judgement:
Appeals Nos.
1425 and 1426 of 1966.
Appeals by special leave from the judgment and order dated October 29, 1962 of the Madras High Court in Tax Case No. 195 of 1960.
section Swaminathan and R. Gopalakrishnan, for the appellant (in both the appeals).
654 T. V. Viswanatha Iyer, T. A. Ramachandran, section P. Nayyar for R. N. Sachthey, for the respondent (in both the appeals).
The Judgment of the Court was delivered by Shah, J.
The Income tax Appellate Tribunal submitted two questions for the opinion of the High Court of Madras : "1.
Whether the sum of Rs. 1,28,716/ is assessable as income under any of the provisions of the Act ? 2.
If the answer is in the affirmative, the assessment years in which the amount falls to be assessed by suitable apportionment.
" The first question was answered by the High Court in the affirmative.
The High Court declined to answer the second question because it did not, :in their view, arise out of the order of the Tribunal.
The assessees have appealed to this Court.
By order dated January 30, 1944, the Collector of Madras, ,,exercising power under r. 75A of the Defence of India Rules, 1939, requisitioned a property known as "Lutterals Gardens" belonging to the assessees.
The property continued to remain under requisition till it vested in the Government of Madras absolutely in consequence of an order made on May 24, 1949 by the Collector of Madras under section 5 of the Requisitioned Land (Continuance of Powers) Act, 1947, declaring.the intention of the Government of Madras to acquire that property.
The assessees declined the offer made by the Collector to pay Rs. 2,40,000/ as compensation for acquisition of the property and interest at the rate of 6% thereon from the date, of notification for acquisition, and the dispute relating to compensation payable to the assessees was referred to the Chief Judge of the Court of Small Causes, Madras.
By order of the High Court of Madras in appeal from the order of the Chief Judge it was adjudged that the assessees be paid Rs. 5,00,0001 as compensation for the property.
The High Court also awarded interest at the rate of 6% on the amount of compensation from the date of notification for acquisition.
During the two previous years corresponding to the assessment years 1955 56 and 1956 57 the assessees received, pursuant to the ,order of the High Court, a total sum of Rs. 6,28,716/ .
In proceedings for assessment of tax for the assessment years 1955 56 and 1956 57, the Income tax Officer apportioned the amount of Rs. 1,28,716/ on the basis of actual receipts in the two previous years and assessed the amounts so apportioned to income tax.
The Appellate Assistant Commissioner held that the apportioned amounts were of the nature of revenue and not capital receipts, but ' in his view the income received was liable to be calculated on accrual basis year after year from the date of the notification for ac 655 quisition, and on that account the assessments of the previous years from 1950 51 to 1954 55 should be reopened and the interest which accrued in those years should be assessed.
The Commissioner of Income tax and the assessees appealed to the Appellate Tribunal against the order of the Appellate Assistant Commissioner.
The assessees submitted that Rs. 1,28,716/received as interest being part of compensation were not assessable to tax, whereas the Commissioner claimed that the Income tax Officer was justified in assessing the amounts in the years in which they were received.
The Income tax Appellate Tribunal accepted the contention of the assessees that the receipts were not assessable to tax because they were of the nature of capital receipts.
At the instance of the Commissioner, the Tribunal referred the two questions set out here in before.
Section 5 of the Requisitioned Land (Continuance of Powers) Act, 1947 authorises the Government by which or under the authority of which land has been requisitioned, to acquire the land subject to requisition, by publishing a notice to the 'effect that the Government has decided to acquire such land.
Section 6 of the Act provides, inter alia, that compensation payable to the owner of the land shall be determined in accordance with the provisions of section 19 of the Defence of India Act, 1939, and the rules made thereunder.
Section 19 of the Defence of India Act, 1939, sets out the principles for determining the compensation payable to a claimant.
The amount of compensation may be fixed by agree ment between the owner and the Government : where no such agreement is reached the Central Government is enjoined to appoint an arbitrator having the qualifications prescribed therein.
Under section 19(1) (e.) the arbitrator in making his award must have regard, inter alia, to the provisions of sub section
(1) of section 23 of the Land Acquisition Act, 1894 in so far as the same can be made applicable.
An appeal Res against the award of the arbitrator to the High Court.
Sub sections (2) and (3) of section 19 confer upon the Central Government authority to frame rules for the purpose of carrying into effect the provisions of section 19.
In exercise of that power, the Government of India framed "The Defence of India (Payment of Compensation and Arbitration) Rules, 1943" which amongst other provisions directed that the Collector shall pay compensation as soon as may be practicable.
But neither section 19(1) of the Defence of India Act, nor the Rules framed under section 19(2) and (3) provide that interest shall be paid on the amount of compensation.
In the present case, interest was, however, offered to be paid by the Collector; and the High Court also awarded interest on the amount of compensation from the date of the notification of acquisition.
It was held by this Court in Dr. Shamlal Narula vs Commis sioner of Income tax, Punjab, Jammu and Kashmir, Himachal 656 Pradesh and Patiala(1) that the statutory interest paid under section 34 of the Land Acquisition Act, 1894, on the amount of compensation awarded from the date on which the Collector has taken possession of land compulsorily acquired under the Land Acquisition Act, 1804, is interest paid for delayed payment of the compensation and is a revenue receipt liable to tax under the Income tax Act.
It was observed in that case at p. 156 ".
interest, whether it is statutory or contractual, represents the profit the creditor might have made if he had the use of the money or the loss he suffered because he had not that use.
It is something in addition to the capital amount, though it arises out of it.
Under section 34 of the Act when the legislature designedly used the word "interest" in contradistinction to the amount awarded, we do not see any reason why the expression should not be given the natural meaning it bears.
The scheme of the Act and the express provisions thereof establish that the statutory interest payable under section, 34 is not compensation paid to the owner for de priving him of his right to possession of the land acquired, but that given to him for the deprivation of the use of the money representing the compensation for the land acquired.
" Counsel for the assessee however contended that the principle of Dr. Shamlal Narula 's case(1) is not applicable to this case, since there is no provision in the Requisitioned Land.
(Continuance of Powers) Act, 1947 and the Defence of India Act, 1939, and the rules framed thereunder for payment of interest on the amount of compensation.
Counsel said that under the Act, the owner is paid not the market value of the property, but compensation determined in accordance with a highly artificial scheme, and that the interest paid, in truth, bears the same quality as compensation for deprivation of property and is on that account a capital receipt not exigible to tax.
In support of his.contention, counsel invited our attention to two decisions : The Commissioners of Inland Revenue vs Ballantine(2) and Simpson (H.M. Inspector of Taxes) vs Exe cutors of Bonner Maurice as Executor of Edward Kay(3).
In Ballantine 's case(2) a claim of a firm of contractors against a railway company for "additional costs, loss and damage ' was referred to arbitration.
The arbitrator awarded to the claimant a sum of money mainly as damages, together with interest thereon at 5 per cent.
per annum from the date of lodgement of claim until payment.
The Revenue sought to charge the interest paid by the (1) (3) (2) 657 railway company to tax under Case III of Sch.
D of the Income tax Act, 1918.
It was held that the sum added in the name of interest was part of damages, and was not "interest of money" chargeable to income tax under Case III of Sch.
D. Lord President Clyde observed : "Now it is familiar that an assessment of the kind may contain as one of its constituent elements an allowance in respect that the claimant has lain for a long time out of his remedy.
The propriety of such an allowance may depend on the character of the claim, and its amount may depend on many considerations of which time is only one.
But an interest calculation is a natural and legitimate guide to be used by an arbiter in arriving at what he thinks would be a fair amount.
In most cases in which such an allowance is a constituent of an award it does not separately appear, but is slumped along with other elements in the gross sum decerned for; but there is nothing to prevent an arbiter, if he thinks it just and reasonable in a particular case, to make the allowance in the form of an actual interest calculation from a past date until the sum fixed as at that date is paid.
In all such cases, however whether the allowance is wrapped up in a slump award or is separately stated in the decree the interest calculation is used in modum aestimationis only.
The interest is such merely in name, for it truly constitutes that part of the compensation decerned for which is attri butable to the fact that the claimant has been kept out of his due for a long period of time.
It is not therefore "interest of money" chargeable under Case ITT of Schedule D." In Simpson vs Executors of Bonner Maurice as Executor of Edward Kay(1) the executors of Kay, a naturalised British subject, who died during the First World War received, as the result of the peace treaty claims, amounts representing partly capital of securities, stocks and shares in Banks in Germany deposited by Kay; partly interest and dividends; and partly compensation under the Peace Treaty.
In a proceeding for assessment of the receipt to tax it was held that the compensation computed on the basis of interest was not income for the purposes of income tax.
Lord Hanworth, M. R., observed at p. 601 "I want to add now one more word in reference to the sum which has been paid by way of compensation under Article 297.
It is said in reference.to that 'that. at least, arose at the time when it was paid under the order of the Mixed Arbitral Tribunal '.
It wag a sum (1) c.
CI/67 12 658 which was calculated as interest" . 'and it is interest, and therefore it is within the words of the Schedule, which undoubtedly impose a tax upon interest which arises or accrues to a person liable to tax. ' But is it interest ? Is that its quality, or is it compensation estimated and measured in terms of interest ? It appears to me quite clear that, apart from Article 297, no such sum could have been recovered.
" Lawrence, L.J., observed at p. 605 "Neither the fact that the compensation was measured by the amount of the interest, which but for the embargo placed upon the money by the German Government could have been earned by the Respondents, nor the fact that part of the compensation was described as "interest" in the decision of the Mixed Arbitral Tribunal in my judgment, has the effect of altering the character of the compensation paid to the Respondents.
" But it must be noticed that liability to pay interest arose in Ballantine 's case(1) under the award of the arbitrator and in the Executors of Bonner Maurice as Executor of Edward Kay 's case (2) under the order of the Mixed Arbitral Tribunal, and in each case, it was held that what was paid, though called "interest", was in truth compensation for loss suffered on account of deprivation of property.
According to the view taken by this Court in Dr. Shamlat Narula 's case(3), if the course of the obligation imposed by the statute to pay interest arises because the claimant is kept out of his money, the interest received is chargeable to tax as income.
The same principle would apply if interest is payable under the terms of an agreement and the Court or the arbitrator gives effect to the terms of the agreement express or implied and awards interest which has been agreed to be paid.
It is therefore necessary to determine whether the obligation to pay interest awarded under the order of the High Court of Madras arose out of the statute or out of the award.
In Satinder Singh & Ors.
V. Amrao Singh and Ors.
(4) lands forming part of Cis Sutlej Jagir were compulsorily acquired under the East Punjab Acquisition and Requisition of Immovable Property (Temporary Powers) Act, 1948.
The claimants to the lands claimed in addition to statutory compensation interest from the date from which they were dispossessed and till the date of payment of compensation.
The arbitrator appointed under the Act awarded interest on the amount of compensation and the High Court of Punjab in appeal Confirmed the order.
This Court held that the claimants were (1) , (2) (3) (4) ; , 659 entitled to interest on the compensation amount from the date of dispossession till the date on which 'the amount of compensation was paid to the claimants.
Section 5 of the East Punjab Acquisition and Requisition of Immovable Property (Temporary Powers) Act, 1948, set out the principles according to which compensation was to be paid in regard to the acquired property, and by cl.
(e) thereof it was provided that the arbitrator in making the award shall have regard 'to the provisions, of sub section
(1) of section 23 of the Land Acquisition Act, 1894 in so far as the same may be applicable.
The Act contained no express provision for payment of interest on compensation determined by the arbitrator.
This Court rejected the contention of the State of Punjab, that sections 28 and 34 of the Land Acquisition Act which dealt with the payment of interest were not intended to apply to the proceedings before the arbitrator.
It was observed "Stated broadly the act of taking possession of immovable property generally implied an agreement to pay interest on the value of the property and it is oil this principle that a claim for interest is made against the State. " The Court further observed : "It would thus be noticed that the claim for interest proceeds on the assumption that when the owner of immovable property loses possession of it he is entitled to claim interest in place of right to retain possession.
The question which we have to consider is whether the application of this rule is intended to be excluded by the Act of 1948, and as we have already observed, the mere fact that section 5(e) of the Act makes section 23(1) of the Land Acquisition Act of 1894 applicable we cannot reasonably infer that the Act intends to exclude the application of this general rule in the matter of the, payment of interest.
" The Court also observed "When a claim for payment of interest is made by a person whose Immovable property has been acquired compulsorily he is not making claim for damages properly or technically so called; he is basing his claim on the general rule that if be is deprived of his land he should be put in possession of compensation immediately; if not, in lieu of possession taken by compulsory acquisition interest should be paid to him on the said amount of compensation.
" The scheme of the East Punjab Acquisition and Requisition of Immovable Property (Temporary Powers) Act, 1948 is similar to the scheme of the Requisitioned Land (Continuance of Powers) Act, 1947.
The Court in Satinder Singh 's case(1) held that be (1)[1961] 3 S.C.R. 676. 660 cause of the injunction expressly to apply the provisions of section 23(1) of the Land Acquisition Act, 1894, in the determination of compensation, the application of sections 28 and 34 dealing with the payment of interest on the amount awarded as compensation cannot be deemed excluded.
The Court also held that when the owner of property is dispossessed pursuant to an order for compulsory ac quisition, an agreement that the acquiring authority will pay interest on the amount of compensation is implied.
The reasoning on which the right of the owner of the lands acquired to interest was affirmed in Satinder Singh 's case(1), prima facie, applies in this case.
Counsel for the assessees contended that the application of sections 28 and 34 of the Land Acquisition Act in proceedings for arbitration under the Requisitioned Lands (Continuance Powers) Act, 1947, was expressly excluded by section 19(1)(g) of the Defence of India Act which enacted that: "Save as provided in this section and in any rules made thereunder, nothing in any law for the time being in force shall apply to arbitration under this section." But cl.
(g) is not susceptible of any such interpretation.
Clauses (a) to (f) of section 19(1) are a Code relating to arbitration in determining the compensation payable to a person deprived of his property.
Provisions relating to payment of interest are not, however, part of the law relating to arbitration and there is nothing in cl 1.
(g) which excludes the application of the substantive law relat ing to payment of interest when the arbitration is determining the amount of compensation.
We are therefore of the view that the principle on which The Commissioners of Inland Revenue vs Ballantine(2) and Simpson (H.M. Inspector of Taxes) vs Executors of Bonner Maurice as Executor of Edward Kay(3) were based has no application to this case.
It may be recalled that in those cases the arbitrator and the Arbitral Tribunal were, in awarding interest, not seeking to give effect to, or to recognize a right to interest, conferred by statute or contract.
The source of the right to interest in both the cases did not arise from the statute or agreement.
In the case on hand, the right to interest arose by virtue of the provisions of sections 28 and 34 of the Land Acquisition Act, 1894, and the arbitrator and the High Court merely gave effect to that right in awarding interest on the amount of compensation.
Interest received by the assessee was therefore properly held taxable.
The appeals fail and are dismissed with costs.
One hearing Y.P. Appeals dismissed.
(1)[1961] 3S.C.R. 676.

summary/full:
The assesses& were offered compensation and interest on the amount of compensation in respect of their property which was first requisitioned under r. 75A of the Defence of India Act, 1939 and later acquired by the State under section 5 of the Requisitioned Land (Continuance of Powers) Act.
The Requisition Act provided that.
compensation payable shall be determined in accordance with the provisions of section 19 of the Defence of India Act and the rules thereunder, but neither section 19 nor the Rules provided that interest shall be paid on the amount of compensation.
The assessee demanded more compensation and interest, and, the High Court in appeal enhanced the compensation and awarded interest on it The Revenue assessed to income tax the amount of interest, which was upheld, in reference, by the High Court.
In appeal.
this Court.
HELD : Interest received by the assessee was taxable.
If the source of the obligation imposed by the statute to pay interest arises because the claimant is kept out of his money, the interest received is chargeable to tax as income.
The same principle would apply if interest is payable under the terms of an agreement and the court or the arbitrator gives effect to the terms of the agreement express or implied and awards interest which has been agreed to be paid Clauses (a) to, (f) of section 19(1) of the Defence of India Act are a Code relating to a arbitration in determining the compensation payable to a person depraved of his property.
Provisions relating to payment of interest, are not, however, part of the law relating to arbitration and there is nothing in cl.
(g) which excludes the application of the substantive law relating to payment of interest when the arbitration is determining the amount of compensation.
In this case, the right to interest arose by virtue of the provisions of Ss. 28 and 34 of the Land Acquisition Act, 1894, and the arbitrator 'and the High Court merely gave effect to that right in awarding interest on the account of compensation.
[658 E F; 660 D H] Dr. Shamtal Narula vs Commissioner of Income tax, Punjab, Jammu and Kashmir, Himachal Pradesh and Patiala, 53 I.T.R. 151, and Satinder Singh & Ors.
vs Amrao Singh & Ors. ; , followed.
The Commissioners of Inland Revenue vs Bellantine, 8 T.C. 59,5, and Simpson (H. M. Inspector of Taxes) vs Executors of Bonner Maurice as Executor of Edward Kay, , distinguished.


judgement:
Appeal No. 728 of 1964.
Appeal by special leave from the.
judgment and decree dated September 25, 1961 of the Punjab High Court in Civil Regular Second Appeal 343 of 1961.
section K. Mehta and K. L. Mehta, for the appellant.
A. D. Mathur, for the respondents.
The Judgment of the Court was delivered by Bhargava, J.
One Ramji Dass died leaving behind a widow, Smt.
Bhagwani.
At the time of his death, he owned some land and a house.
4 bighas and 17 biswas of the land were mortgaged by Smt.
Bhagwani on 2nd May, 1948 in favour of respondent No. 3, Babu Ram.
Later, on 22nd August, 1949, she executed a deed of gift in respect of the house and the land covering an area of 50 bighas and 14 biswas in favour of Smt.
Kala Wanti who was related to her as a grandniece.
Sawan Ram appellant instituted a suit for a declaration that both these alienations were without legal necessity and were not binding on him, claiming that he was the nearest reversioner of Ramji Dass, being his collateral.
In that, suit, Smt.
Bhagwni the donee, Smt.
Kala Wanti, respondent No. 1, and the mortgagee, Babu Ram, respondent No. 3, were impleaded as defendants.
That suit was decreed and Smt.
Bhagwani went up in appeal to the High Court.
During the pendency of the appeal, Smt.
Bhagwani adopted respondent No. 2, Deep Chand, the son of Brahmanand and his wife, respondent No. 1, Smt.
Kala Wanti.
A deed of adoption was executed by her in that respect on 24th August, 1959.
The appeal was dismissed in spite of this adoption.
Bhagwani died on 31st October, 1959, and thereupon, the appellant brought a suit for possession of the house and the land which had been gifted by Smt.
Bhagwani to respondent No. 1 as well as for possession of the land which she had mortgaged with respondent No. 3.
It was claimed that Smt.
Bhagwani had only a life interest in all these properties, because she had divested herself of all the rights in those properties on 22nd August, 1949, before the (No. 30 of 1956) came into force.
The adoption of Deep Chand was also challenged as fictitious and ineffective.
It was further urged that, even if that adoption was valid, Deep Chand became the adopted son of Smt.
Bhagwani and could not succeed to the properties of Ramji Dass.
The suit was dismissed by the trial court, holding that the adoption of Deep Chand was valid and that, though Smt.
Bhagwani had not become the full owner of the property under the , Deep Chand was entitled to succeed to the property of Ramji Dass in preference to the appellant, so that the appellant could not claim possession of these pro 689 perties.
That order was upheld by the High Court.
of Punjab, and the appellant has now come up to this Court in appeal by special leave.
In this appeal before us, only two points have been urged by learned counsel for the appellant.
The first point taken is that, even though the appellant did not challenge the finding of fact that respondent No. 2 was, in fact, adopted by Smt.
Bhagwani, that adoption was invalid under clause (Ii) of section 6 read with sub section
(2) of section 9 of the (No. 78 of 1956) (hereinafter referred to as "the Act").
It is urged that, under section 9 (2) of the Act, if the father of a child is alive, he alone has the right to give in adoption, though the right is not to be exercised, save with the consent of the mother.
In this case, reliance was placed on the language of the deed of adoption dated 14th August, 1959, to urge that Deep Chand was, in fact, given in adoption to Smt.
Bhagwani by his mother, respondent No. 1, even though his father, Brahmanand, was alive.
This point raised on behalf of the appellant is negatived by the evidence on the record.
There is oral evidence of the adoption which has been accepted by the lower courts, and it shows that.
Deep Chand was given in adoption by both the parents to Smt.
Bhagwani.
Even the deed of adoption dated 24th August, 1959, on which reliance was placed on behalf of the appellant in support of this argument, does not bear out the suggestion that Deep Chand was given in adoption by his mother and not by his father.
The deed clearly mentions that "the parents of Deep Chand have, of their own free will, given, Deep Chand to me, the executant, today as my adopted son.
" This recitation is followed by a sentence which states : "Mst.
Kala Wanti, mother of Deep Chand, has put her thumb mark hereunder in token of her consent.
" It was from this solitary sentence that inference was sought to be drawn that Deep Chand had been given in adoption by his mother, Kala Wanti and not by the father.
The deed, in the earlier sentence quoted above, clearly mentions that Deep Chand had been given in adoption by his "parents" which necessarily includes the father.
This later sentence, it appears, was put in the deed, because section 9(2) of the Act mentions that the father is not to exercise his right of giving his child in adoption, save with the consent of the mother.
"The consent of the mother" having been used in the Act which was applicable, the draftsmen of the deed included in it the fact that Deep Chand 's mother had actually given her consent and obtained her thumb impression in token thereof.
This mention of the consent cannot, in these cir cumstances, be held to show that it was the mother who, in fact, gave the child in adoption and not the father.
The second point and the one, on which reliance is mainly placed by learned counsel for the appellant, is that, according 690 to him, under the Act, an independent right of adoption is given to a Hindu female and if a widow adopts a son, he becomes the adopted son of the widow only and is not to be deemed to be the son of her deceased husband.
Under the Shastric Hindu Law, no doubt, if a Hindu widow made an adoption after the death of her husband on the basis of consent obtained from him in his lifetime, the adopted son was deemed to be the son of the deceased husband also; but it is urged that the Act has completely changed this policy.
In support of this proposition, learned counsel drew our attention to the provisions of section 8 of the Act, under which any female Hindu, who is of sound mind, who is not a minor, and who is not married, or if married, whose marriage has been dissolved or whose husband is dead or has completely and finally renounced the world or has ceased to be a Hindu or has been declared by a court of competent jurisdiction to be of unsound mind, has been granted the capacity to take a son or a daughter in adoption.
Then reference was made to section 12 of the Act, which runs as follows : "12.
An adopted child shall be deemed to be the child of his or her adoptive father or mother for all purposes with effect from the date of adoption and from such date all the ties of the child in the family of his or her birth shall be deemed to be severed and replaced by those created by the adoption in the adoptive family; Provided that (a) the child cannot marry any person whom he or she could not have married if he or she had continued in the family of his or her birth; (b) any property which vested in the adopted child before the adoption shall continue to vest in such person subject to the obligations, if any, attaching to the owner ship of such property, including the obligation to maintain relatives in the family of his or her birth , (c) the adopted child shall not divest any person of any estate which vested in him or her before the adoption.
" Reliance was also placed on sections 13 and 14 of the Act which are reproduced below: "13.
Subject to any agreement to the contrary, an adoption does not deprive the adoptive father or mother of the power to dispose of his or her property by transfer inter vivos or by will.
(1) Where a Hindu who has a wife living adopts a child, she shall be deemed to be the adoptive mother.
691 (2) Where an adoption has been made with the consent of more than one wife, the senior most in marriage among them shall be deemed to be the adoptive mother and the others to be, step mothers.
(3) Where a widower or a bachelor adopts a child, any wife whom he subsequently marries shall be.
deemed to be; the stepmother of the adopted child.
(4) Where a widow or an unmarried woman adopts a child, any husband whom she marries subsequently shall be deemed to be the stepfather of the adopted child.
" On the basis of these provisions, it was urged that the scheme of the Act is that, when a Hindu female adopts a child, he becomes the adopted son of the Hindu female only and does not necessarily become the son of the deceased husband, if the Hindu female be a widow.
Emphasis was laid on the fact 'that even an unmarried female Hindu is permitted to take a son or daughter in adoption and in such a case, naturally, no question would arise of the adopted child becoming the adopted son of a Hindu male also.
In this connection, reliance was placed on a decision of the High Court of Andhra Pradesh in Nara Hanumantha Rao vs Nara Hanumayya and Another(1).
For convenience, the facts of that case may be briefly reproduced as given in the head note to indicate the question of law that fell to be decided.
A and his two sons B and C were members of a Hindu joint family.
B died on 26th August, 1924 leaving behind his widow D. A died in the year 1936.
On 17th June, 1957, D adopted E, and E filed the suit against C and his son F for partition and separate possession of a half share in the properties.
The trial court held : (1) that there is a custom among the members of the Kamma caste, to which the parties belonged, whereby the adoption of a boy more than 15 years old is valid; and (2) that the adoption of E could not have the result of divesting the interest of B that had vested in C long prior to the date of the adoption, having regard to the provisions of the Act.
In appeal, the High Court upheld the decision of the trial court on both the points that were raised.
The existence of the caste custom, by which boys aged more than 15 years could be adopted, was held to be sufficiently proved by evidence.
Then the High Court proceeded to consider the provisions of the Act to find out whether E could claim a share in the property of B, the deceased husband of D who had adopted him.
The learned Judges of the High Court enumerated the contents of the various relevant sections of the Act and then proceeded to consider whether E could claim a right in the property left by B. The Court, after reproducing the provisions of section 12 of the Act held : (1) [1964] I Andhra Weekly Reporter, 156.
69 2 "Under the terms of the above section, an adopted child is deemed to be the child of his or her adoptive father or mother for all purposes with effect from the date of the adoption.
Relying on the words "for all purposes", it is argued that the adopted child has the same rights and privileges in the family of the adopter as the legitimate child.
From the language of the section, it is manifest that an adopted child is deemed to be the child of his or her adoptive father or mother.
The use of the word "or" between the words "father" and "mother ' makes this abundantly clear.
The use of the expression "with effect from the date of adoption" as also the language of clause (c) of the Proviso are important.
The expression "with effect from the date of adoption" introduces a vital change in the pre existing law.
Under the law as it stood before the Act came into operation, the ground on which an adopted son was held entitled to take in defeasance of the rights acquired prior to his adoption was that, in the eye of law, his adoption related back, by a legal fiction, to the date of death of his adoptive father.
The rights of the adopted son, which were rested on the theory of "relation back", can no longer be claimed by him.
This is clear from the specific provision made in section 12 that the rights of the adopted are to be determined with effect from the date of adoption.
Clause (c) of the Proviso to section 12 lays down the explicit rule that the adoption of a son or daughter, by a male or female Hindu is not to result in the divesting of any estate vested in any person prior to the adoption.
" When finally expressing its opinion on the question of law, the Court said : "The Act has made a notable departure from the previous law in allowing a widow to adopt a son or daughter to herself in her own right.
Under the Act, there is no question of the adopted child divesting of any property vested in any person or even in herself.
The provisions of section 13 make this position clear, by providing that an adoption does not deprive the adoptive father or mother of the powers to dispose of his or her property by transfer inter vivos or by will.
On a fair interpretation of the provisions of section 12 of the Act, we are of the opinion that the section has the effect of abrogating the ordinary rule of Mitakshara law that, as a result of the adoption made by the widow, the adoptee acquires rights to the share of his.
deceased 39 6 adoptive father which has passed by survivorship to his father 's brothers.
" We are unable to accept this interpretation of the provisions of the Act by the Andhra Pradesh High Court as it appears to us that the High Court ignored two important provisions of the Act and did not consider their effect when arriving at its decision.
The first provision, which is of great significance, is contained in section 5 (1) of the Act which lays down : "No adoption shall be made after the commencement of this Act by or to a Hindu except in accordance with the provisions contained in this Chapter, and any adoption made in contravention of the said provisions shall be void.
" It is significant that, in this section, the adoption to be made is mentioned as "by or to a Hindu".
Thus, adoption is envisaged as being of two kinds.
One is adoption by a Hindu, and the other is adoption to a Hindu.
If the view canvassed on behalf of the appellant be accepted, the consequence will be that there will be only adoptions by Hindus and not to Hindus.
On the face of it, adoption to a Hindu was intended to cover cases where an adoption is by one person, while the child adopted becomes the adopted son of another person also.
It is only in such a case that it can be said that the adoption has been made to that other person.
The most common instance will naturally be that of adoption by a female Hindu who is married and whose husband is dead, or has completely and finally renounced the world, or has been declared by a court of competent jurisdiction to be of unsound mind.
In such a case, the actual adoption would be by the female Hindu, while the adoption will be not only to herself, but also to her husband who is dead, or has completely and finally renounced the world or has been declared to be of unsound mind.
The second provision, which was ignored by the Andhra Pradesh High Court, is one contained in section 12 itself. 'The section, in its principal clause, not only lays down that the adopted child shall be deemed to be the child of his or her adoptive father or mother for all purposes with effect from.
the date of the adoption, but, in addition, goes on to define the rights of such an adopted child.
It lays down that from such date all the ties of the child in the family of his or her birth shall be deemed to be severed and replaced by those created by the adoption in the adoptive family.
A question naturally arises what is the adoptive family of a child who is adopted by a widow, or by a married woman whose husband has completely and finally renounced the world or has been declared to be of unsound mind even though alive.
It is well recognized that, after a female is married, she belongs to the family of her husband.
The child adopted by her must also, therefore, belong to the same family.
On adoption by a widow, therefore, the adopted son is to be deemed to be a member of the family of the deceased husband of the widow.
Further still, he loses all his rights in the family of his birth and those rights 694 are replaced by the rights created by the adoption in the adoptive family.
The right, which the child had, to succeed to property by virtue of being the son of his natural father, in the family of his birth, is, thus, clearly to be replaced by similar rights in the adoptive family and, consequently, he would certainly obtain those rights in the capacity of a member of that family as an adopted son of the deceased husband of the widow, or the married female, taking him in adoption.
This provision in section 12 of the Act, thus, itself makes it clear that, on adoption by a Hindu female who has 'been married, the adopted son will, in effect, be the adopted son of her husband also.
This aspect was ignored by the Andhra Pradesh High Court when dealing with the effect ,of the language used in other parts of this section.
It may, however, be mentioned that the conclusion which we have arrived at does not indicate that the ultimate decision given by the Andhra Pradesh High Court was in any way incorrect.
As we have mentioned earlier, the question in that case as whether E, after the adoption by D, the widow of B, could divest C of the rights which had already vested in C before the adoption.
It is significant that by the year 1936 C was the sole male member of ,the Hindu joint family which owned the disputed property.
B died in the year 1924 and A died in 1936.
By that time, the Hindu Women 's Rights to Property Act had not been enacted and, consequently, C, as the sole male survivor of the family became full owner of that property.
In these circumstances, it was clear that after, the adoption of E by D, E could not divest C of the rights already vested in him in view of the special provision contained in clause (c) of the proviso to section 12 of the Act.
It appears that, by making such a provision, the Act has narrowed down the rights of an adopted child as compared with the rights of a child born posthumously.
Under the Shastric law, if a child was adopted by a widow, he was treated as a natural born child and, consequently, he could divest other members of the family of rights vested in them prior to his adoption.
It was only with the limited object of avoiding any such consequence on the adoption of a child by a Hindu widow that these provisions in clause (c) of the proviso to section 12, and section 13 of the Act were incorporated.
In that respect, the rights of the adopted child were restricted.
It is to be noted that this restriction was placed on the rights of a child adopted by either a male Hindu or a female Hindu and not merely in a case of adoption by a female Hindu.
This restriction on the rights of the adopted child cannot, therefore, in our opinion, lead to any inference that a child adopted by a widow will not be deemed to be the adopted son of her deceased husband.
The second ground taken on behalf of the appellant also, therefore, fails.
The appeal is, consequently, dismissed with costs.
Y.P. Appeal dismissed.

dataset_name: IN-Abs

summary/full:
A widow, whose husband had died before the Hindu Succession Act came into force, adopted respondent 2 after the enforcement of the Act.
On the widow 's death, the appellant the nearest reversioner of her husband, filed a suit challenging the adoption.
The trial court dismissed the suit, which, in appeal, the High Court upheld.
In appeal, to this Court the appellant contended that (i) the adoption was invalid under (ii) of section 6 read with section 9 (2) of the as the son was given in adoption by his mother, even though his father was alive; and (ii) under the , an independent right of adoption is given to Hindu female and if a widow adopts a son, he becomes the adopted son of the widow only and was not deemed to be the son of her deceased husband.
HELD : The appeal must be dismissed.
(i) The evidence on record established that the son was given in adoption by both the parents.
The deed of adoption mentions that the had been given in adoption by his "Parents which necessarily includes the father.
The following sentence stating that the mother of the boy had 'put her thumb mark hereunder in token of her consent, ' was put in the deed, because section 9(2) of the Adoptions and Maintenance Act mentions that the father is not to exercise his right of giving his child in adoption, save with the consent of the mother.
"The consent of the, mother" having been used in the Act which was applicable, the draftsmen of the deed included in it the fact that the boy 's mother had actually given her consent and obtained her thumb impression in token thereof.
689D H] (ii) The provision in section 12 of the Act, makes it clear that, on adoption by a Hindu female who has been married, the adopted son will, in effect, be the adopted son of her husband also.
Under the Shastric Law if a child was adopted by a widow, he was treated as a natural born child and, consequently, he could divest other members of the family of rights vested in them prior to his adoption.
It was only with the limited object of avoiding any such consequence on the adoption of a child by a Hindu widow that the provisions in clause (c) of the proviso to section 12, and section 13 of the Act were incorporated.
In that respect, the rights of the adopted child were restricted.
It is to be noted that this restriction was placed on the rights of a child adopted by either a male Hindu or a female Hindu and not merely in a case of adoption by a female Hindu.
This restriction on the rights of the adopted child cannot, therefore, lead to any inference that a child adopted by a widow will not be deemed to be the adopted son of her deceased husband.
[694B C,F H] Nara Hanumantha Rao vs Nara Hanumayya and another, [1964] 1 Andhra Weekly Reporter, 156, discussed.


judgement:
Appeal No. 702 of 1966.
Appeal by special Leave from the judgment and order dated July 30, 1964 of the Kerala High Court in Income tax Referred Case No. 20 of 1963.
section T. Desai, section K. Aiyar and R. N. Sachthey, for the appellant.
T. V. Viswanath Iyer, section K. Dholakia, and O. C. Mathur, for the respondent.
The Judgment of the Court was delivered by Shah, J.
Two persons Walter and Ramasubramony carried on business in cashewnuts as partners in the name and style of Messrs. Gemini Cashew Sales Corporation.
The partnership was dissolved on the death of Ramasubramony on August 24, 1957, and the business was taken over and continued by Walter on his own account.
The services of the employees were not interrupted and there was no alteration in the terms of employment of the employees of the establishment.
In proceedings for assessment of tax it was urged on behalf of the firm that an amount of Rs. 1,41,506 taken into account under the head "Gratuity payable to workers of the business" in settling the accounts of the firm till August 24, 1957, was a permissible outgoing.
The Income tax Officer rejected the claim and the Appellate Assistant Commissioner confirmed that order.
The Income tax Appellate Tribunal held that by the transfer of the undertaking to Walter, there was no interruption in the employment of the workmen of the establishment, that the terms and conditions of service applicable to the workmen were not altered to their detriment, that Walter had not expressly agreed to take over the liability for compensation payable under section 25FF of the , and since there was dissolution of the partnership on August 24, 1957 and the undertaking was transferred, the workmen became entitled to retrenchment compensation, which the firm was liable to pay.
The Tribunal accordingly held that the firm was entitled to deduct the sum of Rs. 1,41,506 in the computation of income in the assessment year.
1958 59.
In recording their opinion on the following question submit ted by the Tribunal, 729 "Whether the allowance of Rs. 1,41,506 constitutes an allowable expenditure in the assessment of the firm for the year 1958 59", the High Court of Kerala observed that in the determination of the taxable profits of the firm till its dissolution, considerations about the liability to pay retrenchment compensation devolving upon Walter as the assignee of the business valuable consideration were irrelevant, and since it was maintaining accounts on mercantile system, the firm could claim as a Permissible outgoing the amount for which liability was incurred though no actual payment was made to the workmen.
The Commissioner of Income tax appeals with special leave, against the order of the High Court recording an answer in the affirmative.
The, subject matter of the claim was retrenchment compen sation payable to workmen of the establishment under section 25FF of the , Section 25F of the In dustrial Disputes Act, 1947, provides : "No workman employed in any industry who has been in continuous service for not less than one year under an employer shall be retrenched by that employer until (a) the workman has been given one month 's notice in writing indicating the reasons for retrenchment and the period of notice has expired, or the workman has been paid in lieu of such notice, wages for the period of the notice: Provided that no such notice shall be neces sary if the retrenchment is under an agreement which specifies a date for the termination of service; (b) the workman has been paid, at the time of retrenchment, compensation which shall be equivalent to fifteen days ' average pay for every completed year of service or any part thereof in excess of six months; and (c) notice in the prescribed manner is served on the appropriate Government.
" Section 25FF, as substituted by Act 18 of 1957 with effect from November 28, 1956, provides : "Where the ownership or management of an undertaking is transferred, whether by agreement or by operation of law, from the employer in relation to that undertaking to a new employer, every workman who 73 0 has been in continuous service for not less than one year in that undertaking immediately before such transfer shall be entitled to notice and compensation in accordance with the provisions of Section 25F, as if the workman had been retrenched : Provided that nothing in this section shall apply to a workman in any case where there has been a change of employers by reason of the transfer, if (a) the service of the workman has not been interrupted by such transfer; (b) the terms and conditions of service applicable to the workman after such transfer are not in any way less favourable to the workman than those applicable to him immediately before the transfer; and (c) the new employer is, under the terms of such transfer or otherwise, legally liable to pay to the workman, in the event of his retrenchment, compensation on the basis that his service has been continuous and has not been interrupted by the transfer." Under section 25FF the right of the workmen to retrenchment com pensation arises on transfer of ownerships or management from the employer in relation to the undertaking to a new employer.
But in the conditions set out in the proviso no such right accrues.
It is common ground that the first and the second conditions in the proviso are satisfied.
Counsel for the Commissioner contended that the third condition of the proviso was also satisfied, and no right to retrenchment compensation arose in favour of the workmen under section 25FF of the .
Counsel for the Commissioner contended that the liability of the partners in a firm to pay retrenchment compensation being joint and several, when the undertaking carried on by a firm is continued by one of the partners after its dissolution, and the services of the workmen are not terminated and the terms and conditions of the service are not made less favourable, the partner continuing the business may appropriately be held liable to pay to the workmen retrenchment compensation on the footing that the service of the workmen had been continuous.
Counsel relied upon the view expressed by the Calcutta High Court in Alex A. Apcar (Jr.) & Company vs M. N. Gan and Others(1) in which it was observed that a change of partnership by inclusion or retirement of partner, which legally changes the constitution of the firm, does not result (1) A.I.R. 1960 Cal.
14 731 in, a "change of business or employer within the meaning of sections 25F and 25FF".
Counsel for the assessee relied upon a judgment of this Court in Anakapalia Co operative Agricultural and Industrial Society vs Its Workmen & Others(1) in support of the contention that on a bona fide transfer of an undertaking the workmen employed in the undertaking are entitled to retrenchment compensation under section 25FF against the transferor.
That however was a case in which the transferee had declined to re employ the workmen of the transferor and the first condition of the proviso was not fulfilled.
That case can have no application to the present case.
In the view we take, that the allowance claimed is not a proper outgoing, or allowance in computing the profits of the assessee, we do not express any opinion on the question whether the workmen of the undertaking became entitled to retrenchment compensation on the transfer of the undertaking to Walter.
Liability to pay retrenchment compensation arises under section 25FF when there is a transfer of the ownership or management of an undertaking : it arises on the transfer of the undertaking and not before.
Transfer of ownership or management of an undertaking in law operates, except in the conditions Set out in the proviso, as retrenchment of the workmen.
But until there is a transfer of the undertaking resulting in determination of employment the workmen do not become entitled to retrenchment compensation.
So long as the ownership of the business continues with the employer, the right of the workmen to claim compensation remains contingent.
A workman may, before the transfer of ownership of the business, himself terminate the employment: he may die or he may become superannuated: in none of these cases the owner of the business is under any obligation to pay retrenchment compensation to the workman.
The obligation to pay compensation becomes definite only when there, is retrenchment by the employer, or when the ownership or management of the undertaking is, except in the cases contemplated by the proviso, transferred to a new employer, and not till then.
The right therefore arises from determination of employment, or from transfer of the undertaking : it has no existence before these events take place.
The judgment of this Court in Calcutta Company Ltd vs Com missioner of Income tax, West Bengal (2) on which reliance was placed by counsel for the assessee has no bearing on the present case, for in that case, expenditure which it was estimated had to be incurred to discharge an existing and definite obligation enforceable against the assessee in praesenti was held a permissible (1) [962] (2) 732 deduction in the computation of income.
The Calcutta Com pany Ltd had sold plots of land for building purposes undertaking to develop them within six months by laying out roads, providing drainage and installing lights, etc.
In the accounts of the Company maintained according to the mercantile system, the Company had credited the full sale price of the.
plots agreed to be paid by the purchasers, but not actually received, and against the price it debited an estimated sum as expenditure for the development it had undertaken to carry out, even though no part of the amount was actually spent.
By the terms of sale, the Company had undertaken an unconditional obligation which was enforceable against it : the liability was not contingent upon the happening of a future event.
It was held by this Court that the outgoing debited was properly admissible.
The decision of the House of Lords in Owen (H. M. Inspector of Taxes) vs Southern Railway of Peru Ltd.(1) on which counsel for the assessee relied also does not assist the the assessee.
In that case under the Peruvian law the Southern Railway of Peru Ltd. was bound to pay its employees in Peru prescribed compensation payments upon termination of their services, subject to the fulfilment by the employee of certain conditions.
The amount to be paid depended on the length of service and rate of pay at the end of the period of service.
The Company set apart from the gross profits of each year sums prospectively payable under the Peruvian law as compensation on the termination of employment.
In proceedings for assessment to tax of the Company made under Case 1 of Sch.
D of the Income Tax Act, 1918 (8 & 9 Geo. 5, Ch. 40), it was contended on behalf of the Company that upon proper principles of commercial accountancy compensation calculated to have accrued due to each employee from year to year as deferred remuneration was properly allowable as a deduction.
The Special Commissioners upheld the claim of the Company on the (,round that it was a matter of correct accountancy practice to make provision in the accounts for the sums in question.
The matter reached the House of Lords in appeal from an order on a reference under section 64 of the Income Tax Act, 1952.
The House held that where a number of similar contingent obligations arise from trading, there is no rule of law which prevents the deduction of a provision for them in ascertaining annual profits, if a sufficiently accurate estimate can be made.
But a majority of the House held that the "provision claimed by the Company throughout the proceedings was not permissible by reason of the absence of discount and other factors".
Lord MacDermott observed at p. 635 : ". .as a general proposition it is, I think, right to say that in computing his taxable profits for a (1) 733 particular year a trader who is under a definite obligation to pay his employees for their services in that year an 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.
Apart from special circumstances, such a procedure, if practicable, is justified because it brings the true costs of trading in the particular year into account for that year and thus promotes the ascertainment of the "annual profits or gains arising or accruing fro in" the trade.
" Lord MacDermott was of the view that the provision made by the Company led to anomalies, and was not admissible as made, and the case should be remitted to the Special Commissioners whether it is practicable to arrive at satisfactory deductions.
Lord Radcliffe with whom the Lord Chancellor and Lord Tucker agreed was of the view that there is no rule of law which forbids the introduction of a provision for future payments in or payments out, if the right to receive them or the liability to make them, is in legal terms contingent at the closing of the relevant year.
The question which arises in the present case is not about the admissibility of a provision made by a trader by the adoption of it reasonably satisfactory method estimating the present value of an obligation which may arise in future to pay a sum of money to his employees.
The question that falls to be determined is whether the liability which arises on transfer of the, business is to be regarded as a permissible outgoing in the account of the business which is transferred.
Broadly stated, the present value on commercial valuation of money to become due in future, under a definite obligation, will be a permissible outgoing or deduction in computing the taxable profits of a trader, even if in certain conditions the obligation may cease to exist because of forfeiture of the right.
Where, however, the obligation of the trader is purely contingent, no question of estimating its present value may arise, for to be a permissible outgoing or allowance, there must in the year of account be a present obligation capable of commercial valuation.
As already observed, the liability to pay retrenchment com pensation arose for the first time after the closure of the business and not before.
It arose not in the carrying on of the business, but on account of the transfer of the business.
During the entire period that the business was continuing, there was no liability to pay retrenchment compensation.
The liability which arose on transfer of the business was not of a revenue nature.
Profits of a business involve comparison between the state of the business at 734 two specific dates.
Normally the liability which occurs after the last date, unless its source is in a pre existing definite obligation, cannot be regarded as a part of the outgoing of the.
business debit able in the profit & loss account.
A deduction which is proper and necessary for ascertaining the balance of profits and gains of the business is undoubtedly properly allowable, but where a liability to make a payment arises not in the course of the business, not for the purpose of carrying on the business, but springs from the transfer of the business, it is not, in our judgment, a properly debatable item in its profit & loss account as a revenue outgoing.
The claim of the firm to treat it as an item in the determination of the profits of the firm under section 10(1) of the Income tax Act can.not, therefore,. be sustained.
Under section 10(2) (xv) of the Indian Income tax Act in the computation of taxable profits (omitting parts of the clause not material) "any expenditure laid out or expended wholly and exclusively for the purpose of such business, profession or vocation", i.e. business, profession or vocation carried on by the assessee, is a permissible allowance.
But to be a permissible allowance the expenditure must be for the purpose of carrying on the business.
Where accounts are maintained on the the mercantile system, if liability to make the payment has arisen during the time the business is carried on, it May appropriately be regarded as expenditure.
But where the liability is, during the whole of the period that the business is carried on, wholly contingent and does not raise any definite obligation during the time that the business is carried on, it cannot fall within the expression "expenditure laid not or expended wholly and exclusively" for the purpose of the business.
Two cases illustrative of the principle may be noticed.
It was held by the Madras High Court in Commissioner of Income tax, Madras vs Indian Metal and Metallurgical Corporation(1) that a provision made in the annual accounts maintained by an employer setting apart by way of a reserve to meet the liability, if any, to which the employer may become subject in the event of retrenching workmen because of the necessity of retrenchment of the services of the staff, was not a liability in praesenti in the year of account, but was only a contingent liability which may arise on the happening of a particular contingency and was not allowable as a ,deduction in assessment of tax.
This Court in dealing with a case under the Wealth Tax Act in Standard Mills Company Ltd. V. ,Commissioner of Wealth tax, Bombay(1) held that a liability under the award of the Industrial Court to pay gratuity to its ,employees at certain rates on death while in service, or on voluntary retirement or resignation after fifteen years ' continuous (1) (2) 735 service, or on termination of service after certain specified periods, but not if the employee was dismissed for dishonesty or misconduct, was a mere contingent liability which arose only when the employment of the employee was determined by death, incapacity, retirement or resignation : the liability did not exist its praesenti.
The amount of Rs. 1,41,506/ claimed as a permissible allow ance by the assessee in its profit & loss account cannot, in our judgment, be regarded as properly admissible either under section 10 (1) or section 10 (2) (xv) of the Income tax Act.
The answer to the question must, therefore, be in the negative.
The appeal is allowed and the order passed by the High Court is set aside.
The Commissioner will be entitled to his costs in this Court.
R.K.P.S. Appeal allowed.

summary/full:
A partnership of two partners was dissolved on the death of one of them on August 24, 1957 and the business was taken over by the surviving partner on his own account.
The services of the employees were not interrupted and there was no alteration in their terms of employment.
In proceedings for assessment to income tax for the assessment year 1958 59 it was urged on behalf of the firm that an amount of Rs. 1,41,506 taken into account under the head "gratuity payable to workers of the business" in settling the accounts of the firm till August 24, 1957 was a permissible outgoing.
The Income tax Officer rejected the claim and the Appellate Assistant Commissioner confirmed his order.
However, the Tribunal, in appeal, held that on the dissolution of the firm, the workmen became entitled to retrenchment compensation under section 25FF of the and the firm was therefore entitled to the deduction.
The High Court, upon a reference, confirmed this view.
On appeal to this Court, HELD : The amount claimed by the assessee as a permissible allowance in his profit and loss account could not be regarded as properly admissible either under section 10(1) or under section 10(2)(xv) of the Income Tax Act, 1922.
[735 B] Under the proviso to section 25FF the liability.to pay retrenchment compensation arose for the first time after the closure of the business and not before.
It arose not in the carrying on of the business, but on account of the transfer of the business.
It was not therefore a liability of a revenue nature and could not be treated as a permissible deduction under section 10(1).
[733 H] Alex A. Apcar (Jr.) & Company vs M. V. Gan and Others, A.I.R, , referred to.
Anakpalia Cooperative Agricultural and Industrial Society vs Its, Workmen & Others, , Calcutta Company Ltd. vs Commissioner of Income tax, West Bengal, and Owen (H. M. Inspector of Taxes) vs Southern Railway of Peru Ltd., , distinguished.
Where accounts are maintained on the mercantile system, if liability to make a payment has arisen during the time the business is carried on.
and the expenditure is for the purpose of carrying on the business, it may be deductible under Section 10(2)(xv) but where the liability is during the whole of the period that the business is carried on wholly contingent and does not raise any definite obligation during that time it cannot fall L9Sup.
CI/67 3 728 within the expression "expenditure laid out or expended wholly or exclusively" for the purpose of the business.
[734 D E) Commissioner of Income tax, Madras vs Indian Metal and Metallurgical Corporation, and Standard Mills Company Ltd. vs Commissioner of Wealth tax, Bombay, , relied on.


judgement:
Appeal No. 2453 of 1966.
Appeal from the judgment and order dated August 9, 1963 of the Madras High Court in T.C. No. 152 of 1961.
R. Venkatram and R, Ganapathy Iyer, for the appellant.
B. Sen and R. N. Sachthey, for the respondent.
The Judgment of the Court was delivered by Shah, J.
In Sundaram & Company (Private) Ltd. hereinafter called "the Company" the public are not substantially interested within the meaning of section 23A of the Indian Income tax Act, 1922.
In dealing with the assessment of income of the Company for the assessment years 1946 47 to 1951 52, the Income tax Officer, Central Circle, Madras, passed orders under section 23A of the Income tax Act, 1922, and directed that the total income of the Company as determined in the years of assessment less tax payable be deemed to have been distributed amongst the shareholders of the Company as on the relevant dates of the General Body Meetings.
The following table sets out the relevant details 800 Assessment Amount of divi Date of order passed year.
dend deemed to under section 23A deeming have been dec dividend to have been declared.
lared.
1946 47 46,563 March 18,1952 1947 48 43,959 do 1948 49 47,829 do 1949 50 97,875 do 1950 51 92,591 do 1951 52 25,899 March 30, 1955 3,54,716 On July 7, 1955 the Company in a general meeting resolved that the amount of Rs. 3,54,716/ which was under the orders of the Income tax Officer deemed to have been distributed as ;dividend amongst the shareholders pursuant to orders under section 23A of the Income tax Act, be distributed as dividend to the shareholders, and in pursuance of that resolution proportionate part of the dividend due to each shareholder was credited to his account.
The Income tax Officer completed the assessment of the Company for the year 1956 57 and determined Rs. 5,69,396/as its total income.
The Income tax Officer computed the supertax payable by the Company under the Finance Act, 1956, at the rate of six annas and nine pies in the rupee of the total income and granted a rebate at the rate of four annas in the rupee in accordance with the provisions of Cl.
D proviso (i) (b) & (ii) ,of the Schedule to that Act.
Sometime thereafter the Income tax Officer being of the opinion that excessive relief had been granted to the Company within the meaning of section 34 (1) (b) of the Income tax Act, issued a notice on January 31, 1959 for reopening the assessment for the year 1956 57.
The Company filed its return of income in compliance with the notice and contended that the proceedings commenced by the, Income tax Officer were unauthorised, because the income of the Company had not been the subject of "excessive relief" within the meaning of section 34(1)(b), and that actual distribution of dividends already deemed to have been distributed in accordance with the orders passed under section '23A cannot be taken into consideration for the purpose of reducing the rebate of super tax admissible under the proviso 2 to Paragraph D of the Finance Act, 1956.
The Income tax Officer rejected the contentions and ordered that the rebate of super tax to the extent of Rs. 80,978/ be withdrawn.
In appeal to the Appellate Assistant Commissioner it was held that in the circumstances of the case, assessment could be reopened under section 34(1) (b) on the ground that the income had ' been made the subject of "excessive relief", but only Rs. 77,600/and not the whole amount of Rs. 3,54,716/ which was deemed to be distributed under orders under section 23A could be taken into 801 consideration as dividend distributed by the Company during the previous year relevant to the assessment year 1956 57.
The Commissioner of Income tax appealed to the Income tax Appellate Tribunal.
He, contended that in the circumstances of the case the amount of Rs. 3,54,716/ was liable to be taken into consideration for the purpose of withdrawing the rebate of supertax admissible under the Finance Act, 1956.
The Tribunal held that the case of the Company "did not fall within any of the situations contemplated by section 34(1)(b)" and the Company 's income had not been the subject of excessive relief as the rebate of super tax originally granted was out of the tax otherwise computable and not from the assessed income.
But the Tribunal confirmed the order of the Appellate Assistant Commissioner directing that Rs. 77,600/ be taken into account in withdrawing rebate of super tax.
The Tribunal then referred three questions to the High Court of Judicature at Madras : "1.
Whether the Tribunal was justified in disposing of 'the appeal as it did.? 2.
Whether the Tribunal was right in law in entertaining the assessee 's contention relating to the applicability, of section 34(1) (b) under Rule 27 of the Appellate Tribunal Rules ? 3.
Whether the setting aside of 'the assessment under section 3 4 (I ) (b) was correct in law ? " The High Court decided in favour of the Company on the first two questions.
In considering the third question the High Court observed that the plea of the Company that re assessment proceedings under section 34 (I) (b), on the ground of "excessive relief cannot be initiated, must be accepted.
The Court then proceeded to consider whether allowance of rebate to which the assessee was not entitled, did not amount to assessing income at too low a rate, and observed that "there can be no question that the rebate of tax rate and a reduction of such rebate is essentially the arithmetic of rate.
Reading however the provisions of the Finance Act, 1956, as a whole in the perspective that its chief aim and object is to prescribe the rate of income tax and super tax, it seems to us that an assessee escaping some of its provisions and failing to pay the full measure of tax is assessed at too low a rate".
The High Court accordingly held that proceedings under section 34(1) (b) could be initiated when rebate in the payment of super tax was ranted to the assessee without reducing it in the circumstances set out in the second proviso to Part 11 of the First Schedule Paragraph D in the Finance Act, 1956, on the ground that the income, profits and gains of the Company were assessed to tax 802 at too low a rate.
The High Court answered the third question in favour of the Commissioner.
Against the order passed by the High Court on the third question, this appeal is preferred by the, Company.
The Commissioner of Income tax has not challenged the correctness of the decisions on Questions I & 2.
We are unable to agree with counsel for the assessee that the first question raised an enquiry not only as to the correctness of the procedure followed by the Tribunal, but also to the right of the Income tax Officer to initiate a proceeding under section 34(1) (b) to bring to tax rebate which was not reduced.
In terms, the first question relates to a matter of procedure : and in the answer recorded to that question it is not implied that the Income tax Officer had no power to initiate the proceeding under section 3 4 ( 1 ) (b).
The third question raised by the Tribunal was defective.
The true scope of the enquiry arising out of the argument before the Tribunal was not whether the order of assessment was proper.
but whether the proceeding for re assessment was properly initiated under section 34(1) (b).
That is how the High Court also understood the question.
We therefore re frame the question as follows : "Whether the Income tax Officer was in the circumstances of the case competent to initiate the proceeding under section 34 (I) (b) of the Indian Income tax Act for bringing to tax the excessive rebate granted to the assessee ?" Section 34(1) (b) of the Indian Income tax Act, as it stood at the relevant time, provided "If (a) (b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income tax Officer has in consequence of information in his possession reason to believe that income, profit% or gains chargeable to income tax have escaped assessment for any year, or have been under assessed, or assessed at too low a rate, or have been made the subject of excessive relief under this Act or that excessive loss or depreciation has been computed, he may in cases falling under clause (a) at any time and in cases falling under clause (b) at any time within four years of the end of that year, serve on the assessee, or, if the assessee is a company, on the principal officer 803 thereof, a notice containing all or any of the requirements which may be included in a notice under subsection (2) of section 22 and may proceed to assess or reassess such income, profits or gains or recompute the loss or depreciation allowance; and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub section It was held by the High Court of Bombay in P. section Subraman yan, Income tax Officer, Companies Circle I (1) Bombay and Another vs Simplex Mills Ltd.(1) that "the relief referred to in section 34(1) (b) of the Income tax Act, 1922, can only be such relief as is granted to the assessee by reason of his income, profits and (rains being chargeable to tax.
It is, therefore, referable to the various kinds of relief afforded to the assessee under the Act in respect of his income, profits and gains, such, for instance, as are granted under sections 15A, 15C, 49A, 49B, 49C, 49D and 60 of the Act." This Court affirmed the judgment of the Bombay High Court in P. section Subramanyan, Income tax Officer, Companies Circle I (1) and Another vs Simplex Mills Ltd. 2 In Simplex Mills(2) case advance tax paid by the assessee for the assessment year 1952 53 was found refundable and the Income tax Officer allowed interest on the tax paid under section 18A(5) of the Incometax Act, 1922, as it then stood.
The Act was amended by the Income tax (Amendment) Act, 1953, with retrospective effect from April 1, 1952, and it was found that interest allowed to the Company was excessive.
The Income tax Officer then initiated a proceeding under section 34 (1 ) (b) to reassess the tax on the ground that income for that year had been under assessed and had been made the subject of excessive relief.
The Bombay High Court rejected the claim of the Income tax Officer, and this Court held that the original assessment could not be reopened under section 34, because it could not be said either that there was under assessment of the income, or that excessive relief was granted.
In the light of that judgment, the High Court opined that the claim of the Department to initiate a proceeding under section 34(1) (b) on the round that excessive relief was allowed could not be sustained.
But the High Court held that a proceeding for reassessment could be initiated on the ground that income had been assessed at too low a rate.
Counsel for the Company contends that the High Court was in error in proceeding to enlarge the scope of the enquiry and in entering upon a question which was never mooted before the Tribunal.
Section 2 of the Finance Act, 1956, provides insofar as it is material, that : (1) (2) 48 1.T.R. 182 (section C.) 804 .lm15 "Subject to the provisions of sub sections (2), (3), (4) and (5), for the year beginning on the 1st day of April, 1956, (a) income tax shall be charged at the rates specified in Part I of the First Schedule. . (b) rates of super tax shall, for the purposes of section 55 of the Indian Income tax Act, 1922 (XI of 1922) .
. , be those specified in Part 11 of the First Schedule. . . .
Part 11 of the First Schedule specifies the rates of super tax.
Clause D provides : "In the case of every company on the whole of total income Rate Six annas and nine pies in the rupee.
Provided that (i) (ii) a rebate at the rate of four annas per rupee of the total income shall be allowed in the case of any company which satisfies condition (a), but not condition (b) of the preceding clause; and (iii) Provided further that (i) the amount of the rebate under clause (i) or clause (ii), as the case may be, of the preceding proviso shall be reduced by the sum, if any, equal to the amount or the aggregate of the amounts, as the case may be, computed as here under : (a) on the amount representing the face value of any bonus shares or the amount of any bonus issued to its share holders during the previous year with a view to increasing the paid up capital, except to the extent to which such bonus shares or bonus have been issued out of premiums received in cash on the issue of its shares; and at the rate of two annas per rupee.
805 (b) in addition, in the case of a Company referred to in clause (ii) of the preceding proviso which has distributed to its shareholders during the previous year divi dends in excess of six per cent of its paid up capital, not being dividends payable at a fixed rate on that part of the said divi . at the rate dends which exceeds 6 per cent.
of two annas but does not exceed 10 per per rupee.
of the paid up capital; on that part of the said divi at the rate of ' dends which exceeds 10 per cent three annas of the paid up capital; per rupee.
Paragraph D read with section 2(b) of the Finance Act, 1956 fixes the rate of super tax payable by Companies for the purpose of section 55 of the Indian Income tax Act.
From the super tax declared payable, in certain conditions rebate is granted, and that rebate is also related to the total income of the assessee.
By the second proviso, part of the rebate may be withdrawn, if the Company has in the previous year issued bonus shares or bonus or has distributed dividend in excess of six per cent.
of its paid up capital.
The super tax and the rebate admissible are both related to the total income, whereas the reduction of rebate is related to the face value of the bonus shares or of the value of bonus or the amount of dividends distributed.
Super tax payable by a Company is therefore determined as a fraction of the total income, reduced by a percentage of the value of the bonus shares or bonus or dividends distributed.
Counsel for the Company contends that the expression "too low a rate" used in section 34(1) (b) must, having regard to the context in which the expression is used and in the scheme of the Indian Income tax Act, be regarded merely as the fraction which determines tax liability of the assessee, but when in computing super tax liability, the Income tax Officer has after determining the amount by applying the fraction to reduce the resultant by reference to a factor unrelated to total income, it cannot be said that tax is charged at a certain rate.
Counsel says that the Legislature has not used the expression "assessed at too low an amount" but the expression used is "assessed at too low a rate" therefore says counsel for the Company the jurisdiction of the Income tax Officer will be attracted only when the wrong fraction 806 has been applied in the determination of super tax, and not when the computation of tax depends on other factors.
We are unable to accept this contention.
The assumption that the expression "rate" has been used in section 34(1) as meaning a fraction of total income is, in our judgment, not warranted.
By the use of the expression "rate" in the context in which it occurs, undoubtedly a relation between the taxable income and the tax charged is intended, but the relation need not be of the nature of proportion or fraction.
The expression "rate" ' is often used in the sense of a standard or measure.
Provided the tax is computable by the application of a prescribed standard or measure, though not directly related to taxable income, it may be called tax computed at a certain rate.
We agree with the High Court that the rebate of tax and the reduction of such rebate are essentially matters of measure or standards of rate.
The chief aim and object of the Finance Act, 1956, is to prescribe the standard or measure of income tax and super tax and it seems that an assessee escaping some of its provisions, and failing to pay the full measure of tax is assessed at too low a rate.
But the view we have taken is not sufficient to dispose of the appeal.
It may be recalled that the question arising out of the order of the Tribunal was about the competence of the Income tax Officer, to initiate proceedings under section 34 (I) (b).
It is true that it was not argued before the Tribunal on behalf of the Company that on the notice served by the Income tax Officer proceedings for reassessment could only be initiated on the ground that income had been the subject of excessive relief, and not on any other ground.
But the Company did contend that the initiation of the reassessment proceeding was invalid, and the plea, that the initiation was invalid because the notice was defective was only tin aspect of the plea raised by the Company.
The question is originally raised by the Tribunal, and as reframed by us, includes that enquiry.
Counsel for the Company did argue before the High Court that in a proceeding to reassess income initiated on a notice that income has been subject to excessive relief, the Income tax Officer was incompetent to reassess income on the footing that income was assessed at too low a rate, but the High Court did not record their decision on that plea : they merely suggested that it will be open to the Company to raise the question when the matter is again taken up for consideration.
If however the question arising out of the order of the Tribunal was, as correctly pointed out by the High Court, one about the "validity of initiation of proceeding under section 34(1) (b)", the High Court was bound to decide all aspects of that question raised before them, before recording an answer : if they did not, the Tribunal would 807 be powerless to enter upon an enquiry of any other aspect of the question after answer to the question is recorded by the High, Court.
We are unable to agree with the assumption made by the High Court that because a particular aspect of the question of law raised was not specifically argued before the Tribunal, the High Court cannot deal with that aspect.
We are, in the state of the record before us, unable to record an answer to the question, and the case must be remanded to the High Court to determine whether the proceedings were validly initiated on the notice issued against the Company.
The notice which was served upon the Company is not included in the paper book prepared for use in this Court.
The notice must of necessity be part of the record of the Income tax Officer, even if it be not on the record of the Tribunal.
It will be open to the High Court, in determining the contention raised by the Company, to call for a supplementary statement of the case relating to the form and contents of the notice and the validity thereof from the Tribunal.
After receiving the supplementary state ment, if any, the High Court will proceed to dispose of the third question in the light of the reasons set out by us in this judgment.
Costs of this appeal will be costs in the High Court.
Y.P. Appeal remanded.

summary/full:
The Income tax Officer issued a notice to the assessee for reopening the assessment for the year 1956 57 on the ground that "excessive relief" within the meaning of section 34(1)(b) of the Income tax Act, 1922 had been granted to the assessee.
Rejecting the contention of the assessee that the income had not been the subject of "excessive relief" and therefore the proceedings were unauthorised and that the amount deemed to have been distributed under orders under section 23A could not be taken into consideration for the purpose of reducing the rebate of super tax admissible under proviso 2 to paragraph D of the Finance Act, 1956, the Income tax Officer ordered that the rebate of super tax granted be reduced.
The Appellate Assistant Commissioner held that only a part of the amount of dividend deemed to have been declared by the assessee could be taken into consideration in withdrawing the rebate of super tax.
On appeal by the Commissioner, the Tribunal held that the case of the assessee did not fall within any of the situations contemplated by section 34(1) (b), but confirmed the order of the Appellant Assistant Commissioner.
On the question "whether the setting aside of the assessment under section 34(1) (b) was correct in law" the High Court was of the opinion that the claim of the department to initiate proceedings under section 34(1)(b) on the ground that excessive relief was allowed could not be sustained, but held that the proceedings under the section could be initiated on the ground that the income profits and gains of the asses see were " assessed at too low a rate".
The High Court did not 'record its decision on the plea of the assessee that in a proceeding to re assess income initiated on a notice that income had been subject to "excessive relief", the Income tax Officer was incompetent to re assess income on the footing that income was assessed at too low a rate.
In appeal to this Court the assessee contended that (i) the High Court was in error in enlarging the scope of the enquiry and entering upon a question never mooted before the Tribunal and (ii) by the use of the expression "assessed at too low a rate" it was intended that the jurisdiction of the Income tax Officer would be attracted only when the wrong fraction had been applied in the determination of super tax and not when the computation of tax depended on other factors.
HELD : (i) The case must be remanded to the High Court to determine whether the proceedings were validly initiated on the notice issued against the asscssee.
[807B] 799 The scope of the enquiry arising out of the arguments before the Tribunal was not whether the assessment was proper, but, whether the Income tax Officer was in the circumstances of the case competent to initiate the proceeding under section 34(1) (b) of the Income tax Act for bringing to tax the excessive rebate granted to the assessee.
The question referred to the High Court had to be reframed accordingly The question, as framed by the Tribunal, though defective, included that enquiry.
The High Court was, therefore, bound to decide all aspects of that question and it was wrong in making the assumption that because a particular aspect of the question of law raised was not specifically argued before the Tribunal the High Court could not deal with it.
[S02D E; 806F H; 807A B] P. section Sutbramanyan, Income tax Officer, Companies Circle I (1) and Anr.
vs Simplex Mills Ltd. , referred to.
(ii) The High Court was right in holding that the rebate of tax and the reduction of such rebate were essentially matters of measure or Standards of rate.
The expression rate in section 34(1) does not mean a fraction of total income; it is often used in the sense of standard or measure.
Provided the tax is computable by the application of a prescribed standard or measure, though not directly related to taxable income, it may be said that the tax is computed at a certain rate.
The aim and object of the Finance Act, 1956, is to prescribe the standard or measure of income tax or super tax, and an assessee escaping some of its provisions and failing to pay the full measure of tax is "assessed at too low a rate".
[806B C]