regard to the third item of demand concerning leave in proportion the Tribunal has made appropriate direction which it is unnecessary to set out for the purpose of this appeal.
Before the Tribunal the main contention raised by the appellant was in regard to the propriety and reasonableness of the demand and in regard to the practice prevailing in comparable concerns.
Before this Court, however, the provision made by the award in regard to privilege leave has been attacked mainly on the ground that the Tribunal had no jurisdiction to make such an award having regard to the provisions of section 79 of the (63 of 1948) (hereafter called the Act).
It is urged that section 79 of the Act has made exhaustive and self contained provisions with regard to the granting of annual leave with wages to the employees to whom the said Act applies, and the effect of section 79 is to introduce standardisation in the matter of leave; which means neither the employer voluntarily, nor an Industrial Tribunal by its award, can add to the leave prescribed by the, said section.
In the matter of leave section 79 is a complete code, and no additions to the said leave can be made either by a contract or by an award.
It is common ground that the respondents are governed by the pro visions of the Act.
This point was not raised before the Tribunal, but since it is a point of law which arises on admitted facts we have permitted the learned Attorney General to argue it before us.
The Act was first enacted in 1934 as Act 25 of 1934.
Since then it has been amended from time to time.
Its main object is to consolidate and amend the law regulating labour in factories.
For the purpose of determining which concerns and which employees 300 would be governed by the Act section 2(m) and (1) define "factory" and "worker" respectively.
Even a broad view of the scheme of the Act and a perusal of its provisions would clearly indicate that the Act is a beneficent measure and its policy is to make reasonable provisions for the preservation of health of the workmen, their safety and their welfare.
With that object in view, the Act has made provisions for the regulation of working hours of adults, has regulated the employment of young persons, and has also provided for annual leave with wages to the workmen.
The amendments made in the relevant provisions of the Act from time to time indicate that the Act has been pursuing its beneficent policy slowly but steadily and is attempting to provide for the workmen better and larger amenities in their employment.
It is in the light of this obvious policy and object of the Act that we have to decide the question raised before us by the appellant.
Section 79(1) occurs in Chapter VIII which deals with annual leave with wages.
It provides thus: "79.
Every worker who has worked for a period of 240 days or more in a factory during a calendar year shall be allowed during the subsequent calendar year, leave with wages for a number of days calculated at the rate of (i). if an adult, one day for every twenty days of work performed by him during the previous calendar year; (ii). if a child, one day for every fifteen days of work performed by him during the previous calendar year.
Explanation 1 For the purpose of this sub section (a) any days of lay off, by agreement or contract or as permissible under the standing orders; (b) in the case of a female worker, maternity leave for any number of days not exceeding twelve weeks; and (c). the leave earned in the year prior to that in which the leave is enjoyed; shall be deemed to be days on which the worker 301 has worked in a factory for the computation of the period of 240 days or more, but he shall not earn, leave for these days.
" This section has 11 other sub sections which deal with different aspects and make relevant provisions in regard to annual leave with wages.
It is not disputed that the award purports to make provisions for privilege leave in excess of the annual leave sanctioned by section 79.
Can the Industrial Tribunal direct the appellant to provide such additional privilege leave to its employees?; in other words, does section 79 purport to standardise annual leave with wages so that no departure from the said standard is permissible either way? The appellant 's contention is that except for pre existing awards, agreements, contracts or except for pre existing law no departure from the standardised provision is permissible after section 79 was enacted.
This argument raises the question of construing section 79 in the light of the other relevant provisions of the Act.
It may be conceded that the provisions made by section 79 are elaborate, and in that sense may be treated as self contained and exhaustive.
It is also clear that section 79(1) does not use the expression "not more than or not less than" as it might have done if the intention of the Legislature was to make its provisions correspond either to the minimum or the maximum leave claimable by the employees; but even so, when section 79(1) provides that every worker shall be allowed leave as therein prescribed, the provision prima facie sound,% like a provision for the minimum rather than for the maximum leave which may be awarded to the worker.
If the intention of the Legislature was to make the leave permissible under section 79(1) the maximum to which a workman would be entitled, it would have used definite and appropriate language in that behalf.
We are, therefore, inclined to think that even on a plain construction of section 79(1) it would be difficult to accede to the argument that it prescribes standardised leave which inevitably would mean the maximum permissible until section 79(1) itself is 302 Even on the basis that section 79(1) is capable of the construction sought to be placed on it by the appellant, the question would still remain whether the Raid construction should be preferred to the alternative construction which, as we have just indicated, is reasonably possible.
The answer to this question must be in the negative for two reasons; first, having regard,to the obvious policy and object of the Act, if section 79(1) is capable of two constructions that construction should be preferred which furthers the policy of the Act and is more beneficial to the employees in whose interest the Act has been passed.
It is well settled that in construing the provisions of a welfare legislation courts should adopt what is sometimes described as a beneficent rule of construction; but, apart from this general consideration about the policy and object of the Act, sections 78 and 84 occurring in the same Chapter as section 79 clearly indicate that section 79(1) is not intended to standardise leave provisions as contended by the appellant, and that is the second reason why the appellant 's argument cannot be accepted.
Let us then consider the provisions of Bs.
78 and 84.
Section 78(1) provides that the provisions of Chapter VIII shall not operate to the prejudice of any right to which a worker may be entitled under any other law, or under the terms of any award, agreement or contract of service.
There is a proviso to this sub section which lays down that when such award, agreement or contract of service provides for longer annual leave with wages than provided in this Chapter the worker shall be entitled only to such longer annual leave.
Section 78(2) exempts specified workers from the operation of Chapter VIII.
The first difficulty which this section raises against appellant 's argument is that it undoubtedly recognises exceptions to the leave prescribed by section 79(1).
It is well known that standardisation of conditions of service in industrial adjudication generally does not recognise or permit exceptions; if the hours of work are standardised, for instance, or the wage structure is standardised, it is intended to make hours of work and wages uniform in the whose industry brought 303 under the working of standardisation Standardisation thus inevitably means levelling up of those whose terms and conditions of service were less favourable than the standardised ones, and levelling down those of such others whose terms and conditions were more favourable than the standardised ones.
That being so, if section 79(1) intended to standardise annual leave with wages it would normally not have made provisions in regard to exceptions as section 78(1) obviously does.
Besides, the scope and extent of the exceptions recognised by section 78(1) are decisively against the appellant 's construction of section 79(1).
The learned Attorney General has strenuously contended that the saving provision of section 78(1) applies only to existing law and existing awards, agreements or contracts of service; in other words, his argument is that the Legislature has deliberately decided to except pre existing arrangements and in that sense it is a departure from the usual concept of standardisation.
In our opinion, the assumption that section 78(1) is confined to existing arrangements is plainly inconsistent with a fair and reasonable construction of the said provision.
When s.78(1) refers to any other law it could not have been intended that it is only to existing laws that the reference is made and that the idea underlying the provision was that no law can be passed in future which would grant more generous leave to the employees.
Such a restriction on the legislative activities of the appropriate Legislatures cannot obviously have been intended.
If the reference to law is not confined only to existing law there is no reason why reference to any award, agreement or contract of service should be similarly circumscribed or limited.
We feel no difficulty in holding that what section 78(1) protects are laws, awards, agreements or contracts of service which were then existing or which would come into existence later; that is to say section 78(1) does not affect preexisting arrangements and does not also prohibit future arrangements which would be more generous than section 79(1).
A law may be passed making more generous provisions, or agreements or contracts may 304 be entered into or awards made with the same result.
If that be the true position section 78(1) clearly negatives the theory that section 79(1) provides for standardisation of annual leave with wages.
The provisions of section 84 would also lead to the same result.
Section 84 provides that where the State Government is satisfied that the leave rules applicable to workers in a factory provide benefits which in its opinion are not less favourable than those for which Chapter VIII makes provision it may by written order exempt the factory from all or any of the provisions of Chapter VIII subject to such conditions as may be specified in the order.
Now, the power to exempt factories has to be exercised having regard to the effect of the totality of the benefits which may be afforded to the workers by their respective factories.
This power to exempt also necessarily postulates the existence of better amenities than those guaranteed by Chapter VIII, and that means that if a factory provides better leave amenities to its employees, the State Government may in the interest of the employees exempt the factory from the operation of this Chapter.
The scope of section 84, like the scope of section 78, cannot be limited only to the more favourable benefits which may be existing at the date when the Act was passed.
What is true about the existing benefits would be equally true about the benefits which may be granted by an employer to the employees in future.
Let us illustrate what the con sequence would be if the appellant 's argument is accepted.
Take the case of an employer who has been exempted under section 84 on the ground that the benefits of leave conferred by him on his employees are more favourable to them.
In such a case, the employer may make his benefits still more favourable after exemption is accorded to him; but an employer who has already not provided more favourable benefits would be effectively precluded from making any such provisions in future.
It is difficult to imagine that such a consequence could have been intended by the provisions of this welfare legislation.
305 The history of the amendments made in the relevant provisions of the Act also indicates that the Act has been gradually making more liberal provisions in ' the interest of workmen to whom it applies.
In the original Act as it was passed (25 of 1934) section 34 provided for weekly holiday but no provision was made for holidays with pay.
When the said Act was amended by Act 3 of 1945, section 49A which is equivalent to present section 78(1) without the proviso was inserted; and section 49B provided, inter alia, that every worker who has completed a period of twelve months continuous service in a factory shall be allowed during the subsequent period of twelve months holidays for a period of ten days.
That is how provision for holidays came to be made.
By the ; 'amending Act 63 of 1948, section 78 with the present proviso was enacted; and section 79 made a provision for annual leave with wages.
While making provision for annual leave with wages the section then prescribed a minimum of ten days; subsequently, by amending Act 25 of 1954, section 79 as it stands at present was enacted; and in section 78 the word "annual" has been added to qualify leave in the proviso.
We have thus briefly referred to some changes made in the Act from time to time in order to show that subsequent amendments have sought to make the provisions more liberal.
There is one more point which may incidentally be mentioned whilst we are considering the amendments made in the Act from time to time.
Section 49A which broadly corresponds to section 78 of the present Act saved other laws and terms of any award, agreement or contract of service just as section 78(1) does.
Now, if the said section is construed on the lines which the appellant wants us to construe section 78(1) it would only be arrangements existing at the date when the said amending Act came into force on January 1, 1946, that would be protected and saved, and nothing that happened either by way of legislation or by way of awards or contracts subsequent to the said date would attract the provisions of the said section 49A or section 78 which subsequently took its place.
This obviously is not 39 306 intended by the Legislature which incidentally shows that section 78(1) cannot be confined to existing arrangements or laws, but takes within its sweep future laws, agreements, contracts or awards.
Therefore, the challenge to the validity of the award based on the assumption that section 79(1) provides for standardised award of annual leave with wages fails.
Then it is urged that the provision made by the award for privilege leave introduces discrimination between the clerical staff covered by the present reference and operatives covered by the earlier awards made by the same Tribunal.
We were told that operatives had made a similar claim for privilege leave before the same Tribunal, and the said claim had been rejected.
The argument is that the provision for privilege leave made by the present award would create discontent amongst the operatives to whom similar leave has been denied, and that would disturb industrial peace.
We are not impressed by this argument.
It is not seriously disputed that a distinction has generally been made between operatives who do manual work and clerical and other staff; in fact the appellant 's standing orders themselves make different relevant provisions for the two categories of its employees.
It is also not disputed that in practice such distinction is made by comparable concerns, and awards based on the same distinction are generally made in respect of the two separate categories of employees.
We are, therefore, unable to appreciate the argument that in granting privilege leave to the present staff the Tribunal has either overlooked its earlier award or has made a decision which suffers from the vice of discrimination.
The practice prevailing in comparable concerns and the trend of awards both seem to show that a distinction is generally made between the two categories of employees, and since the said distinction is perfectly justifiable no question of discrimination can arise.
It is then argued that making liberal provisions for privilege leave and sick leave are really opposed to the modern trend in industrial thought, and so such liberal awards should be discouraged and corrected.
307 There is no doubt that when industrial adjudication seeks to do social justice it cannot ignore the needs of national economy; and so in considering matters of leave, either in the form of privilege leave or sick leave, the Tribunals should not ignore the consideration that unduly generous or liberal leave provisions would affect production and obviously production of essential commodities is in the interest of not only the employers and the employees but also of the general community; but it is difficult for us to accept the argument that we should make suitable modifications in the provisions made by the award in regard to privilege leave or sick leave.
These are matters primarily for the Industrial Tribunal to consider and decide.
The Tribunal is more familiar with the trend prevailing in comparable concerns, and unless it appears that the impugned provisions cannot be sustained on any reasonable ground or that they mark a violent departure from the prevailing practice or trend, we would be reluctant to interfere with the decision of the Tribunal.
After all, in deciding what ,would be a reasonable provision for privilege leave or sick leave, the Tribunal has to take into account all relevant factors and come to its own decision.
As we have already indicated, in making the present award the Tribunal has considered previous decisions which were relevant and prevailing agreements in comparable concerns.
We have carefully considered the criticism made by the learned Attorney General against the provisions contained in the award, but we are not satisfied that a case has been made out for interference in an appeal under article 136.
The result is the appeal fails and is dismissed with costs.
Appeal dismissed.

summary:
It is not correct to say that section 79 of the , standardises the grant of annual leave with wages to employees to whom the Act applies and that neither the employer by voluntary agreement nor the Industrial Tribunal by its award can vary that standard.
It is well settled that in construing the provisions of a welfare legislation, such as the Act in question which has for its object the preservation of the health, safety and welfare of the workmen, courts should apply the rule of beneficent construction and moreover, sections 78 and 84 of the Act put it beyond doubt that section 79(1) is not intended to standardise annual leave with wages by providing the maximum.
Rightly construed section 78(1) of the Act not only protects past laws, awards, agreements and contracts but also those that are to come into existence in the future and does not prohibit a more generous agreement than that prescribed by section 79(1).
Likewise the scope of section 84 of the Act which, in empowering the State to exempt a factory from all or any provisions of Ch.
VIII of the Act, contemplates better amenities than those guaranteed by the Chapter, cannot be limited to benefits existing at the date of the Act but must also apply to future benefits which an employer may grant to his employees.
Consequently, in a case where the Industrial Tribunal, on a consideration of awards and agreements between employers and employees in comparable concerns, awarded annual leave in excess of what is prescribed by section 79(1), Held, that the award was not open to challenge.
Held, further, that the distinction generally made between operatives doing manual work and clerical and other staff is perfectly justifiable and so the award of privilege leave to the clerical staff could not be said to be discriminatory.
Although the Industrial Tribunals in awarding privilege leave or sick leave must not fail to consider their effect on production and so on the interest of the community in general, this Court would be reluctant under article 136 of the Constitution to interfere with an award unless its provisions are unsustainable on any reasonable grounds and make a violent departure from the practice and trend prevailing in comparable concerns.
38 298


judgement:
Appeal No. 311 of 1959.
Appeal from the judgment and order dated October 31, 1955, of the Travancore Cochin High Court, Ernakulam, in Original Petition No. 75 of 1955.
A. N. Kripal and D. Gupta, for the appellant.
Sardar Bahadur, for the respondent.
December 13.
The Judgment of the Court was delivered by 238 KAPUR, J.
This is an appeal pursuant to a certificate of the High Court of Kerala against the judgment and order of that court and the question for decision is the applicability of section 35 of the Indian Income tax Act (hereinafter termed the 'Act ').
The facts which have given rise to the appeal are these: The respondent is a limited company which owns a spinning mills at Alwaye.
It commenced business in January, 1951, and its first accounting year ended on December 31, 1951, and the relevant assessment year is 1952 53.
It filed its return showing an income Rs. 3,21,284 without taking into account the amount allowable under section 15C of the Act.
On February 2, 1953, the net assessable income of the respondent was determined at Rs. 1,47,083 after deducting Rs. 1,79,081 under section 15C.
The respondent however declared a dividend of Rs. 4,72,415 which attracted the application of section 2 of the Finance Act, 1952, read with Part B, proviso (ii) of First Schedule and thus it became liable to the payment of additional income tax and this fact was overlooked by the Income tax Officer.
After giving notice under section 35 of the Act, the Income tax Officer by an order dated January 25, 1954, rectified this error and imposed an additional tax at the rate of one anna in the rupee.
He later discovered that this was also erroneous and the rate should have been 5 annas in a rupee.
By an order dated August 12, 1954, he rectified the error.
Under section 18A, advance income tax had to be paid and the respondent company had deposited only Rs. 5,000 and therefore became liable to penal interest under section 18A(8) of the Act.
By the same order this omission to impose penal interest was ' corrected and this error was thus rectified.
Against this order the respondent company went in revision under section 33A(2) to the Commissioner of Income tax but the revision was dismissed.
Thereupon the respondent company filed a petition in the High Court of Kerala under article 226 of the Constitution on the ground that section 35 of the Act did not apply and that on the merits additional tax could not be imposed.
The High Court by its judgment dated October 31, 239 1955 held that the orders made were without jurisdiction and therefore granted a writ of certiorari quashing the orders and the Income tax Officer has brought this appeal pursuant to a certificate of that High Court.
According to the High Court, section 35 of the Act was a provision for rectification of "mistakes apparent on the record" and in the opinion of the High Court it was a mistake analogous to O. 47, r. 1 of the Code of Civil Procedure for grant of review on the ground of mistake or error apparent on the face of the record and it construed it in the following words: "i.e. an evident error which does not require any extraneous matter to show its incorrectness.
The error may be one of fact but is not limited to matters of fact and include also errors of law.
But the law must be definite and capable of ascertainment.
An erroneous view of law on a debatable point or a wrong exposition of the law or a wrong application of the law or a failure to apply the appropriate law cannot be considered a mistake or error apparent on the face of the record.
See Chitaley 's C.P.C. Col.
III pp.
3549 50, 5th edition.
" On the ground that the applicability of proviso (ii) of Part B of the First Schedule of the Finance Act was a complex question which could not be said to be "apparent on the face of the record", the High Court held that the necessary foundation for the exercise of the powers under section 35 had not been laid and therefore the Income tax Officer had no jurisdiction to make the order that he did.
The High Court also held that the levy of penal interest under section 18A(8) of the Act for failure to make advance deposit under section 18A(3) was also without jurisdiction.
The learned Judges of the High Court seem to have fallen into an error in equating the language and scope of section 35 of the Act with that of O. 47, r. 1, Civil Procedure Code.
The language of the two is different because according to section 35 of the Act which provides for rectification of mistakes the power is given to the various income tax authorities within four years from the date of any assessment passed by them to rectify 240 any mistake "apparent from the record" and in the Civil Procedure Code the words are "an error apparent on the face of the record" and the two provisions do not mean the same thing.
This court in Maharana Mills (Private) Ltd. vs Income tax Officer, Porbandar (1) has laid down the scope of section 35 at p. 358 in the following words: "The power under section 35 is no doubt limited to rectification of mistakes which are apparent from the record.
A mistake contemplated by this section is not one which is to be discovered as a result of an argument but it is open to the Income tax Officer to examine the record including the evidence and if he discovers any mistake he is entitled to rectify the error provided that if the result is enhancement of assessment or reducing the refund then notice has to be given to the assessee and he should be allowed a reasonable opportunity of being heard.
" In that case the error arose because of an initial mistake in determining the written down value which was subsequently rectified.
In an earlier case M. K. Venkatachalam vs Bombay Dyeing & Manufacturing Co. Ltd. (2) where as a consequence of a subsequent amendment of the law having retrospective effect, the Income tax Officer reduced the amount of interest under section 18A(5) of the Act and the assessee obtained from the High Court a writ of prohibition against the Income tax Officer on the ground that the mistake contemplated had to be apparent on the face of the order and not a mistake resulting from an amendment of the law even though it was retrospective in its effect, it was held that it was a case of error apparent from the record.
Gajendragadkar, J. in his judgment said: "At the time when the Income tax Officer applied his mind to the question of rectifying the alleged mistake, there can be no doubt that he had to read the principal Act as containing the inserted proviso as from April 1, 1952.
" Thus this court has held that discovery of an error on (1) (2) ; 241 the basis of assessment due to an initial mistake in determining the written down value is a mistake from the record and so is a misapplication of the law even though the law came into operation retrospectively.
The Income tax Officer, can, under section 35 of the Act, examine the record and if he discovers that he has made a mistake he can rectify the error and the error which can be corrected may be an error of fact or of law.
The restrictive operation of the power of review under 0.
47 R. 1, Civil Procedure Code is not applicable in the case of section 35 of the Act and in our opinion it cannot be said that the order of the Income tax Officer in regard to assessment in dispute was without jurisdiction.
In regard to section 18A (8) also the learned Judges have misdirected themselves because that section is mandatory.
It provides: section 18A(8) "Where, on making the regular assessment, the Income tax Officer finds that no payment of tax has been made in accordance with the foregoing provisions of this section, interest calculated in the manner laid down in sub section (6) shall be added to the tax as determined on the basis of the regular assessment.
" Therefore the Income tax Officer was required to calculate the interest in the manner provided under the provisions of that sub section and had to add it to the assessment.
Counsel for the respondent sought to raise the question as to the applicability of proviso (ii) of Part B of First Schedule of the Finance Act 1952 and relied upon the judgments of this Court in Commissioner of Income tax vs Elphinstone Spinning & Weaving Mills Co. Ltd. (1) and similar cases reported as Commissioner of Income tax, Bombay City vs Jalgaon Electric Supply Co. Ltd.(1) and Commissioner of Income tax, Bombay City vs Khatau Makanji Spinning and Weaving Co. Ltd. (3); but the facts of those cases were different.
In the first case there was no total income and the (1) (2) (3) [1960] 40 I.T.A. 189.
31 242 Finance Act was not applicable in that case.
In the second there was no profit in any preceding year and therefore the fiction failed because it postulates that there should be undistributed profits of one or more years immediately preceding the previous year.
In the third case also the Finance Act was inapplicable because the additional tax was not properly laid upon the total income and what was actually taxed was never a part of the total income of the previous year.
In our opinion the order of the High Court was erroneous.
We therefore allow this appeal and set aside the judgment and order of the High Court with costs in this court and in the High Court.
Appeal allowed.

dataset_name: IN-Abs

summary:
After the respondents net assessable income for the years ,952 53 was determined, it declared dividends which attracted provisions of the Finance Act, 1952, and became liable to the 237 payment of additional income tax, which fact was overlooked by the Income tax Officer, who, after giving notice under section 35 of the Income tax Act, rectified the error and imposed an additional tax at the rate of one anna in the rupee.
He later discovered that this was also erroneous and the rate should have been five anmas in a rupee and rectified the error; by the same order the omission to impose penal interest under section 18A(8) was rectified and penal interest was imposed.
The respondent 's case before the High Court was that section 35.of the Act did not apply and that on the merits the additional tax could not be imposed.
The High Court held that the necessary foundation for the exercise of the powers under section 35 bad not been laid and therefore the Income tax Officer had no jurisdiction to make the order; and also that the penal interest under section 18A(8) of the Act for failure to make advance deposit was also without jurisdiction.
Held, that the language and scope of section 35 of the Indian Income tax Act, 1922, could not be equated with that of O. 47, r. 1 of the Code of Civil Procedure.
The Income tax Officer could under section 35 of the Act examine the record and if he discovered that a mistake had been made, could rectify the error both of law and fact.
The restrictive operation of the powers of review under 0.
47, r. of the Code of Civil Procedure was not applicable in the case of section 35 of the Income tax Act.
Held, further, that the section 18A(8) was a mandatory one and the Income tax Officer was required to calculate the interest in the manner provided under the provisions of that sub section and had to add it to the assessment.
Maharana Mills (P.) Ltd. vs Income tax Officer, and M. K. Venkatachalam vs Bombay Dyeing & Manu facturing Co. Ltd.; , , discussed.
Commissioner of Income tax vs Elphinstone Spinning & Weaving Mills Co. Ltd. , Commissioner of Income tax, Bombay City vs Jalgaon Electric Supply Co. Ltd., and Commissioner of Income tax, Bombay City vs Khatau Makanji Spng.
& Weavg to.
Ltd., not applicable.


judgement:
Appeals Nos. 223 and 224 of 1960.
Appeals from the order dated November 23, 1956, of the Andhra Pradesh High Court, Hyderabad, in Tax Revision Cases Nos. 17 and 18 of 1956.
268 C. K. Daphtary, Solicitor General of India and T. V. B. Tatachari, for the appellants.
K. N. Rajagopal Sastri and D. Gupta, for the respondent.
December 14.
The Judgment of the Court was delivered by HIDAYATULLAH, J.
These are two appeals on certificates granted by the High Court of Andhra Pradesh against a common judgment in a sales tax revision filed by the appellants in the High Court.
The facts are as follows: In the year 1952 53, for which the assessment of sales tax was in question, the appellants dealt in gunnies, and purchased them from two Mills in Vishakapatnam District and in respect of which they issued delivery orders to third parties, with whom they had entered into separate transactions.
The procedure followed by the appellants was this: They first entered into contracts with the Mills agreeing to purchase gunnies at a certain rate for future delivery.
Exhibit A 1 is a specimen of such contracts.
The appellants also entered into agreements with the Mills, by which the Mills agreed to deliver the goods to third parties if requested by the appellants.
The Mills, however, did not accept the third parties as contracting parties but only as agents of the appellants.
Exhibits A 2 and A 2(a) are specimen agreements of this kind.
Before the date of delivery, the appellants entered into agreements with third parties, by which they charged something extra from the third parties and handed over to them the delivery orders, which were known as kutcha delivery orders.
Exhibits A 3 and A 4 are specimens of the agreement and the delivery orders respectively.
The Mills used to deliver the goods against the kutcha delivery orders along with an invoice and a bill, of which Exs.
A 6 and A 7 are specimens respectively, and collected the sales tax from the third parties.
The tax authorities, however, treated the transaction between the appellants and third parties as a fresh sale, and sought to levy sales tax on it 269 again, which, the appellants, contended, was not demandable, as there was no second sale.
The appellants failed in their contentions before the Deputy Commercial Tax Officer, Guntur, and their appeals to the Deputy Commissioner of Commercial Taxes, Guntur and the Andhra Sales Tax Appellate Tribunal, Guntur, were unsuccessful.
The appellants then went up in revision to the High Court under the Madras General Sales Tax Act, 1939 (as amended by Madras Act No. 6 of 1951), but were again unsuccessful.
The High Court, however, granted certificates, on which these appeals have been filed.
The contentions of the appellants are that the agreement and the delivery of the kutcha delivery order did not amount to a sale of goods, but was only an assignment of a right to obtain delivery of the gunnies, which were not in existence at the time of the transaction with third parties, and were not appropriated to the contract, or, in the alternative, that this was only an assignment of a forward contract.
They seem to have relied in the High Court upon the deci sions of this Court reported in The Sales Tax Officer, Pilibhit vs Messrs. Budh Prakash Jai Prakash(1) and Poppatlal Shah vs The State of Madras (2) to show that these transactions were not sales.
These cases were not relied upon by the appellants before us, presumably because the High Court has adequately shown their inapplicability to the facts here.
The learned Solicitor General appearing for the appellants rested his case entirely upon the first contention, namely, that there was only an assignment of a right to obtain delivery of the gunnies and not a sale.
He contended that there was only one transaction of sale between the Mills and the third parties, who, on the strength of the assignment of the right to take delivery, had received the goods from the Mills.
in our opinion, this does not represent the true nature of the transactions, either in fact, or in law.
To begin with, the Mills had made clear in their agreements that they were not recognising the third parties as contracting parties having privity with (1) ; (2) ; 270 them, and that delivery would be given against the kutcha delivery orders to the third parties as agents of the appellants.
The Mills, therefore, recognised only the appellants as contracting parties, and there was thus a sale to the appellants from the Mills, on which ,;sales tax was correctly demanded and was paid.
In so far as the third parties were concerned, they had purchased the goods by payment of an extra price, and the transaction must, in law and in fact, be considered a fresh transaction of sale between the appellants and the third parties.
A delivery order is a document of title to goods (vide section 2(4) of the Sale of Goods Act), and the possessor of such a document has the right not only to receive the goods but also to transfer it to another by endorsement or delivery.
At the moment of delivery by the Mills to the third parties, there were, in effect, two deliveries, one by the Mills to the Appellants, represented, in so far as the Mills were concerned, by the appellants ' agents, the third parties, and the other, by the appellants to the third parties as buyers from the appellants.
These two deliveries might synchronise in point of time, but were separate, in point of fact and in the eye of law.
If a dispute arose as to the goods delivered under the kutcha delivery order to the third parties against the Mills, action could lie at the instance of the appellants.
The third parties could proceed on breach of contract only against the appellants and not against the Mills.
In our opinion, there being two separate transactions of sale, tax was payable at both the points, as has been correctly pointed out by the tax authorities and the High Court.
The appellants relied upon a decision of the Andhra Pradesh High Court in The State of Andhra vs Kolla Sreeramamurty (3), but there, the facts were different, and the Division Bench itself in dealing with the case, distinguished the judgment under appeal, observing that there was no scope for the application of the principles laid down in the judgment under appeal, because in the cited case, "the property in the goods did not pass from the mills to the assessee and (3) Second Appeals Nos.
194 & 195 of 1954 decided on June 27, 1957.
271 there was no agreement of sale of goods to be obtained in future between the assessee and the third party".
In the result, the appeals tail, and are dismissed with costs.
One hearing fee.
Appeals dismissed.

summary:
The respondents dealt in gunnies.
They first entered into contracts with two Mills agreeing to purchase gunnies at a certain rate for future delivery, and also entered into agreement with third parties, by which they charged something extra from those third parties and handed over the delivery order known as kutcha delivery order.
The Mills however did not accept the third parties as contracting parties, but only as the agents of the appellants and delivered the goods against the kutcha delivery orders, and collected the Sales Tax from the third parties.
The tax authorities treated these transactions between the appellant and the third parties as fresh sales and sought to levy sales tax again, which the appellants contended, was not demandable as there were no second sales; the delivery of a kutcha delivery order did not amount to a sale of goods, but was only an assignment of a right to obtain delivery of gunnies which were not in existence and not appropriated to the contract; this was only an assignment of a forward contract.
Held, that the agreements between the parties showed that third parties were not recognised by the sellers.
A delivery order being a document of title to goods, the possession of such a document not only gave the right to recover the goods but also to transfer them to another by endorsement or delivery.
There being two separate transactions of sale, one between the Mills and the original purchasers and the other between the original purchasers and third parties, tax was payable at both the points.
The Sales Tax officer, Pilibhit vs M/s. Budh Prakash jai Prakash; , , Poppatlal Shah vs The State of Madras, ; , and The State of Andhra vs Kolla Sreeramamurthy, decided on June 27, 1957, referred to.


judgement:
Appeal No, 145 of 1960.
Appeal by special leave from the judgment and order dated March 18, 1958, of the Kerala High Court in Tax Revision Case No. 12 of 1957.
V.A. Seyid Muhamad and Sardar Bahadur, for the appellant.
C.K. Daphtary, Solicitor General of India, Thomas Vellapally, section N. Andley, J. B. Dadachanji, Rameshwar Nath and P. L. Vohra, for the respondent.
December 15.
The Judgment of the Court was delivered by 286 KAPUR, J.
This is an appeal by special leave against the judgment and order of the High Court of Kerala in Tax Revision No. 12 of 1957.
The respondent who is the assessee owned an estate of 590 acres in South Malabar district, now in Kerala State.
Out of that area 85 acres were covered by Pepper, Arecanut, Paddy and Coconut cultivation while the rest i.e. 505 acres had rubber plantations upon it.
Of that area 235 acres were occupied by immature non bearing rubber trees and 270 ' acres had mature rubber trees.
The assessment relates to the year 1955 56, the accounting year being the year ending March 31, 1955.
The respondent claimed from out of the income expenses relating to the maintenance and upkeep of immature non bearing rubber trees.
The Agricultural Income tax Tribunal held that the expenses incurred on the whole area under rubber plantations were deductible expenses and remanded the case for ascertaining the expenses incurred in forking and manuring of the "non bearing and immature" rubber grown areas also.
The appellant then preferred a revision application to the High Court under section 54(1) of the Madras Plantations Agricultural Income Tax Act, 1955 (Mad.
V of 1955).
The High Court held that the amount spent on the upkeep and maintenance of immature rubber trees was a deductible expenditure under section 5(e) of that Act which provides: S.5 "Computation of agricultural income: The agricultural income of a person shall be computed after making the following deductions, namely:. . . . . :. . . (e) any expenditure incurred in the previous year (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of the plantation;".
The provisions of section 5(e) of the Madras Act, applicable to the present case, are the same as those of section 5(j) of the Travancore Cochin Agricultural Income Tax Act (Act XXII of 1950).
The only difference is in the last few words.
In place of "for the purpose of the plantation" in the former, the words "for the purpose of 287 deriving the agricultural income" are used in the latter.
If anything the words of the former Act are more favourable to the respondent.
In Travancore Rubber and Tea Company Ltd. vs Commissioner of Agricultural Income Tax, Kerala (1), which was an assessment under the Travancore Cochin Act, we have decided the question of deductibility of sums expended for purposes of forking, manuring etc.
of immature rubber trees.
That judg ment will govern this case also.
This appeal therefore fails and is dismissed with costs in this court and the High Court.

summary:
The assessee owned an Estate of 590 acres out of which 235 acres were occupied by immature non bearing rubber trees, for the maintenance and upkeep of which the respondent claimed expenses from out of the income, which was allowed both by the Agricultural Income Tax Tribunal and the High Court.
The appellant came up by special leave.
Held, that the provisions of section 5(e) of the Madras Planta tions Agricultural Income Tax Act, 1955 (Mad.
V of 1955), applicable to the present case, and those of section 5(1) of the Travancore Cochin Agricultural Income Tax Act, 1950 (Tr.
Co. XXII of 1950) being the same, the judgment in Travancore Rubber & Tea Co. Ltd. vs The Commissioner of Agricultural Income tax, Kerala, in which the question of deductibility of sums expended for purposes of forking, manuring etc.
of immature rubber trees had been decided, will govern this case.
Travancore Rubber & Tea Co. Ltd. vs The Commissioner of Agricultural Income tax, Kerala, ; , applied.


judgement:
Appeals Nos. 134 to 137 of 1959.
Appeals by special leave from the judgment and order dated September 20,1957, of the Bombay High Court in Income Tax Reference No. 14 of 1957.
R. J. Kolah, section N. Andley, J. B. Dadachanji, Rameshwar Nath and P. L. Vohra, for the appellants.
K. N. Rajagopal Sastri and D. Gupta, for the respondent.
January 3.
The Judgment of the Court was delivered by HIDAYATULLAH, J.
This judgment governs the disposal of Civil Appeals Nos.
134 to 137 of 1959.
They have been filed by four assessees with special leave, and arise out of similar facts, and it is not necessary to refer to more than one case to consider the point in question.
The assessment year under consideration is 1952 53, and the previous year, the Calendar year, 1951.
In that year, Mr. Tulsidas Kilachand, one of the four appellants, made a declaration of trust in favour of his wife, a portion of which may be quoted here: ". . . 1, Tulsidas Kilachand hereby de clare that I hold 244 shares of Kesar Corporation Ltd. and 120 shares of Kilachand Devchand & Co., Ltd upon trust to pay the income thereof to my wife Vimla for a period of seven years from the date hereof or her death (whichever event may be earlier) and I hereby declare that this trust shall not be revocable." In the year of account, a sum of Rs. 30,404 was received as dividend income on those shares, and the assessee contended that this income, after being grossed up, was not liable to be included in his total income, in view of the third proviso to section 16(1)(c) of the Indian Income tax Act.
The Income tax Officer did not accept this contention, and though the assessment order is not before us, we gather from the statement of the case that the reason he gave was that the income had accrued to or had arisen in the hands of 353 Mr. Tulsidas Kilachand and had been paid by him to his wife.
The Income tax Officer held that the words of the proviso "income arising to any person by virtue of a settlement or disposition" did not apply to this income.
On appeal, the Appellate Assistant Commissioner held that the case was governed by section 16(3)(b), and need not be considered under the third proviso.
to section 16(1)(c) of the Act.
It appears to have been conceded before him that if the former provision applied, the proviso would not save the income from being assessed in the hands of Mr. Tulsidas Kilachand.
The appeal was dismissed.
In the appeal before the Tribunal, Mr. Tulsidas Kilachand again relied upon the third proviso to section 16(1)(c), and contended that the case was riot governed by section 16(3)(b) and that the dividend income could not be included in his assessment.
The Tribunal came to the conclusion that the case was covered either by section 16(3)(a)(iii) or by section 16(3)(b), and that the income from the shares was, therefore, liable to be included in the income of Mr. Tulsidas Kilachand.
The Tribunal, however, raised and referred the following question under section 66(1) of the Act to the High Court of Bombay: "Whether on a true construction of the deed of declaration of trust dated 5th March , 1951, the net dividend income of Rs. 30,404 on 120 shares of Kilachand Devchand & Co., Ltd. and 244 shares of Kesar Corporation Ltd. held under trust by the assessee for the benefit of his wife was income liable to be included in the total income of the assessee? The High Court came to the conclusion that, though section 16(1)(c) was not satisfied in view of the third proviso, section 16(3)(b) was applicable to the case, and answered the question in the affirmative.
In the appeal before us, the case for the Department was based both on section 16(3)(a)(iii) and section 16(3)(b), while the appellants contended that this disposition fell within the third proviso to section 16(1)(c).
The relevant provisions are: 45 354 " 16.
Exemptions and exclusions in determining the total income. (1) In computing the total income of an assessee. . . . . . . . . (c) all income arising to any person by virtue of a settlement or disposition whether revocable or not, and whether effected before or after the commencement of the Indian Income tax (Amendment) Act, 1939 (7 of 1939), from assets remaining the property of the settlor or disponer, shall be deemed to be income of the settlor or disponer, and all income arising to any person by virtue of a revocable transfer of assets shall be deemed to be income of the transferor: Provided. . . . . . . . .
Provided further. . . . . . . .
Provided further that this clause shall not apply to any income arising to any person by virtue of a settlement or disposition which is not revocable for a period exceeding six years or during the lifetime of the person and from which income the settlor or disponer derives no direct or indirect benefit but that the settlor shall be liable to be assessed on the said income as and when the power to revoke arises to him.
(2). . . . . . . . (omitted) (3).
In computing the total income of any individual for the purpose of assessment, there shall be included (a) so much of the income of a wife or minor child of such individual as arises directly or indirectly (i). . . . . . . . . (ii). . . . . . . . . . (iii) from assets transferred directly or indirectly to the wife by the husband otherwise than for adequate consideration or in connection with an agreement to live apart; or (b). so much of the income of any person or association of persons as arises from assets transferred otherwise than for adequate consideration to the person or 355 association by such individual for the benefit of his wife or a minor child or both.
" The object of framing section 16 can almost be taken from the observations of Lord Macmillan in Chamberlain vs Inland Revenue Commissioners (1), where he stated as follows: "This legislation . (is) designed to overtake and circumvent a growing tendency on the part of taxpayers to endeavour to avoid or reduce tax liability by means of settlements.
Stated quite generally, the method consisted in the disposal by the taxpayer of part of his property in such a way that the income should no longer be receivable by him, while at the same time he retained certain powers over, or interests in, the property or its income.
The legislature 's counter was to declare that the income of which the taxpayer had thus sought to disembarrass himself should, notwithstanding, be treated as still his income and taxed in his hands accordingly.
" These observations apply also to the section under consideration, and the Indian provision is enacted with the same intent and for the same purpose.
Section 16 thus lays down certain exemptions and exclusions in determining the total income of an assessee.
Some of the provisions lay down the conditions for inclusion of certain income, while others lay down the conditions for exclusion of other income.
We are concerned with the income accruing in case of settlements and the conditions under which income of a wife is treated as the income of the settlor or disponer or as the income of the husband.
We have to see if the pro visions for exclusion or inclusion apply to this case.
Section 16(1)(c) provides that income from assets remaining the property of the settlor or disponer or arising to any person by virtue of a revocable transfer of assets shall be deemed to be the income of the transferor.
What cl.
(c) means was decided by this Court in Provat Kumar Mitter vs Commissioner of Income tax (2).
There, Provat Kumar Mitter had assigned the dividends only, and had not transferred the relevant shares.
It was held by this Court that this (1) , 329.
(2) 356 was a case of application of one 's own income and not assignment of the source from which the income was derived, which alone saved the income from tax, subject, however, to provisions like section 16(1)(c) and section 16(3).
The deed in favour of the wife in that case gave only a right to the dividends, and not being a transfer of an existing property of the assessee, section 16(1)(c) and the third proviso were not attracted.
That case thus has no application to the facts of the present case, where the disposition is differently made.
The disposition here is for a period of seven years or the life of the settle ' whichever is shorter.
During that period or the life of the settlee, Mr. Tulsidas Kilachand has bound himself upon trust to pay the dividends to his wife and not to revoke the settlement.
The intention is obviously to put this case within the third proviso to section 16(1)(c), because cl.
(c) does not apply to any income arising to any other person provided the disponer derives no direct or indirect benefit, even though the assets remain his property.
If it were only a question of the application of the proviso, this disposition would be exempt.
But by the deed of trust, the settlor holds the shares in trust; the shares do not remain the property of the settlor.
Section 16(1)(c) has, therefore, no application, and the proviso is not attracted.
The section goes on to deal with other situations and to provide for them specially.
Sub section (3) provides specially for assets transferred to the wife or minor child.
Income from assets transferred to the wife is still to be included in the total income of the husband, (a) if the assets have been transferred directly or indirectly to the wife by the husband otherwise than for adequate consideration [vide sub section
(3)(a)(iii)], or (b) so much of the income of any person or association of persons as arises from assets transferred otherwise than for adequate consideration to the person or association by such individual for the benefit of his wife [vide sub section
(3)(b)].
The first question is whether there can be said to be transfer of assets to the wife or to 'any person ' for the benefit of the wife.
The second question is whether there was adequate consideration for the transfer, if 357 there was one The contention of the assessee is that there was no transfer of any assets at all.
It is contended that the ownership of shares involves a bundle of rights, and that they are, generally speaking, (a) right to vote, (b) right to participate in the distribution of assets on dissolution, and (c) right to participate in the profits, e. g., dividends which might be Hi, .declared.
It is pointed out that none of these rights was transferred to the wife, because transfer of assets connotes a creation of a right in the assets in praesenti.
It is urged that there was no transfer of assets either to the wife or to any person for the benefit of the wife but merely a creation of a trust in respect of the shares, the dividends from which were payable to the wife, and that thus section 16(3)(a)(iii) or section 16(3)(b) was not applicable.
It is lastly contended that even if it be held that there was such a transfer, it was for adequate consideration, being for love and affection, which is a good consideration.
The contention that there was no transfer at all in this case is not sound.
The shares were previously held by Mr. Tulsidas Kilachand for himself.
After the declaration of trust by him, they were held by him not in his personal capacity but as a trustee.
No doubt, under sections 5 and 6 of the Indian Trusts Act if the declarer of the trust is himself the trustee also, there is no need that he must transfer the property to himself as trustee; but the law implies that such a transfer has been made by him, and no overt act except a declaration of trust is necessary.
The capacity of the declarer of trust and his capacity as trustee are different, and after the declaration of trust, he holds the assets as a trustee.
Under the Transfer of Property Act, there can be a transfer by a person to himself or to himself and another person or persons.
In our opinion, there was, in this case, a transfer by Mr. Tulsidas Kilachand to himself as a trustee, though there was no formal transfer.
The assessee also stresses the words "any person or association of persons" in section 16(3)(b), and contends that such a person must be other than the husband, who transfers.
The word "any person" is wide 358 enough to include the husband, when he transfers property to himself in another capacity.
The change of capacity makes him answer the description "any person".
This deed must be regarded as involving a transfer by the husband to a trustee, and even though the husband is the same individual, in his capacity as a trustee he must be regarded as a person distinct from the transferor.
In our opinion, section 16(3)(b) covers the case.
It remains to consider whether there was adequate consideration for the transfer.
Reliance has been placed only upon love and affection.
The words "adequate consideration" denote Consideration other than mere love and affection, which, in the case of a wife, may be presumed.
When the law insists that there should be "adequate consideration" and not good consideration", it excludes mere love and affection.
They may be good consideration to support a contract; but adequate consideration to avoid tax is quite a different thing.
To insist on the other meaning is really to say that consideration must only be looked for, when love and affection cease to exist.
In our opinion, this case falls within the special rules concerning wife and minor child, laid down in section 16(3)(b) and not within the third proviso to section 16(1)(c).
It must thus be held that there was a transfer of the assets to the husband trustee for the benefit of the wife, The answer given by the High Court was thus correct.
The appeals fail, and are dismissed with costs.
One hearing fee.
Appeals dismissed.

summary:
By a deed dated March 5, 1951, the appellant made a declaration of trust in favour of hiswife as follows: "I hereby declare that I hold 244 sharesupon trust to pay the income thereof to my wifefor a period of seven years from the date hereof or her death (whichever event may be earlier) and I hereby declare that this trust shall not be revocable".
In the year of account, 1951, a sum of Rs. 30,404 was received as dividend income on those shares and the appellant claimed before the income tax authorities that this sum was not liable to be included in his total income in view of the third proviso to section 16(1)(c) of the Indian Income tax Act, 1922, but this claim was rejected on the ground that the case was covered either by section 16(3)(a)(iii) or by section 16(3)(b) of the Act.
The appellant 's contention was that under the deed of trust there was no transfer of assets either to the wife or to any person for the benefit of the wife but merely a creation of a trust in respect of the shares, the dividends from which were payable to the wife, that even if it be held that there was such a transfer, it was for adequate consideration being for love and affection which was a good consideration, and that thus section 16(3)(a)(iii) or section 16(3)(b) was not applicable.
Held, that on a true construction of the deed dated March 15, 1951, there was a transfer of the shares by the husband to himself as a trustee for the benefit of the wife and that even though the husband was the same individual, in his capacity as a trustee he must be regarded as a person distinct from the transferor.
Held, further, that the words "adequate consideration" in section 16(3) of the Indian Income tax Act, 1922, denoted considera tion other than mere love and affection, which, in the case of a wife, may be presumed.
Accordingly, the present case fell within section 16(3)(b) of the Act and not within the third proviso to section 16(i)(c).
Provat Kumar Mitter vs Commissioner of 'Income tax; , , distinguished.


judgement:
Appeal No. 315/1958.
Appeal by special leave from the judgment and order dated February 5, 1957, of the Bombay High Court in I.T.R. No. 34/1956.
372 R. J. Kolah, and I. N. Shorff, for the appellant.
A. N. Kripal and D. Gupta, for the respondent.
January 6.
The Judgment of the court was delivered by KAPUR, J.
This is ail appeal against the judgment and order of the High Court of Judicature at Bombay in Income tax Reference No. 34 of 1956.
The appellant is a non resident Bank incorporated under the National Bank Act of the United States of America with its head office in that country and with branches all over the world including some branches in India.
It was assessed under the Business Profits Tax Act (Act XXI of 1947), hereinafter termed the " Act ", in respect of the chargeable accounting periods: 1 4 1946 to 24 12 1946, 25 12 1946 to 24 12 1947, 25 12 1947 to 23 12 1948, and 24 12 1948 to 31 3 1949 and the sole question for decision in this appeal is the meaning of the word " reserves " in R. 2(1) of Schedule 2 of the Act and how the capital of the appellant during the above mentioned chargeable accounting periods has to be computed for the purpose of allowing the " abatement " under the Act.
The appellant contended that in computing the amount for the purpose of abatement it was entitled to include what is termed in the United States " Undivided Profits ", the contention being that this item falls within the word " reserves" in R. 2(1) of Schedule 11 of the Act which provides: "Where the company is one to which rule 3 of Schedule I applies, its capital shall be the sum of the amounts of its paid up share capital and of its reserves in so far as they have not been allowed in computing the profits of the company for the purpose of the Indian Income tax Act, 1922 (XI of 1922), diminished by the cost to it of its investments or other property the income from which is not includable in the profits, so far as that cost exceeds any debt for money borrowed by it.
" 373 It is not necessary to give the details of all the years; but it will be sufficient as an illustration if we: were to confine ourselves to the " Undivided Profits " in the Balance Sheet as on December 31, 1946, wherein the relevant entries were as follows : Capital . $ 77,500,000 00 Surplus . $ 152,500,000.00 Undivided Profit . $ 29,534,614.21 The Report of the Directors dated January 14, 1947, was as follows: " At the year end, Capital of the Bank remains at $ 77,500,000 surplus has increased to $ 152,500,000 by the transfer of Rs. 10,000,000 from Undivided Profits.
After this transfer, Undivided Profits are $ 29,534,614 an increase of $ 240,376 from a year ago.
The Trust Company has Capital of $ 10,000,000 surplus of s 10,000,000 and Undivided Profits of $ 8,097,020.
The two institutions thus show total capital funds, that is Capital, Surplus and Undivided Profits of $ 287,631,634 or $ 46 39 per share compared with $ 44.60 per share at the end of 1945.
" According to the Balance Sheet of 1948, capital funds since 1939 had increased from $ 169,768 thousands to $ 320,795 thousands in the year 1948 and there had been a progressive increase both in what is called " Surplus " as well as " Undivided Profits ", the former increased from $ 62,500 thousands to $ 182,500 thousands and the latter from $ 19,768 thousands to $ 50,795 thousands.
The question in this case is whether this large sum of money shown as " Undivided Profits " is a part of the Reserves or is equivalent to the unallocated amount carried forward at the end of a year of account in the balance of Profit & Loss Account as we know it.
It was the sum of $ 29,534,614.21 and similar sums for the other chargeable Accounting Periods which are the subject matter of controversy in this appeal.
Both the Income tax Officer and the Appellate Assistant Commissioner excluded these amounts in determining the capital of the Bank under R. 2(1) of Schedule II on the ground that they were not a part of the reserves of the Bank.
374 The appellant took an appeal to the Income tax Appellate Tribunal which was dismissed on the ground that " Undivided Profits " meant nothing more than the " Balance of the profits and loss account" and that no distinction could be drawn merely because in the nomenclature used in the United States, the amount was shown as " Undivided Profits" and not balance of the profit and loss account.
At the instance of the appellant the following question of law was referred to the High Court.
" Whether on the facts and in the circumstances of the case I Undivided Profits ' of $ 29,534,614.21 shown in the condensed statements of conditions as of December 31, 1946, can be treated as reserves and added to the capital, as required by rule 2(1) of Schedule II to the Business Profits Tax Act for the chargeable accounting period 25 12 1946 to 24 12 1947?" In its order the Tribunal said that the Treasury Rules in United States divided capital account into four different heads, Capital, Reserve, Surplus and the Undivided Profits.
The reserves are really reserves for liabilities including the reserves for dividends.
" The general reserves as shown by the balance sheet in India is equivalent to the Surplus.
The undivided profits is equivalent to the balance of profit and loss account.
" In the statement of the Case submitted to the High Court, the Appellate Tribunal stated that the question whether the Undivided Profits meant the same thing as balance of the profit and loss account was a question of fact and it did not matter what name was given to it.
But this was the very question which was referred to the High Court.
The High Court after referring to the Directors ' Report to the shareholders held that the Undivided Profit of $ 29,534,614.21 did not constitute " reserves " because no direction had been given in regard to it, it had never been transferred to any reserve and had never been earmarked for any particular purpose and that the only act of volition on the part of the Directors of the Bank was the transfer of 10 million 375 dollars to the Surplus.
In its judgment the High Court said : "It is true that these large amounts (of Un divided Profits) remain with the Bank, that the Bank uses them, that business is carried on with the help of those funds and that they are as much capital of the Bank as capital in the strict sense of the term. " The High Court however held that they did not satisfy the test laid down by the Supreme Court in Century Spinning & Manufacturing Co. Ltd. vs C.I.T., Bombay (1) as the amount was not transferred to any reserve and there being no act of volition on the part of the Directors this could not be regarded as Reserve.
The correctness of this view is challenged before us.
The Directors ' report dated January 14, 1947, shows that the surplus increased as a result of the allocation made by the Directors, by 10 million Dollars, which was taken from Undivided Profits and the Undivided Profits themselves increased to $29,534,614.21 which was an increase of $240,376 in the year 1946 and therefore the Capital Funds of the company which included Capital, Surplus and Undivided Profits along with similar items from the Trust Company had increased considerably which was reflected in per share increase, i.e., 44.60 per share at the end of 1945 to 46.39 per share at the end of 1946 thus showing that it was the result of an act of the Directors that Surplus was increased and a particular sum was left in the Undivided Profits.
It was contended that no sum could be treated as 'Reserves ' unless the Directors recommended it to be so allocated and it was so adopted by the shareholders.
But this argument ignores the evidence placed by the appellant.
Under the Treasury Rules of the United States of America containing " Instructions for Preparation of Reports of Condition by National Banking Associations ", certain sums had to be specifically allocated under section 5211 of the revised Statute of the United States (Title Items 25 to 28, according to these instructions, deal (1) ; 376 with Capital Account.
Item 26 deals with 'Surplus ' and item 27 with 'Undivided Profits ' and item 28 with ' Reserves ' (and retirement account for preferred stock).
The following Reserves come under item 28: (a).
Reserve for dividends payable in Common stock.
(b) Reserves for other undeclared dividends.
(c) Retirement account for,preferred stock.
(d) Reserves for contingencies, etc.
Item 29 was as follows " Total capital accounts ".
This item is the sum of items 25 to 28, inclusive.
Along with this the appellant has placed a copy of the letter from the Deputy Controller of Currency, Washington, the relevant portion of which is as follows : " In connection with this matter we wish to assure you that your position as stated is in complete accord with that of the Office of the Comptroller of the Currency.
In the United States, the 'Undivided Profits ' as reflected in the accounting of a bank actually represents a part of its capital funds.
All of the other bank supervisory agencies in the United States consider the 'Undivided Profits ' of a bank as a part of its capital funds.
In any calculation for the purpose of determining the adequacy of capital in a: commercial bank in the United States, the supervisory authorities include 'Undivided Profits ' as an integral part of the capital structure as it would not be possible otherwise to make an accurate computation.
When losses occur in banks, it is the usual practice in many banks to charge them against the 'Undivided Profits ' account which by any reasoning would be inappropriate if the account were regarded as ' Undistributed Profits '.
In commercial banks in the United States, it is not customary to maintain any account that could be regarded specifically as 'Undistributed Profits ' in the same.
sense as applied to similar accounts in the other corporations in India.
The term 'Undivided Profits ' simply follows a bank accounting nomenclature used ill the 'United States to 377 designate profits set aside, after provisions for expenses and taxes, dividends and reserves, for continuous future use in the business of the bank ' and it bears a close, if not identical, relationship to the Earned Surplus Account of an industrial corporation.
Balance sheets of three other banks of the United States relied on by the appellant show that Capital Fund comprises three kinds of funds, i.e., Capital, Surplus and Undivided Profits.
The documents placed on the record show that these three different kinds of funds put together make up what is called " Capital Fund '.
The creation and maintenance of the item known as Undivided Profits is a requirement of the Treasury Rules which are made under the Statute and therefore it cannot be said that the amount of Undivided Profits in the Balance Sheet was not allocated as a result of either a resolution of the Directors, accepted by the shareholders or on account of the requirements of the law.
The " Undivided Profits " have to be employed in the manner indicated by the letter of the Deputy Controller of Currency.
They are set up for expenses, taxes, dividends and reserves for continuous use in the business of the Bank and are a part of the capital funds and an integral part of the capital structure and without it, it would not be possible to make an accurate computation.
The reason for the existence of this fund, as shown by that letter is that when there are losses, they can be charged against "Undivid ed Profits " which expression means profits set apart after provision for expenses and taxes etc.
for continuous use in the business of the Bank.
There is a difference between the system of accounting of Banking Companies in India and the United States; the failure to appreciate this difference has led the Appellate Tribunal as well as the High Court to arrive at an erroneous conclusion.
In India at the end of an year of account the unallocated profit or loss is carried forward to the account of the next year and such unallocated amount gets merged in the account of that year, In the system of accounting in the 48 378 U.S. A. each year 's account is self contained and ,nothing is carried forward.
If after allocating the profits to diverse heads mentioned above any balance remains, it is credited to the " Undivided Profits " which become part of the capital fund.
If in any year as a result of the allocation there is a loss the accumulated undivided profits of the previous years are drawn upon and if that fund is exhausted the Banking Company draws upon the surplus.
In its very nature the Undivided Profits are accumulation of amounts of residue on hand at the end of year of successive periods of accounting and these amounts are by the prevailing accounting practice and the Treasury directions regarded as a part of the capital fund of the Banking Company.
The nature of " Undivided Profits" was considered by the Supreme Court of America in Fidelity Title and Trust Co. vs United States (1).
In that case a suit was brought by the Fedelity Co. to recover the tax assessed on its whole capital and undivided profits under section 2 of the Spanish War Revenue Act.
In the Supreme Court it was contended by the company that the terms "Capital", " Surplus " and " Undivided Profits " have a precise and definite meaning in the business of banking and that Undivided Profits are not surplus and cannot therefore be taxed as " Surplus ".
The Government on the other hand contended that the undivided profits were taxable as being a part of Capital or Surplus.
The Court held that " Undivided Profits ".
were taxable as being a part of the Capital employed.
Mr. Justice Brandeis delivering the opinion of the Court said at p. 955: " The Act declares that 'in estimating capital surplus shall be included, ' and that the 'annual tax shall in all cases be computed on the basis of the capital and surplus for the preceding fisical year. . . . . . . " As it is the use or employment of capital in banking, not mere possession thereof by the banker, which determines the amount of tax, the fact that a portion of the capital so used or employed is (1) ; ; 379 designated 'undivided profits ' is of no legal signi ficance." As to what the word " Reserves " as used in the Business Profits Tax Act connotes, was considered by this Court in the Commissioner of Income tax vs Century Spinning & Manufacturing Co. Ltd. (1).
It was held that the true nature and character of a sum disputed as reserve was to be determined with reference to the substance of the matter.
The amount in dispute in that case was the profits after the deduction of depreciation and tax which amount was carried to the Balance Sheet and was later recommended by the Directors to be appropriated mainly to dividends and balance to be carried forward to the next year 's account.
Thus on the crucial date, i.e., April 1, 1946, from which the Chargeable Accounting Period began the sum in dispute had not been declared as reserve; on the other hand the Directors had earmarked it for distribution as dividend and it remained as a mass of undistributed profits available for distribution.
At page 209 Ghulam Hassan J. said: "The reserve may be a general reserve or a specific reserve, but there must be a clear indication to show whether it was a reserve either of the one or the other kind.
The fact that it constituted a mass of undistributed profits on the 1st January ' 1946, cannot automatically make it a reserve . . . . .A reserve in the sense in which it is used in rule 2 can only mean profit earned by a company and not distributed as dividend to the shareholders but kept back by the directors for any purpose to which it may be put in future. . . . " Applying this test to the disputed sum, it cannot be said that the amount is not "Reserve" within the meaning of the Rules.
As is shown by the instruction under section 5211 of the Revised Statute of the United States and the letter of the Deputy Controller referred to above, the appellant bank was required to keep a, certain sum of money under the head " Undivided ,Profits " and that is an integral part of the capital (1) ; 380 structure.
Under these circumstances it would be erroneous not to treat the amount of " Undivided Profits " as a part of the capital fund.
In our opinion therefore the amount designated as Undivided Profits " is a part of the reserves and has to be taken into account when computing the capital and reserves within R. 2(1) of Schedule 11 of the Act.
The question which was referred by the Tribunal should have been decided in the affirmative and in favour of the appellant and the amount should have been added to the capital as allowed by R. 2(1) for the Chargeable Accounting Periods.
In the result the appeal is allowed.
The appellant will have its costs in this Court and in the High Court.
Appeal allowed.

summary:
The appellant, a non resident Banker incorporated under the National Bank Act of the United States of America with its Head Office in America, was assessed under Business Profits Tax Act, 147.
Under the Treasury Rules of the United States of America and Instructions for preparation of reports of conditions by the National Banking Association certain sums had to be specifically allocated under section 5211 of the Revised Statute of the United States, and the appellant bank was required to keep a certain sum of money under the head " undivided profits " and that was an integral part of tile capital structure.
The reason for the existence of this fund was that when losses occurred according to the practice they could be charged against " undivided profits ", i.e., profits set apart after provision for expenses and taxes etc.
for continuous use in the business of the Bank.
The appellant contended that in computing the amount for the purpose of " abatement " it was entitled to include the undivided profits " which fell within the word " reserves ".
The question was whether the large sum of money shown as " undivided profits " was a part of the reserves.
Held, that the amount designated as " undivided profits was a part of the reserves and had to be taken into account when computing the capital and reserves within Rule 2(1) of Sch.
II of the Business Profits Tax Act, 1947.