judgement:
Appeal No. 1397 of 1969.
Appeal from the judgment and order dated January 1, 1968 of theKerala High Court in O. P. No. 2413 of 1965.
V.A.Seyid Muhammad and A. G. Pudissery, for the appellant.
alias A. R. Somanatha Iyer and P. Kesava Pillai for the respondent.
The Judgment of the Court was delivered by Hegde J.
One K. C. Sreemanavikraman alias Eattan Raja was the Zamorin of Calicut.
He was a Sthanamdar.
In respect of the sthanam property, he was liable to pay agricultural income tax under the Kerala Agricultural Income tax Act, 1950 (in brief the Act) for the period from November 1, 1956 to March 31, 1958.
Sreemanavikraman Raja died on May 2, 1958.
Thereafter on May 12, 1958, Sthanam Properties (As sumption of Temporary Management and Control) and Hindu Succession (Amendment Act of 1958 came into force.
After the death of Sreemanavikraman Raja, the sthanam property was taken possession of by Kunhammaman Raja claiming to be the succeeding sthanamdar.
In respect of the assessment due for the, period November 1, 1956 to March 31, 1958, Kunhammaman Raja was assessed to tax as the successor sthanamdar.
The said Kunhammaman Raja died on December 23, 1960 without making any payment.
Thereafter the next senior most member in the Zamorin family, P. C. Cheria Kunjunni Raja took possession of the sthanam property.
He also died soon after.
During the life time of P. C. Cheria Kunjunni Raja, the Agricultural Income tax Officer imposed a penalty of Rs. 5,000/ for non payment of the tax referred to earlier.
P. C. Cheria Kunjunni Raja paid a sum of Rs. 20,100/out of the tax and penalty due, as coercive proceedings were threatened to be taken against him.
On the death of P. C. Cheria Kunjunni Raja, the next senior most member in the Zamorin family was K. C. Cheria Kunjunni Raja.
When the 936 Agricultural income tax Officer attempted to collect the tax imposed under the assessment order mentioned earlier from K. C. Cheria Kunjunni Raja, he filed a petition before that officer representing that he had nothing to do with the sthanam property and the sthanam property stood divided under section 7(3) of the on the death of Sreemanavikraman on May 2, 1958.
The had come into force on June 18, 1956.
After the receipt of that representation, the Agricultural Income tax Officer passed an order on March 25, 1963 stating that as the successors of the Zamorin who died on 2 5 1958 had designated themselves as Zamorin Rajas, they have the liability to pay the arrears due to the Government.
He directed K. C. Cheria Kunjunni Raja to pay the tax and penalty imposed.
Aggrieved by that order K. C. Cheria Kunjunni Raja filed a writ petition in the Kerala High Court challenging the validity of the threatened proceedings against him.
The High Court quashed the demand notices issued by the Agricultural Income tax Officer to K. C. Cheria Kunjunni Raja.
It held that the assessment having been made on Kunhammaman Raja, his share alone was liable to be proceeded against.
It further held that the liability ' to pay that tax and penalty was that of the personal heirs of Kunhammaman Raja and that only to the extent, they had come into possession of the assets of the said Raja.
Thereafter the Inspecting Assistant Commissioner, Kozhikode ordered that as the entire sthanam property had devolved on the 693 members, all those persons were liable to pay the arrears of the tax and penalty.
This order was made without notice to the parties.
Meanwhile in the partition suit in the Zamorin 's family, the court appointed two joint receivers.
The receivers objected to the order of the Assistant Commissioner demanding the arrears of tax referred to earlier from them.
They represented to him that the estate in their hands is not liable to pay the arrears of tax and penalty demanded.
But those representations were not accepted by the authorities.
They threatened to proceed against the assets in the hands of the receivers.
At that stage, the receivers filed the writ petition from which this appeal arises.
Therein they challenged the right of the Agricultural Income tax Officer to collect the arrears of tax and penalty from out of the properties in their hands.
The question before the High Court was whether the tax due from Manavikraman Raja was realisable from the assets in the hands of the receivers.
The writ petition was heard by a full bench of three judges.
By a majority, the High Court came to the conclusion that the only persons who were liable to pay the tax in question were the personal heirs 937 of Sreemanavikraman Raja who had received the income.
The Court held that in view of section 7(3) of the , the sthanam property stood divided at the time of the death of Sreemanavikraman Raja into 693 shares, out of which 692 shares went to members of the Tarwad of the deceased and one share to his Personal heirs wife and children.
It opined that the tax due from Manavikraman Raja could have been levied and collected only from his personal heirs as they alone were liable to pay that tax.
As a result of that conclusion, it quashed the impugned demand.
Section 7 of the provides for the devo lution of interest in the property of a tarwad, tavazhi, kutumba, kavaru, or illom.
Section 7(3) provides : "Notwithstanding anything contained in sub section
(1) when a sthanamdar dies after the commencement of this Act, the sthanam property held by him shall devolve upon the members of the family to which the sthanamdar belonged and the heirs of the sthanamdar as if the sthanam property had been divided per capita immediately before the death of the sthanamdar among himself and all the members of his family then living and the shares falling to the members of his family a the heirs of the sthanamdar shall be held by them as their separate property." "Explanation For the purposes of this sub section the family of a sthanamdar shall include every branch of that family, whether divided or undivided, the male members of which would have been entitled by any custom or usage to succeed to the position of sthanamdar if this Act had not been passed.
" We have considered the scope of this section in Civil Appeal No. 1137 of 1969.
Hence it is sufficient for our present purpose to state that in view of section 7(3) of the , it must be held that on the death of Sreemanavikaraman Raja, each of the members of his tarwad took a per capita share in the sthanam property as co owners and not as his heirs.
His personal heirs took the share which the deceased was deemed to have got as his share when he was taking his last breath.
Section 7(3) of the embodies a fiction.
The purpose of that fiction was to gradually abolish the sthanams and to provide for the devolution of the sthanam properties on the members of sthani 's tarwad except as regards one per capita share which the personal heirs of the sthanamdar are to inherit as the heirs of the sthanamdar.
938 The nature of a sthanam was considered by this Court in K. K. Kochuni and ors.
vs The State of Madras and ors.
(1) Therein this Court observed that according to the custom, Sthanam means a position of dignity and respect and for maintaining that position, properties were attached to that office and the same was held by the "stani".
Stani is solely entitled to the income of that property during his life time.
The senior most member of a tarwad usually became the sthanamdar of the sthanam attached to that tarwad.
On his succession to stanom.
he stood separated from the rest of the family.
He solely became entitled to the stanom property but he gave up his right in the tarwad property.
All the same he and the members of his tarwad had the same right of succession to the properties of each other as if his severance from the family had been the result not of his succession to the stanom, but a voluntary division between him and the rest of the family.
Whatever might have been the customary law, section 7(3) of the Hindu Succession Act the validity of which was not in issue before us by a fiction deems that the sthanam property stood divided amongst the stani and the members of his tarwad, a split second before his death.
From the language of the section.
it is clear that the members of the tarwad took the property as co owners and not as the heirs of the deceased stani.
This fiction was created for the purpose of providing for the devolution of the sthanam properties.
The Act 28 of 1958 came into force only on May 12, 1958.
Therefore that Act cannot have any effect on the sthanam with which we are concerned in this case because that stanom stood destroyed on May 2, 1958.
Hence we need not refer to the provisions of that Act.
The income of the sthanam property during November 1, 1956 to March 31, 1958 was the exclusive property of Sreemana vikaraman Raja.
He was alone entitled to that income.
Therefore he alone was liable to pay the tax.
Under the Agricultural ,Income tax Act, no charge is created on property in respect of the arrears of agricultural income tax.
That being so, the liability to pay the arrears of tax due from the deceased stani fell on his personal heirs and that only to the extent they received any of his assets.
This position is clear from section 24(1) of the Act which provides that "when a person dies, his executor, administrator or other legal representative shall be liable to pay out of the estate of the deceased person to the extent to which the estate is capable of meeting the charge, the agricultural income tax assessed as payable by such person or any agriculture income tax which would have been payable by him under this Act, if be had not died".
(1) 939 The assessment made on Kunjunni Raja in his capacity as the successor sthanamdar was an invalid assessment.
Legally he, never became the sthanamdar.
There was no sthanam after the, death of Manavikraman Raja.
With the death of Manavikraman Raja the sthanam came to an end.
The only persons who could have represented the estate of Sreemanavikraman Raja were his personal heirs.
They were not made parties to the assessment.
No notice of the assessment proceedings was given to them.
Kanjunni Raja was not one of his legal representatives.
Even if it is considered that the sthanam properties had devolved on the members of the tarwad by succession.
Kanjunni Raja alone could not have represented the entire body of successors numbering 692.
There was no question of any bona fide enquiry by the assessing authority.
It was clearly a case of misunderstanding the legal position.
Further, it does not appear that Kunjunni Raja was assessed as the legal representative of the deceased stani.
He appears to have been assessed as the successor stani liable to pay the debts due from the estate.
Hence the assessment was not made in accordance with law, see Income tax Officer, Kozhikode vs Mrs. Susheela Sadananda and anr.(1).
In this view of the matter it is not necessary for us to consider the other provisions of the Act providing for the assessment and collection of the tax due from a deceased person.
In the result this appeal fails and the same is dismissed with costs.
V.P.S. Appeal dismissed.

summary/full:
Section 7(3) of the , by a fiction deems that the Sthanam property stands divided amongst the sthani and the :members of his tarwad, a split second before the death of the sthani.
The members of the tarwad took the property as co owners and not as heirs ,of the deceased sthani.
The purpose of the fiction was to gradually abolish the sthanams and to provide for the devolution of the sthanam properties on the members of sthani 's tarwad except as regards one per capita share which the personal heirs of the sthani are to inherit as the heirs of the sthani.
On May 2, 1958, the Zamorin of Calicut died.
In respect of the agricultural income tax under the Kerala Agricultural Income tax Act, 1950, which he was liable to pay for the period November 1, 1956 to March 31, 1958, the person who took possession of the sthanam property claiming to be the succeeding sthani was assessed to tax as the sursthani After his death, the Agricultural Income tax Officer attempted to collect the tax from the successive senior most members of the Zamorin 's family.
The validity of the assessment was challenged and the High Court held that the liability to pay the tax and penalty imposed was only that of the personal heirs of the person who took possession of the properties immediately after the death of the Zamorin, and that, only to the extent of the assets of that person which had come into their possession.
Thereafter, it was ordered by the Department that, as the entire Sthanam property bad devolved on the 693 members of the tarwad all those persons were liable to pay the tax and penalty, but the order was made without notice to the parties.
When the authorities threatened to proceed against the properties in the hands of the Receivers, who were appointed in the par tition suit in the Zamorin 's family, the Receivers filed a writ petition challenging the right of the Agricultural Income tax Officer to collect the arrears of tax and penalty from out of the properties in their hands.
The High Court quashed the demand holding that the only persons who were liable to pay the tax were the personal heirs of the Zamorin as it was they who had received the income.
Dismissing the appeal to this Court, HELD:Under the law relating to sthanams the sthani was alone entitled to the income of the sthanam properties.
Therefore the income of the sthanam property in the present case, during November 1, 1956 to March 31, 1958 was the exclusive property of the Zamorin who has the sthani.
Hence, he alone was liable to pay the tax.
Under the Agricultural Income tax Act, no charge is created on property in respect of the arrears of agricultural income tax.
Under section 24(1) of the Act the liability to pay 935 the arrears of tax due from the deceased sthani fell on his personal heirs and that, only to the extent they received any of his assets.
The assessment made of the person who took possession of the properties after the Zamorin 's death as the successor sthani was an invalid assessment, because, legally he never became the sthani.
On the death of the Zamorin the sthanam came to an end and the only persons who could have represented the estate of the Zamorin were his personal heirs who, however, were not made parties to the assessment.
[938 F H; 939 A B] Income tax Officer, Kozhikode vs Mrs. Susheela Sadananda, , K. K. Kochuni vs State of Madras, and M. K. B. Menon vs Asstt.
Controller of Estate Duty, C.A. No. 1137/1969 dt. 5 10 1971, referred to.


judgement:
l Appeals Nos.
1993 of 1968 and 1173 of 1971.
Appeals by certificate/special leave from the judgment and order dated August 3, 4, 1967 of the Gujarat High Court in Income tax Reference No. 18 of 1966.
section T. Desai, R. N. Sachthey and B. D. Sharma, for the appellant (in both the appeals).
V.S. Desai, K. L. Hathi and P. C. Kapur, for the respondent (in both the appeals).
The Judgment of the Court was delivered by Grover, J.
This is ,in appeal from a judgment of the Gujarat High Court.
Originally an appeal (C.A. 1993/68) had 952 been brought by certificate but that certificate was found to be defective as no reasons were stated therein for granting it.
A Petition for special leave, was, therefore, filed and the same has been granted.
Both the appeals shall stand disposed of by this judgment.
The assessee is a registered firm and carried on the business of commission agency and general merchants.
It also does forward business.
It is a member of the Saurashtra Oil and Oilseeds Association Ltd., Rajkot.
During the assessment year 1958 59 the corresponding accounting period being the samvat year 2013 the assessee claimed to have incurred a loss of Rs. 3 40,443/ in certain transactions entered into with different people for the supply of groundnut oil.
The transactions, according to the assessee, were non transferable ready delivery contracts entered into with non members of the Association.
It was expected that these contracts would be performed but owing to certain reasons some of the contracts could not be performed and differences had to be paid.
According to the assessee it had acted as a Pucca Artia.
The assessee claimed that the aforesaid loss was allowable under section 10(1) of the Income Tax Act, 1922 as a deduction against its other business income.
The Income tax Officer came to the conclusion that the transactions in question were hit by the provisions of the Forward Contracts Regulation Act, 1952, hereinafter called the 'Act ' and the Rules and Regulations of the Saurashtra Oil and Oilseeds Association Ltd.
In particular the transactions were hit by the provisions of sub sections
(1) and (4) of section 15 of the Act and were not saved by section 18.
The losses were held to have been incurred in illegal transactions.
He rejected the contention of the assessee that even on the assumption that the losses were incurred in illegal transactions they could be allowed in the computation of the income.
The Income tax Officer further held that the losses incurred in illegal business could not be deducted from the speculative profits under section 24 of the Indian Income tax Act, 1922, hereinafter called the "Act of 1922".
The Appellate Assistant Commissioner confirmed the order of the Income tax Officer.
In the appeal before the Tribunal it was held that the transactions in question were not illegal contracts but were contracts which had been, validly entered into under the Act and the bye laws etc.
The Tribunal thereafter proceeded to examine the question whether the losses incurred could be allowed on the assumption that the transactions were illegal.
It was of the view that the assessee would be entitled to a set off under section 24 even if the losses were incurred in illegal transactions.
The Tribunal remanded the matter for a report from the Appellate Assistant Commissioner as to the applicability of the proviso to section 24(1) (read with the Explanation) of the Act of 1922.
After the remand report was received the Tribunal gave the following two findings : (1) the contracts under consideration were all 953 non transferable specific delivery contracts where the intention ab initio was either to give or take delivery (2) the contracts were entered into either for the purchase or sale and later on the same quantity was either sold or purchased back by the assessee on behalf of the same constituents at the market rates prevailing at the material time i.e. they were squared up by corresponding sales or purchases as the case might be.
After referring to certain decisions of High Courts the Tribunal held that the loss of Rs. 3,40,443 had been incurred in speculative transactions.
The Tribunal next proceeded to consider whether notwithstanding that the losses had been incurred in speculative transactions the assessee could set off those against the other income under section 10(1) of the Act of 1922.
Purporting to follow the view of the majority of the High Courts, the Tribunal held that such a loss could not be set off against the other income.
But according to the Tribunal the assessee was certainly entitled to set off the loss against the profits in speculative transactions and to that extent the contention of the assessee was accepted.
Both the assessee and the Commissioner of Income tax moved the Tribunal for submitting a case and referring certain questions of law to the High Court.
Thus in all the following four questions were referred by the Tribunal (1) Whether on the facts and in the circumstances of the case the contracts in respect of which the loss of Rs. 3,40,443 was claimed were illegal contracts and were not validly entered into under the Forward Contracts Regulation Act 1952 ? (2) Whether even assuming the transactions in which the loss of Rs. 3,40,443/ was incurred, were illegal transactions, the assessee would be entitled to the set off of the said loss ? (3) Whether on the facts and in the circumstances of the case the transactions resulting in a loss of Rs. 3,40,443 were speculative transactions for the purpose of section 24 of the Indian Income tax Act 1922 merely on the ground that The assesses had not performed the contracts by giving delivery and had paid damages in settlement of the obligations contracted for ? (4) Whether on the facts and in the circumstances of the case the assessee is entitled to set off the balance of the loss of Rs. 1,21,397/ against the assessee 's other income ?" The High Court did not consider that it was necessary to answer the first question.
The answer to the second question was that 954 even though the disputed contracts were not validly entered into in accordance with the provisions of section 15(4) of the Act the loss ,of Rs. 3,40,443/ was liable to be taken into account in computing the business income, of the assessee under section IO of the Act of 1922 and the assessee was entitled to set it off against the profits fro other speculative transactions.
The third question was answered in the affirmative with the result that the transactions resulting in the loss of Rs. 3,40,443/ were held to be speculative for the purpose of section 24 of the Act of 1922.
The fourth question was answered in the negative and against the assessee.
It is the Commissioner of Income tax alone who has appealed.
So far as the first question is concerned we are unable to comprehend why the High Court did not decide it.
A lot of debate took place before us on the question whether the contravention of section 15 (4) of the Act would render the contracts illegal.
According to that provision no member of a recognised Association shall, in respect of any goods specified in the notification under sub section
(1), enter into any contract on his own account with any person other than, a member of the recognised Association unless he has secured the, consent or authority of such person and disclosed in the note memorandum or agreement of sale or purchase that he has bought or sold the goods as the case may be on his own account.
It is not necessary to refer to the proviso.
It is common ground and has been admitted before us that there was a clear contravention of the provisions of section 15(4) so far as the transactions in question were concerned.
According to section 20(e) any person who enters into any contract in contravention of the provisions of section 15(4) among other sections shall on conviction be punishable for the first offence with imprisonment which may extend to one year or with fine of not less than Rs. 1,000/ or with both.
It is wholly incomprehensible how such a contract would not fall directly within the ambit of the first part of section 23 of the Indian Contract Act which deals with consideration or object of an agreement which is forbidden by law.
Such consideration or object would be unlawful according to the provisions of that section and the agreement would consequently be 'void.
The High Court did not decide the point whether the contracts which contravened the provisions of section 15(4) of the Act were illegal.
It did not consider it material to decide whether the impugned contracts were illegal.
In its opinion what was material was that the impugned contracts had been entered into unlawfully and the question was whether the loss sustained in the unlawful business could be taken into account in computing the business income of the assessee.
We consider that the first question which was referred to the High Court stands concluded by the law laid down by this Court in Sunderlal & Son vs 955 Bharat Handicrafts (P) Ltd. (1) It was laid down that the prohibition imposed by section 15 (4) of the Act was not imposed in the interest of revenue.
That provision was conceived in the larger interest of the public to protect them against the malpractices indulged in by members of recognised associations in respect of transactions in which their duties as agents came into conflict with their personal interest.
Parliament had made a writing, evidencing or confirming the consent or authority of a non member, as a condition of the contract if the member has entered into a contract on his own account.
So long as there was no writing as was contemplated by section 15 (4) or its proviso there was no enforceable contracts It is well settled that contracts which are prohibited by statute the prohibition being either express or implied would be illegal and unenforceable if they are entered into in contravention of the statute.
Under the provisions of the Act there is not only an express prohibition (section, 15 (4) ) but punishment is also provided for contravention of that prohibition, (s ' 20).
Such contracts could not possibly be regarded as having been validly entered into under the Act.
The answer 'to the first question, therefore, should have been in the affirmative and against the assessee.
Coming to the second question, the language thereof is some what ambiguous and the question was not framed properly.
It appears that there were two aspects which had come up for consideration before the departmental authorities the Tribunal and the High Court.
The first aspect related to the deduction of the loss of Rs. 3.40,443/ incurred in the aforesaid illegal transactions while computing the profits of the assessee 's speculative business under section 10(1).
The other was the set off which can be allowed within the relevant parts of section 24 of the, Act of 1922.
The High Court referred to various English decisions as also to Wheat croft 's Law of Income tax and Simon 's Income tax for supporting the 'View that even where a trade is illegal it would still be a trade within the meaning of income tax law and if any profits are derives from such trade they would be assessable to tax.
The High Court did not accept the contention urged on behalf of the Revenue that although the profits from an, illegal I trade or business would be exigible to tax the losses from such business could not be taken Court observed "There is in principle no distinction between profits and losses of a business and if the profits of an illegal business are assessable to tax, equally the losses arising (1) ; 956 from illegal business must be held to be liable to be taken into account in computing the income of the assessee '.
The High Court was not inclined to accede to the submission on behalf of the Revenue that the same principle would be applicable as has been applied in certain cases in which the question which came up for determination was whether an expenditure, incurred on an illegal activity would be deductible under section 10 (2) (xv) of the Act of 1922.
One of such cases, is a decision of the Punjab High Court in Raj Woollen Industries vs Commissioner of Income tax, Simla(1).
In that case the real question was whether a certain amount which was paid to achieve what was prohibited by law, viz., the export of wool without having the requisite export licence was an amount which the assessee was entitled to deduct under section 10 (2) (xv) of the Act of 1922.
It was held that according to principle and authority such a deduction could not be claimed.
It was also observed that such a deduction would not be permissible even under section 10(1).
Following observations may be referred to : .lm15 "Profits had to be ascertained according to the accepted principles of commercial accountancy and if section 10(2) (xv) did not permit deduction of an item of expenditure which was laid out or expended for carrying on the business in contravention of the law, then such an outgoing though otherwise properly admissible, as set off against the gross receipts on the principles of commercial accountancy could not be taken into consideration in computing the profits".
On the other hand according to the decision of a full bench of the, Allahabad High Court in Chandrika Prasad Ram Swarup vs Commissioner of Income tax, U.P. & C.P. (2) income assessable to tax is the actual income of an individual or a firm irrespective of the manner in which the income was derived.
Legality or illegality of the transaction culminating in profits or losses, was, therefore, foreign to the scope of an inquiry into the income of an individual or a firm for the purpose of income tax.
Now while section 10(1) of the Act of 1922 imposes a charge on the profits or gains of a business it does not provide how these profits are to be computed.
Section 10(2) enumerates various items which are admissible as deductions.
They are, however, not exhaustive of all allowances which can be made in ascertaining the profits of a business taxable under section 10(1).
It is undoubtedly true that profits and gains which are liable to be taxed under (1) (2) 957 s.10(1) are what are understood to be such under ordinary commercial principles.
The loss for which the deduction is claimed must be one that springs directly from the carrying on of the business and is incidental to it.
If this is established the deduction must be allowed provided that there is no provision against it express or implied in the Act : (See Badridas Daga V. Commissioner of Income tax(1).
In that case loss sustained by the business by reason of embezzlement by an employee was held to be an admissible deduction under section 10(1) although it did not fall within section 10(2) (xi) of the Act of 1922.
Indeed profits cannot be computed without deducting the loss and permissible expenses incurred for the purpose of the business.
The approach of the high Court in the present case has been that in order to arrive at the figure of profits even of an illegal business the loss must be deducted if it has actually been incurred in the carrying on of that business.
It is the net profit after deducting the out goings that can be brought to tax.
It certainly seems to have been held and that view has not been shown to be incorrect that so far as the admissible deductions under section 10(2) are concerned they cannot be claimed by the, assessee if such expenses have been incurred in either payment of a penalty for infraction of law or the execution of some illegal activity.
This, however, is based on the principle that an expenditure is not deductible unless it is a commercial loss in trade and a penalty imposed for breach of the law during the course of the trade cannot be described as such.
Penalties which are incurred for infraction of the law is not a normal incident of business and they fall on the assessee in some character other than that of a trader; (See Haji Aziz & Abdul Shakoor Bros vs Commissioner of Income tax, Bombay City(2).
In that case this Court said quite clearly that a disbursement is deductible only if it falls within section 10(2) (xv) of the Act of 1922 and a penalty cannot be regarded as an expenditure wholly and exclusively laid for the purpose of the business.
Moreover disbursement or expense of a trader is something "which comes out of his pocket.
, A loss is something different.
That is not a thing which he expends or disburses.
That is a thing which comes upon him abextra" (Finlay J., in Allen vs Farquharson Brothers & Co.) (3).
If the 'business is illegal neither the profits earned nor the losses incur red would be enforceable in law.
But that does not take the profits.
out of the taxing statute.
Similarly the taint of illegality of the business cannot detract from the losses being taken into account for computation of the amount which can be subjected to tax as "profits" under section 1 0 ( 1 ) of the Act of (1)34 I.T.R. 10.
(3) (2) 958 1922.
The tax collector cannot be heard to say that he will bring the gross receipts to tax.
He can only tax profits of a trade or business.
That cannot be done without deducting the losses and the legitimate expenses of the business.
We concur in the view of the High Court that for the purpose of s.10(1) the losses which have actually been incurred in carrying on a particular illegal business must be deducted before the true figure relating to profits which have to be brought to tax can be computed or determined.
This will, however, not conclude the answer to question No. 2 because it seems to have been framed with the other aspect relating to "set off" under s.24 of the Act.
The High Court found that the transactions were of a speculative nature.
It was thus held that the loss of Rs. 3,40,443/ sustained in the impugned contracts was liable to be set off against ,the profit of Rs. 2,19,046/ which was admittedly a profit from speculative, transactions.
The concluding portion of the judgment of the High Court may be reproduced because to Our mind it creates a certain amount of difficulty.
"The loss of Rs. 3,40,443/ sustained in the impugned contracts was, therefore, liable to be set off only against the profit of Rs. 2,19,046/ which was admittedly profit from speculative transactions and the balance of Rs. 1,21,397/ after such set off was not liable to be set off against the other income of the assessee in view of the first proviso to section 24(1).
We may make it clear that in taking this view we have proceeded upon the basis (that the impugned contracts which resulted in the loss of Rs. 3,40,443 constituted a separate business distinct from the business of forward contracts resulting in the profit of Rs. 2,19,046/ .
The result would, however, be the same even if the impugned contracts which resulted in the loss of Rs. 3,40,443/ did not constitute a separate business but were part of the same business of forward contracts which resulted in the profit of Rs. 2,19,046/ for in that event the loss of Rs. 3,40,443 would be liable to be taken into account in determining the profits from such business under section 10".
Section 24, to the extent it is material for our purposes, is set out below : "Set off of loss in computing aggregate income (1)Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in section 6, he shall be entitled to have the amount of the 959 loss set off against his income, profits or gains under any other head in that year Provided that in computing the profits and gains.
chargeable under the head "profits and gains of business, profession or vocation" any loss sustained in speculative transactions which are in the nature of a business shall not be taken into account except to the extent of the amount of profits and gains, if any, in any other business consisting of speculative transactions; Explanation 1.
Where the speculative transactions carried on are of such a nature as to constitute a business, the business shall be deemed to be distinct and separate from any other business.
Explanation 2.
A speculative transaction means a, transaction in which a contract for purchase and sale of any commodity including stocks and shares is periodically or ultimately settled otherwise than by actual delivery or.
transfer of the commodity or scripts;" In order to claim the set off the meaning of the speculative transaction has to be first looked at.
Under Explanation 2 such a transaction means a transaction in which a contract for the purchase and sale of any commodity is periodically or ultimately settled otherwise than by actual delivery etc.
Now the contract has to be an enforceable contract and not an unenforceable one by reason of any taint of illegality resulting in its invalidity.
It has already been found by us that the contracts in question were illegal and unenforceable on account of contravention of section 15(4) of the Act.
The High Court was in error in considering that any set off could be allowed in the present case under the first proviso to section 24(1) which must be read with Explanation 2.
There would have been no difficulty in disposing of the matter finally after the above discussion.
But enough attention was not devoted to the business which the assessee was doing and in which the profit of Rs. 2,19,046 was made and the loss of Rs. 3,40,443 was sustained.
It has been found to be of a speculative nature but the High Court has not clearly found that it was the same business in which the amount of the profit and the loss mentioned above was earned and sustained in which case alone a deduction will be possible of the loss under section 10(1).
The High Court proceeded on the basis that if the business in which the profit was made and the business in which the loss was incurred were separate a set off could be claimed by the assessee under section 24(1).
If, however, the business was the same then the loss would be liable to be taken 960 into account while computing the profits under s.10(1).
As we have come to the conclusion that no set off could be allowed under section 24(1) of the Act of 1922 it will have to be determined whether the profits and losses were incurred in ' the same business even though that business involved the entering into contracts some of which were, in the eye of the law, illegal.
If the trade or the business, for instance, the business of commission agency or forward business was the same in which the profits were made and the loss was incurred then in order to arrive at the figure which can be subjected to tax the loss will have to be deducted from the profit.
For this purpose we shall have to remit the matter to the High Court to decide this point and if necessary, after calling for a supplementary statement of the case.
In the result our answer to the first question is that the contracts were illegal.
on the third and the fourth questions there is no dispute nor has any appeal been preferred by the assessee relating to them that the answers returned by the High Court in the affirmative and in the negative respectively were not correctly answered.
As regards question No. 2 the High Court will have to answer the same in the light of our judgment.
Th. , appeal by special leave (i.e. C.A. 1173/71) shall stand disposed of accordingly and the other appeal by certificate (i.e. C.A. 1993/68) is hereby dismissed.
There will be no order as to costs.
V.P.S. Appeal partly allowed.

dataset_name: IN-Abs

summary/full:
Section 15(4) of the Forward Contracts (Regulation) Act, 1952 is conceived in the larger interest of the public to protect them against the malpractices indulged in by members of recognised associations in respect of transactions in which their duties as agents come into conflict with their personal interest.
Parliament had made a writing, evidencing or confirming the consent or authority of a non member, as a condition of the contract if the member has entered into a contract on his own account.
So long as there was no such writing there was no enforceable contract.
Under the Act, there is not only an express prohibition but also punishment for contravention of that prohibition.
The assessee, a registered firm, was a member of the Saurashtra Oil and Oilseeds Association, and was carrying on the business of commission agency and general merchants.
It was also doing forward business.
During the assessment year 1958 59 it incurred a loss in certain transactions.
Those transactions were in contravention of the provisions of section 15(4) of the Forward Contracts (Regulation) Act.
The assessee claimed that the loss was allowable under section 10(1) of the Income tax Act, 1922, as a deduction against its other business income even if the losses were incurred in illegal transactions.
The Income tax Officer rejected the contention of the assessee, and also held that the losses incurred in illegal business could not be deducted from speculative profits under section 24 of the Income tax Act.
The Appellate Assistant Commissioner confirmed the order.
The Tribunal held that the assessee could not set off the loss against the other income under section 10(1) of the Income tax Act but was entitled to do so under section 24.
On the questions referred to the High Court namely : (1) Whether the loss was in respect of illegal contracts, (2) Whether the loss was a result of speculative transactions and therefore could be set off under section 24 of the Income tax Act, and (3) whether even if the loss was as a result of illegal transactions the assessee was entitled to set off the loss under section 10(1) of the Income tax Act, the High Court did not answer the first question but held that the losses could be set off both under section 10 and section 24 of the Income tax Act.
In appeal to this Court, HELD:(1) It is well settled that contracts which are prohibited by statute, the prohibition being either express or implied, would be illegal and unenforceable if they are entered into in contravention of the statute.
Therefore, the contracts in the present case, were illegal contracts and the loss was in respect of such illegal contracts.
[955 C D] Sunder Lal vs Bharat Handicrafts ; , followed.
951 (2)Under Explanation 2 of section 24 a speculative transaction means a transaction in which a contract for purchase and sale of any commodity is periodically or ultimately settled otherwise than by actual delivery etc.; but the contract has to be an enforceable contract and not an unenforceable one by reason of any taint or illegality.
In the present case, the contracts were illegal and unenforceable on account of the contravention of section 15(4) of the Forward Contracts (Regulation) Act.
The High Court was therefore in error in considering that set off could be allowed under section 24(1) of the Income tax Act.
[959 D F] (3)While section 10(1) of the Income tax Act imposes a charge on profits or gains of a business it does not provide how those profits are to be computed.
Section 10(2) enumerates various items which are admissible as deductions but they are not exhaustive.
The profits and gains which are liable to tax under section 10(1) are what are understood to be such under ordinary commercial practice.
The loss for which the deduction is claimed must be one that springs directly from the carrying on of the business and is incidental to it, that is, the profit was earned and the loss was sustained in the same business.
If this is established the deduction must be allowed provided that there is no provision against it.
If the business is illegal, neither the profits earned nor the losses incurred would be enforceable in law but that does not take the profits out of the taxing statute.
Simi larly, the taint of illegality of the business cannot detract from the loss being taken into account for computation of the amount which can BE subjected to tax as profits.
Cases which deal with payment of a penalty for infraction of law or the execution of some illegal activity stand on a different footing, because, an expenditure is not deductible unless it is a commercial loss in trade and such a penalty cannot be described as such.
[956 G H. 957 A B, D E, G H; 959 H; 960 A B] [Since in the present case no finding was given by the High Court that the two businesses in which profits were made and losses were sustained were the same, the matter was remanded to the High Court for decision on this point.] Raj Woollen Industries vs C.I.T., Simla, , Chandrika Prasad Ram Swarup vs C.I.T., U.P. & C.P., 7 I.T.R. 269, Badridas Daga vs Commissioner of Income tax, 34 I.T.R. 10, Haji Aziz & Abdul Shakhor Bros vs C.I.T., Bombay City, and Allen vs Fraquharson Bros. , referred to.


judgement:
Appeal No. 266 of 1969.
Appeal by special leave from the judgment and order dated August 16, 1967 of the Kerala High Court in Income tax Referred Case No. 44 of 1966.
C. K. Viswanatha Iyer and K. Jayaram, for the appellant.
V. A. Seyid Muhammad and A. G. Pudissery, for the respon dent.
The Judgment of the Court was delivered by Hegde, J.
The appellant, Venugopala Varma Rajah is the present Rajah of the Vengunad Swaroopan in Palghat District, Kerala State.
He is the Karnavan of his Tarwad.
He will be hereinafter referred to as the assessee.
The predecessor of the appellant, as the then Kamavan of the family, submitted the return for the assessment year 1959 60 under the Kerala Agricultural Income tax Act (which will hereinafter be referred to as the Act) showing a gross income of Rs. 1,21,912/ and a net income of Rs. 84,065/60 P.
That 'represented the income from the properties held by him under the family Karar dated May 29, 1909.
Agricultural Income tax Officer overruling the objection of the assessee included in the income returned, the income of the properties which had been put in possession of the junior members of the family under the aforementioned Karar of 1909.
The net income so computed was Rs. 2,32,957/ and a tax of Rs. 1,30,672/35 P. was imposed.
In appeal the Appellate Authority excluded from the taxable income the income of the properties allotted to the "Rani Group" but sustained the addition of the income of the properties allotted for the enjoyment of the male members.
Aggrieved by the order of the Appellate Authority, the assessee took up the matter in second appeal to the Appellate Tribunal of the Agricultural Income tax.
The Tribunal rejected the contention of the assessee and dismissed the appeal.
Thereafter at the instance of the assessee, it stated a case under section 60(1) of the Act and submitted to the High Court for its opinion three questions of law namely L119SupCI/72 1002 "(1) Whether the findings of the Tribunal that the family karar of 1909 does not constitute a diversion of family income to the various allottees thereunder is correct ? (2) Whether the findings of the Tribunal that the provisions of sub section (1) of sec.
9 of the Act are applicable only to cases of diversion of income and not otherwise is correct ? (3) Whether the findings of the Tribunal that the provisions of sub sec.
(1) of sec.
9 of the Act are not applicable to the facts of this case are correct ? Questions Nos. 2 and 3, in our opinion, do not bring out the import of sec.
9 (1) correctly but it is not necessary to go into that aspect as our decision covers the real point in issue.
The Reference originally came up for hearing before a Division Bench but as the questions arising for decision were considered to be of importance, the same was referred to a Fun Bench of three judges.
The High Court by its judgment dated August 16, 1967 answered Question Nos. 1 and 2 against the assessee.
It did not answer the third question as it was of the view that answer to that question was unnecessary in view of its findings on Questions Nos. 1 and 2.
Thereafter this appeal was brought by certificate.
The assessee in this case is the H.U.F. of which the appellant was the Kamavan at the relevant time.
The question for decision is whether the income of the properties put in possession of the male members under the Karar of 1909 continues to be the, income of the family.
At present we are not concerned with the income of the properties put in possession of the "Rani Group" in view of the decision of the Appellate Authority which had not began appealed against.
If the income in dispute continues to be the income of the family then the revenue is justified in bringing the same to tax under the provisions of the Act.
On the other hand if that income has ceased to be the income of the family, then the same cannot be brought to tax in the hands of the assessee.
Therefore, the sole question is whether that income is the income of the family ? Section 9 of the Act provides "9(1) In computing the total agricultural income of an assessee all agricultural income arising to any person by virtue of a settlement or disposition, whether revocable or not, and whether effected before or after 1003 the commencement of this Act, from asset remaining the property of the settlor or disponer shall be deemed to be the agricultural income of the settlor or disponer and all agricultural income arising to any person by virtue of a revocable transfer of asset shall be deemed to be the agricultural income of the transferor Provided that for the purpose of this sub section a settlement, disposition or transfer shall be deemed to be revocable if it contains any provision for the transfer directly or indirectly of the agricultural income or asset to the settlor, disponer or transferor or in any way gives the settlor, disponer or transferor a right to reassume power directly or indirectly over the agricultural income or assets : Provided further that the expression settlement, disposition shall, for the purposes of the sub section include any disposition trust, covenant, agreement or.
arrangement and the expression "settlor or disponer" in relation to a settlement or disposition shall include any person by whom the settlement or disposition was made Provided also that this sub section shall not apply to any agricultural income arising to any person by virtue of a settlement or dispo sition which is not revocable for a period exceeding six years or during the life time of the person and from which agricultural income the settlor or disponer derives no direct or indirect benefit but that the settlor shall be liable to be, assessed on the said agricultural income as and when the power to revoke arises to him.
" A Hindu Undivided Family is a person within the, meaning of s.2(m) of the Act.
We shall now proceed to examine the nature of the Karar entered into in 1909.
The family of the assessee appears to have been one of the premier land holding families in Malabar.
It appears to have had agricultural properties in various places.
To the Karar in question all the then living members ( 12 in number) of the family were parties.
The properties mentioned in 'A ' Sch.
to the Karar were set apart for the maintenance, education and other expenses of the female and male members residing in Kalari Kovilagom which is otherwise known as "Rani Group".
Under the Karar, Karnavan of the Tarwad was to perform the marriage ceremonies of the female members of the Tarwad in accordance with the prevailing conditions and to meet 1004 the expenses thereof.
All other expenses of female, and male members residing in Kalari are to be met from the income of the 'A ' Sch. properties.
The members residing in the Kalari have no right to alienate or encumber the properties allotted to them and all government revenue due in respect of those properties should be paid by them.
Party No. 2, the second senior most member in the family was to be given 7,000 paras of paddy annually for his maintenance and for this purpose paddy lands yielding 3,500 paras of paddy shown in 'B ' Sch. were made over to his possession and Party No. 1, Karnavan of the Tarwad was directed to give to Party No. 2 from Malayalam era 1085 onwards 3,500 paras of paddy.
Further the Karnavan was directed that he should redeem "Karukakode Challa Nilam" and make over the same to Party No. 2, but after making over the same to Party No. 2, be was not to pay 3,500 paras of paddy referred to earlier.
" C" Sch. properties yielding an income of 4,750 paras of paddy were allotted for the enjoyment of Party No. 3.
He was required to maintain himself from out of their income.
Properties shown in 'D ' Sch. were set apart for the mainte nance of Party No. 4.
The land revenue of B, C and D Sch.
properties was required to be paid by the Karnavan of the tarwad.
On the death of Party No. 2 or on his becoming Karnavan of the family, Party No. 3 was to take over the properties allotted for the maintenance of Party No. 2 and Party No. 4 was to take over the properties for the maintenance of Party No. 3.
The Karar prohibited the persons who were in possession of the properties allotted for their enjoyment from alienating or encumbering those properties, and if in contravention of those terms, they alienated any of those properties, the Karnavan was entitled to resume the properties treating the alienation as void.
Clause 18 of the Karar prohibited the parties in possession of the properties from cutting and selling the kuzhikoors or dismantling the buildings in the properties in their possession.
Clause 19 of the Karar prohibited the parties from enhancing the munpattom amounts due to the tenant.
Clause 6 of the Karar provided that all the male members living in the Kalari, on completing the age of 21 should leave the Kalari and thereafter the Kamavan should make arrangements for their maintenance.
Karar does not stipulate what arrangement he should make for their maintenance.
Therefore it follows that he may maintain them either in the Tarwad house or give them maintenance allowance either in the shape of paddy or cash.
It may also be noted that the Karar does not provide as to what would happen if the number of members in the Tarwad substantially increases.
One other thing that has got to 1005 be noted is that the Karar is silent as to what would happen to the properties shown in Schs.
B, C and D after Parties Nos. 2, 3 and 4 die, all of whom, we were told have died.
Hence Kamavan can take possession of them on behalf of the family after their death.
On an examination of the various clauses in the Karar, it is obvious that the joint status of the parties was not disrupted.
The arrangement made in the Karar was only an arrangement for providing maintenance.
No party was given any absolute right in any portion of the family properties.
The properties mentioned in the Karar continued to be the properties of the family.
The arrangement made under the Karar cannot even be considered as a permanent arrangement.
The properties were not divided on the basis of Thavazies.
The liability to maintain the male members, aged more than 21 years excepting Parties Nos. 2, 3 and 4 continued to be that of the Karnavan.
The Karar also does not provide for devolution of the properties allotted to Parties 2 to 4.
Hence those properties must necessarily go back to the possession of the Karnavan after those Members die.
We have earlier seen that the responsibility of performing the marriage ceremonies of the female members continued to be that of the Karnavan.
He is also responsible for the payment of land revenue in respect of the family properties excepting properties included in Sch.
(A) to the Karar.
Under these circumstances, it is not possible to hold that Karar in question embodied an irrevocable settlement.
In the very nature of things, the arrangement made under that Karar must be held to be one which is revocable if there is any substantial change in the circumstances of the family.
For our present purpose it is sufficient if we hold that the properties allotted for the enjoyment of the various members of the family under the Karar continued to be the properties of the family.
In view of section 9(1) of the Act in computing the total agricultural income of the H.U.F., all agricultural income arising from the assets remaining the property of the family should be deemed to be the agricultural income of the family.
We have earlier come to the conclusion that the agrrangement made under the Karar is revocable if there is substantial change in the circumstances of the family.
That arrangement confers benefit on the family inasmuch as it is absolved of the responsibility to maintain its members which, otherwise is its responsibility.
Section 9 (1) of the Act is similar to section 16 (1) (c) of the Indian Income tax Act, 1922.
The latter section has come up for consideration by courts.
The courts have laid down the test that if 1006 the income in dispute is considered as having been applied to discharge an obligation of the assessee, the same is liable to be included in the assessable income of the assessee but if on the other hand the same had been diverted by an overriding charge, then it is not liable to be included in the assessable income of the assessee as it ceased to be his income.
If we apply this test to the facts of the present case, it is clear that the income in dispute continued to be the income of the family.
It was merely applied to discharge an obligation of the family namely the obligation to maintain the junior members of the family.
At first sight some of the decided cases on the subject appear to speak in conflicting voices.
But on a careful examination, it is possible to find out the dividing line.
The earliest decision on the subject is that of the Judicial Committee in Raja Bejoy Singh Dudhuria vs Commissioner of Income tax, Bengal(1).
The, assessee therein succeeded to the family ancestral estate on the death of his father.
Subsequently his step mother brought a suit for maintenance against him in which a consent decree was made directing the assessee to make a monthly payment of a fixed sum to his step mother and declaring that the maintenance was a charge on the ancestral estate in the hands of the assessee.
While computing his income, the assessee claimed that the amounts paid by him to the step mother under the decree should be excluded.
That contention was not accepted by the authorities under the Act as well as by the High Court but the Judicial Committee reversing their decision came to the conclusion that though assessee 's liability under the decree did not fall within any of the exemptions or allowances conceded in sections 7 to 12 of the Indian Income tax Act, yet the sums paid by the assessee to his stepmother were not "income" of the assessed at all; the decree of the court by charging the appellant 's whole resources with a specific payment to his step mother had to that extent diverted his income from him and had directed it to his step mother; to that extent what he received for her was not his income; it was not a case of the application by the appellant of part of his income in a particular way; it was rather the allocation of a sum out of his revenue before it became income in his hands.
This decision at the first sight appears to lend support to the assessee 's contention but in understanding the ratio of the decision, we must bear in mind the fact that in that case the Advocate General had abandoned before the High Court the contention that the assessee and his stepmother were members of undivided family and accepted the Position that the appellant was liable to be assessed as an individual and in no other manner.
In view of this concession, the payment that had to be made to the step mother of the assessee became a (1) 1007 charge on tile estate even before that estate devolved on him.
Therefore what the assessee got was the income of the property minus what he had to pay to his step mother.
The above conclusion of ours receives support from a later decision of the Judicial Committee in P. C. Mullick and anr.
(Executors) vs Commissioner of Income tax, Bengal(1).
Therein a testator had by his will appointed the appellants his executors and had directed them to pay Rs. 10,000/ out of the income of his property on the occasion of his addya sradh for expenses in connection therewith to the person who was entitled to perform the sradh.
He had also directed them to pay out of the income of his property the costs of taking out probate of his will.
During the year of account the executors had paid Rs. 5,537/ for expenses in connection with the addya sradh and a sum of Rs. 1,25,000/ for probate duty.
The question arose whether those payments were deductible in computing the chargeable income.
The Judicial Committee held affirming the judgment of the Calcutta High Court, that the payments made for the sradh expenses and the costs of probate could not be excluded in computing the chargeable income.
Those were payments made out of the income of the estate coming to the hands of the appellants as executors and in pursuance of obligation imposed by the testator.
Their Lordships were of opinion that it was not a case in which a portion of the income was by an overriding title diverted from the person who would otherwise have received it as in Bejoy Singh Dudhuria 's (2) case, but a case in which the executors having received the whole income apply a portion of it in a particular way.
From this judgment of the Judicial Committee, it is dear that the true test is that if the income in question is an income of the assessee, the application of the same being not relevant for determining its assessability, it is assessable in his hands but if it is not his income then it cannot form part of his assessable income.
The scope of section 16 (1) (c) of the Indian Income tax Act, 1922 came up for consideration by this Court in Commissioner of Income tax, Bombay City vs Sitaldas Tirathdas (3) .
Therein the assessee Sitaldas Tirathdas of Bombay had many sources of income, chief among them being property, stocks and shares, bank deposits and share in a firm known as M/s. Sitaldas Tirathdas.
He followed the financial year as his accounting year.
For the assessment years 1953 54 and 1954 55, his total income was respectively computed at Rs. 30,375/ and Rs. 55,160/ .
This computation was not disputed by him but he sought to deduct Rs. 1350/ in the first assessment year and a sum of Rs. 18,000/ (1) (3) (2) 1008 in the second assessment year on the ground that under a decree, he was required to pay these sums as maintenance to his wife and his children.
In support of his claim, he relied on the decision of the Judicial Committee in Bejoy Singh Dudhuria 's case (supra).
This Court rejected that contention observing (at pp.
374 and 375 of the Report) "In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income.
Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact.
There is a difference between an amount which a person is obliged to apply out of his income and amount which by the nature of the obligation cannot be said to be a part of the income of the assessee.
Where by the obligation income is diverted before it reaches the assessee, it is deductible, but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow.
It is the first kind of payment which can truly be excused and not the second.
The second payment is merely an obligation to pay another a portion of one 's own income, which has been received and is since applied.
The first is the case in which the income never reaches the assessee who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable.
" Counsel for the assessee tried to lay stress on the observation of this Court that the income should reach the hands of the assessee before it can be considered as his income.
According to him in the case before us, the income in dispute never reached the hands of the assessee.
We are unable to accept this contention as correct.
The income is the income of the family.
It reached the hands of the family as soon as it reached the hands of any of the members of the family who were entitled to receive it on behalf of the family.
The members of the family received that income on behalf of the family and applied the same in discharge of an obligation of the family.
When this Court spoke of the income reaching the hands of the assessee, it did not refer to any physical act.
It was dealing with a legal concept a receipt in law.
Viewed that way, it is quite clear that the income with which we are concerned in this case was received by the family.
One other decision on the point in issue which we would like to refer is the decision of the Bombay High Court in Commis (1) 1009 sioner of Income tax, Bombay vs Makanji Lalji(1), wherein Beaumont C.J., speaking for the court held that in computing the income of the H.U.F. for purposes of income tax, moneys paid to the widow of a deceased coparcener of the family as maintenance and residence allowance cannot be deducted, even though the amount of such allowance has been fixed by a decree of the Court and has be en made a charge on properties belonging to the family.
It is not necessary to refer to cases which deal with the diversion of the income of the assessee.
The test to be applied for finding out whether there is diversion of income or not is set, out by this Court in Commissioner of Income Tax, Bombay City, V. Ratilal Nathalal(1).
For the reasons mentioned above this appeal fails and the same is dismissed with costs.
V.P.S. Appeal dismissed.

summary/full:
The assessee was a Hindu undivided family of which the appellant was the Kamavan.
It possessed agricultural properties.
There was a family settlement among all the members of the family then living.
The settlement allotted some properties to some of the male members but did not provide for their devolution.
Also the joint status of the members was not disrupted and the properties allotted for the enjoyment of the various members of the family continued to be the properties of the family.
The liability to maintain the other male members and the responsibility of performing the marriages of the female members continued to be that of the Karnavan.
He was also responsible for the payment of land revenue in respect of the family properties excepting some items.
On the question whether the income of the properties put in possession of the male members under the settlement continued to be the income of the family and therefore liable to tax under the Kerala Agricultural Income tax Act, 1950, the department, Tribunal and the High Court on reference, held against the assessee.
Dismissing the appeal to this Court, HELD : Section 9(1) of the Act is similar to section 16(1) (c) of the Income tax Act, 1922.
Under the latter section the test is that if the income in dispute is considered as having been applied to discharge an obligation of the assessee, the same is liable to be included in the assessable income of the assessee, but if on the other hand the same bad been diverted by an overriding charge then it is not liable to be so included as it ceases to be the assessee 's income.
[1006 A B) In the present case, the arrangement only provided for maintenance and did not give any absolute right in any portion of the family properties to any one.
It thus conferred benefit on the family inasmuch as it was absolved of the responsibility of maintaining its members.
[106 5 G H] Further, it was not even a permanent arrangement and was revocable if there was any substantial change in the circumstances of the family.
The properties would 'go back to the possession of the Karnavan on the death of the member to whom the property was allotted.
[1005 C, D, E] The members of the family received the income of the various properties allotted to them on behalf of the family, and applied the same in discharge of an obligation of the family.
Therefore, the income reached the hands of the family as soon as it reached the hands of any of its members.
[1008 F H] 1001 Hence, under section 9(1) of the Act, the income should be deemed to be that of the assessee.
[1005 F G] Raja Bejoy Singh Dudhuria vs C.I.T., Bengal, and Mullick vs C.I.T. Bengal, , explained and applied.
C.I.T., Bombay City vs Sitaldas Tirathdas, , followed.
C.I.T., Bombay vs Makanji Lalji, and C.I.T., Bombay City vs Ratilal Nathalal, 25 l.
T.R. 426, referred to.


judgement:
Appeal No. 542 of 1967.
Appeal from the judgment and decree dated January 24, 1964, of the Kerala High Court in Appeal Suit No. 368 of 1959.
Manual T. Paikeday, S.K. Sabharwal and Ganpat Rai, for the appellant.
A. R. Somanatha Iyer and M. R. K. Pillai, for the respondent.
The Judgment of the Court was delivered by Sikri, C.J.
By judgment dated May 26, 1970, this Court (Sikri J., as he then was, and Ray J.) allowed Civil Appeal No. 542 of 1967, set aside the judgment of the High Court and passed a decree in favour of the appellant after modifying the decree passed by the Trial Court.
The respondent subsequently filed Review Petition No. 35 of 1970 for review on the ground that they had failed to 978 bring to the notice of the Court the provisions of Travancore Regulation IX of 1094 and the fact that the loans were.
granted under the above Regulation.
We allowed review on February 1, 1971.
This judgment is, however, in continuation of our earlier judgment dated May 26, 1970, The only new point which needs discussion is the effect of the provisions of Travancore Regulation IX of 1094 on our conclusion on the fourth point in that judgment.
We had inter alia held that the "fourth point raised by the learned counsel for the plaintiff is fatal for the respondent.
" We observed that "the bonds do not give power to the Government to sell the properties other than mentioned in the bond.
The properties mentioned in plaint A schedule items 2 to 5, B Schedule items 1 and 3 to 8, and C schedule items were not given as security under the bond and the Government had no authority to sell them.
It is conceded on behalf of the respondent that all the properties were sold in one lot.
This, in our opinion ' vitiates that the sale of all the properties was void.
" The fourth point raised before us was that "the Government had no authority to attach and sell plaint A schedule items 2 to 5 and B schedule items 1 and 3 to 8 and C schedule items, which were not given as security under the bonds; and if the Government had no authority then the sale of all the properties is void.
" We had while dealing with the third ground also observed that "no other regulation has been brought to our notice which makes dues under this bond to be recoverable as arrears of public or land revenue.
" It now transpires that Regulation IX of 1094 Travancore Land Improvement & Agricultural Loans Regulation provides for recovery of land improvement loans from the borrower as if they were arrears of land revenue due by him.
Section 7 of the above Regulation provides "7.
(1) Subject to such Rules as may be made under Section 10, all loans granted under this Regulation, all interests (if any) chargeable thereon and costs (if any) incurred in making the same shall, when they become due, be recoverable in any of the following modes : (a) from the borrower as if they were arrears of land revenue due by him; (b) from his surety (if any as if they were arrears of land revenue due by him; (c) except as regards the loans referred to in Section 4, out of the land for the benefit of which 979 the loan has been granted as if they were arrears of land revenue due in respect of that land; (d) out of the property comprised in the collateral security according to the procedure for the realisation of land revenue by sale of immovable property other than the land on which the revenue is due : Provided that no proceeding in respect of any land under Clause (c) shall affect any interest in that land which existed before the date of the order granting the loan, other than the interest of the borrower, and of mortgagees of, or persons having cha rges on, that interest, and, where the loan is granted under Section 3 with the consent of another person, the interest of that person, and of mortgagees of, or persons having charges on, that interest.
(2) When any sum due on account of any such interests or costs is paid by a surety or an owner of property comprised in any collateral security, or recovered from a surety or out of any such property, such sum shall on the application of the surety or the owner of such property, be recovered on his behalf from the borrower or out of the land for the benefit of which the loan has been granted, in manner provided in this Section.
" From these provisions it is quite clear that the loans granted under the Regulation, interest and charges, etc. can be recovered in any or all of the four modes described in the section.
They can be recovered from the borrower under clause (a); they can be recovered from recovered from a surety under clause (b); the, land for the benefit of which the loan had been granted can be proceeded. against under clause (c) ; and under clause (d) property comprised in the collateral security can be proceeded against.
The fact that the properties which had been sold were not mentioned in the bond as collateral security or were not expressly hypothecated does not make any difference because the Travancore Revenue Recovery Act 1 of 1068 provides under section 5 that "when Public Revenue due on land may be in arrear, such arrear, together with interest, if any, and costs of process.
may be recovered by the sale of the defaulter 's movable or immovable property or both, in the manner hereinafter provided.
" The learned counsel for the appellant contends that neither the Travancore Revenue Recovery Act 1 of 1068 nor the Land improvement and Agricultural Loans Regulation IX of 1094, and 980 the rules made thereunder, confer any power or jurisdiction on the State Government or its officers to sell through the machinery of the Revenue Recovery Act any other property of the borrower than what he has specifically given by his bond as security for the loan.
It is further contended that the borrower does not incur any personal liability.
unless he has specifically so covenanted in the bond and hence the sale of all the 12 out of the 13 items of land sold one item alone having been a security property under the loan agreement was unauthorised, illegal and void.
We are unable to agree with this contention.
It is not necessary for the borrower to specifically so convenant in his bond that he would be personally liable because section 7 (1 ) (a) of Regulation IX of 1094 makes the borrower personally liable.
This is also made clear by sub section
Under sub section (2), if a surety pays the loan he can request that the money be recovered from the borrower on his behalf.
The learned counsel relied on the decision in Ulahannan Quseph vs Koohitti Kochukiimari(1) where reference was made to an earlier judgment in the Dewan of Travancore vs Eravi Narayanan(2) in which it was held that "though under section 59 of the Revenue Recovery Regulation, moneys due to Government under written agreements and all sums declared by other Regulations to be realisable as arrears of public revenue may be recovered under this Regulation, that section only makes the machinery or procedure prescribed in the Regulation applicable to such cases, and it would not follow that the incidents of a Revenue sale held under section 39 would also attach to sales held under the authority conferred by the provisions of section 59.
" The Court held that the property in the case remained subject to the plaintiff 's prior charge.
We are unable to appreciate how this case assists us on the question whether there is any personal liability of the appellant or not.
The learned counsel also due our attention to Birendra Nath Raha vs Mir Mahabubar Rahaman (3).
In this case it was held that according to the provisions of the Bengal Land Revenue Sales Act, 1868, the properties in question could not be sold because they were neither an estate nor a tenure within section 5 of the Act.
No such question arises in this case but it may be mentioned that at page 336 the Court interprated cl.
(a) of section 7 of the Land Improvement Loans Act to mean that it imposed a personal liability on the borrower.
(1) , 54.
(2) 29 Travancore Law Reports 37.
(3) A.I.R. 1947 Cal.
981 There is, however, authority against the contentions of the appellant.
The Madras High Court observed in Gonjalada Bhojarajappa vs Korlahalli Halappa(1) as follows : "It is clear from section 5, Revenue Recovery Act, that for the recovery of a loan advanced under the Agriculturists Loans Act it is open to the Collector to sell any part of the immovable property belonging to the defaulter, and the remedy is not confined to that particular property in respect of which or for whose improvement the loan had been taken.
" It may be noted that Section 5 of the , provides : "Every loan made in accordance with such rul es, all interest (if any) chargeable thereon, and costs (if any) incurred in making or recovering the same, shall, when they become due, be recoverable from the person to whom the loan was made, or from any person who has become surety for the repayment thereo f, as if they were arrears of land revenue or costs incurred in recovering the same due by the persons to whom the loan was made or by his surety." In interpreting this section, the Madras High Court, in the above mentioned case clearly held that it was open to the Collector to sell any part of the immovable property belonging to the defaulter, and the remedy was not confined to that particular property in respect of which or for whose improvement the loan had been taken.
We may also mention that in Lakshman Venkatesh Naik vs Secretary of State(2), while dealing with section 7 of the , which is in terms similar to sec.
7 of Travancore Regulation IX of 1094, it was observed that "it was therefore open to the Collector to adopt all or any of the four different methods which the Section provides for the recovery of the taqavi arrears.
" In the result the appeal is dismissed.
The parties will bear their own costs throughout.
Our order dated February 1, 1971 awarding Rs. 1,500 to the appellant as thrown away costs shall however, stand.
K.B.N. Appeal dismissed.
(1) A.I.R. 1946 Mad. 226.
(2) A.I.R. (1939) Bom.

summary/full:
The loans granted under the Travancore Land Improvement and Agricultural Loans Regulation IX of 1094 together with interest and charges etc.
can be recovered from the borrowers under cl.
(a) of section 7(1) of the Regulation, as arrears of land revenue due by him or in any of the other modes prescribed by cls.
(b), (c) and (d) of the section.
The fact that the properties which had been sold were not mentioned in the bond as collateral security or were not expressly hypothecated does not make any difference, because, Travancore Revenue Recovery Act 1 of 1068 (M.E.) provides under section 5 "when public revenue due on loan may be in arrear, such arrear, together with interest if any and cost and process may be recovered by the sale of the defaulter 's movable or immovable property or both in the manner hereinafter provided." Further, it is not necessary for the borrower to specifically so covenant in his bond that he would be personally liable, because, section 7(1) (a) of the Regulation makes the borrower personally liable.
This is also made clear by sub section
(2) under which if a surety pays the loan he can request that the money be recovered from the borrower on his behalf.
[979 F] Ulahannan Quseph vs Koohitti Kochukumari, 23 Tr.
L. J. 1051, 54 and Birendra Nath Raha vs Mir Mahabubar Rahaman, A.I.R. 1947 Cal.
332, held inapplicable, Gonjalada Bhojarajappa vs Korlahalli Halappa, A.I.R. 1946 Mad. 226, Lakshman Venkatesh Naik vs Secretary of State A.I.R. 1939 Bom.
183 Hand Birendra Nath Raha vs Mir Mahabubar Rahman, A.I.R. 1947 Cal.
332, referred to.


judgement:
Appeal No. 194 of 1967.
Appeal from the judgment and order dated April 27, 1964 of the Madhya Pradesh High Court in Misc.
(First Appeal No.60 of 1960.
section N. Anand and Kailash Mehta, for the appellant.
section section Khanduja and K. C. Dua, for respondent No. 1.
The Judgment of the Court was delivered by Khanna, J.
This is an appeal on a certificate of fitness granted by the Madhya Pradesh High Court against the judgment of that Court whereby that Court in appeal set aside the order of the Additional District Judge, Jabalpur, dismissed the objections against an award and directed that the award be made a rule of the Court.
Naraindas, appellant is the brother of Vallabhdas and Durga prasad, respondents 1 and 2 and son of Smt.
Sukhrani, respondent No. 3.
There were, some arbitration proceedings in 1932 between the appellant and respondents 1 to 3 on one side and Pannalal and Smt.
Dulari Bahu on the other side.
Those proceedings related to partition of property and a claim for maintenance allowance by Dulari Bahu.
An award was given in those proceedings and was made a rule of the Court on 13 12 1933.
According to the award, Dulari Bahu was to get a maintenance allowance of Rs. 12/ per mensem from the appellant and his brothers .
A charge was created of the maintenance allowance on the house which fell as a result of partition to the 30 share of the appellant and respondents 1 to 3.
It was also provided that if the appellant and his brothers failed to pay the monthly allowance, Dulari Bahu would, be entitled to get the house sold.
Out of the sale proceeds, Rs. 3,000/ were to be deposited in a bank on the condition that the, amount of interest would be paid to Dulari Bahu but she would not be entitled to draw the principal amount.
On Dulari Bahu 's death, Rs. 2,000/ out of Rs. 3,000/ would be paid to the appellant and his brothers and Rs. 1,000/ to Pannalal.
The amount of maintenance payable to Dulari Bahu was increased to Rs. 30/ per mensem in a suit brought by her and decided on 8 10 1949.
As the appellant and his brothers did not pay the maintenance allowance to Dulari Bahu, she, in execution of her claim for maintenance allowance, got their houses situated at Jabalpur sold by Court auction.
The houses were purchased for Rs. 22,000/ by Sitaram and Laxminarain, respondents 4 and 5.
After obtaining the sale certificate, respondents 4 and 5 took proceedings for obtaining possession of the houses but they were resisted by respondent No. 1.
The appellant and his brothers further claimed that they had deposited some amount with respondents 4 and 5.
The appellant and his brothers and mother on one side and respondents 4 and 5 on the other side thereupon appointed four arbitrators, as per agreement dated 8th April, 1955.
According to the agreement, respondents 4 and 5 would have no claim in the houses purchased by them in Court auction and the arbitrators would make award in respect of the amounts to be paid by either of the parties as well as regarding the maintenance allowance payable to Durga Bahu and Sukhrani Bahu.
The arbitrators thereafter gave their award dated 20th October, 1956 wherein they made provision for the amounts payable to different parties.
Regarding the amount of maintenance allowance payable to Dulari Bahu, the award provided that Rs. 3,000/ out of the sale proceeds would be withdrawn from the Court and be deposited with Durgaprasad, respondent.
Durgaprasad was made liable to pay the amount of Rs. 30/ per mensem as maintenance allowance to Dulari Bahu.
The award further provided 'that out of the amount of Rs. 3,000/ , Rs. 1,000/ would be paid, to Pannalal and Rs. 2,000/ to Durgaprasad on the death of Dulari Bahu.
Dulari Bahu was also given a right of residence in a room and maintenance allowance of Rs. 30/ payable to her was made, a charge on the house allotted to Durgaprasad.
After the award had been put in Court, objections were filed against the award.
Learned Additional District Judge set aside the award on the ground that the award affected the, rights of 31 Dulari Bahu and she had not been made a party to the arbitration agreement.
The reference to arbitration as well as the award, according to the Additional District Judge did not amount to an adjustment and were,, therefore, invalid.
It was also held that the award was in excess of the arbitration agreement.
Some other grounds were also given but we are not concerned with them.
On appeal, the High Court reversed the decision of the Additional District Judge and held that there was no infirmity in the arbitration proceedings or the award.
In the result, the award was made a rule of the Court.
Mr. Anand, on behalf of the appellant, has argued that Dulari Bahu was an interested party in the dispute relating to arbitration and as she did not join the arbitration agreement, the reference to arbitration and the subsequent award should be held to be invalid.
There is, in our opinion, no force in this contention.
The dispute which was referred to the arbitrators related to the houses in question which had been sold in Court auction.
The, interest of Dulari Bahu pertained only to the recovery of her maintenance allowance.
According to the earlier award which Dulari Bahu sought to enforce, she was to get the maintenance allowance from an amount of Rs. 3,000/ which was to be kept in deposit.
The rights of Dulari Bahu in this respect remained in tact and were in no way affected by the award dated 20th October, 1956.
The maintenance allowance payable to her was also kept as a charge over the immovable property.
The fact that Dulari Bahu did not sign the arbitration agreement as such would not vitiate the arbitration proceedings.
The present is not a case wherein the arbitration proceedings are sought to be assailed by Dulari Bahu.
On the contrary, it is the admitted case of the parties that Dulari Bahu did not raise any objection to the arbitration proceedings or the subsequent award on the ground that her rights had been prejudicially affected.
This apart, we find that Dulari Bahu, according to the learned counsel, died about three years ago.
In the circumstances, it would be purely academic to dilate upon the question as to whether the rights of Dulari Bahu were prejudicially affected by the award in question.
It is next argued by Mr. Anand that as the reference to arbitrators was made out of Court and as all the parties to the arbitration agreement did not sign the award in token of their acceptance, the same could not be made a rule of the Court.
There is no substance, in our opinion, in the above contention.
It is always open to parties to refer a dispute to arbitration without the intervention of the Court.
In case, a suit is pending in respect of the subject matter of the dispute, there can be no valid reference during the pendency of the suit, to arbitration without 32 the order of the Court.
The underlying reason for that is to avoid conflict of jurisdiction by both the Court and the arbitrator dealing concurrently with the same dispute.
An award given or a reference during the pendency of a suit relating to dispute which is the subject matter of reference without obtaining the order of the Court cannot be enforced.
The only exception to this rule is provided by the proviso to section 47 of the (Act 10 of 1940) according to which "an arbitration award otherwise obtained may with the consent of all the parties interested be taken into consideration as a compromise or adjustment of a suit by any Court before which the suit is pending".
In such an event, the award is enforced as a compromise or adjsutment of the suit because all the interested parties give their consent to the award.
Where,, however, as in the present case, no suit is pending with respect to the subject matter of dispute and the parties choose to refer a dispute to arbitrators, it is not essential that the parties should signify their consent to the award before the same can be enforced.
Any other view would run counter to the entire scheme and object of arbitration for the settlement of disputes according to which, agreement and consent are imperative only at the stage of referring the dispute to arbitrators but not at the stage of the award.
The decision of Bachawat, J. (as he then was) in Jugaldas Demodar Modi & Co. vs Pursottam Umedbhai & Co.(1) relied upon by the appel lant has no bearing as the said case dealt with an arbitration reference during the pendency of a suit.
We are also not impressed by the contention raised on behalf of the appellant that because there had been earlier litigation about the house allotted to the appellant and his brothers, the same could not be, the subject matter of arbitration dispute.
A dispute is referred to arbitration because the parties agreed to such a reference and the mere fact that the property which is the subject matter of dispute was also the subject matter of an earlier litigation, cannot prevent the parties to refer the dispute about that property to arbitration.
What is referred to arbitrators in such a case is the fresh dispute and although the finding of the Court in the previous litigation may have a bearing on the dispute referred to the arbitrators, it would not stand in the way of reference of the fresh dispute to the arbitrators.
It is not the case of the appellant before us that the precise dispute which was the subject matter of the award dated 20th October, 1956 had been adjudicated upon earlier in a civil Court.
The appeal consequently fails and is dismissed with costs.
G.C. Appeal dismissed.

summary/full:
By an arbitration award given in 1933 D was given a maintenance allowance enforceable against property allotted to the appellant and his brothers and mother.
Since the allowance was not paid D secured a decree for the sale of houses belonging to the appellant and his brothers.
The property was purchased by respondents 4 and 5 who after obtaining sale certificate from the court sought to obtain possession of the same.
On, 8th April 1955 the appellant his brothers and mother entered into an arbitration agreement with respondents 4 and 5.
According to, the agreement respondents 4 and 5 gave up their claim to the houses purchased by them in court auction and the arbitrators were to make award in respect of the amounts to be paid by either of the parties as well as the maintenance allowance payable to D and to the appellant 's mother.
The arbitrators by their award dated 20th October 1956 made provision for the amounts payable to different parties.
The also made on for the payment of allowance to D as well as for her residence.
provision the award had been put in court objections were filed against it.
The Additional District Judge, set aside the award inter alia on the ground that the award affected the rights of D and she had not been made a party to the agreement.
The High Court reversed the judgment of the Additional District Judge.
In appeal by certificate the appellant contended; (i) that the award was invalid because D was an interested party in the dispute relating to arbitration and she had not joined the arbitration agreement; (ii) that the reference to arbitrators was made out of court and as all the parties to the arbitration agreement did not sign the award in token of their acceptance, the same could not be made a rule of court; (iii) that because there had been earlier litigation about the house allotted to the appellant and his brothers, the same could not be the subject matter of arbitration dispute, HELD : (i) The rights of D remained intact and were in no way affected by the award dated 20th October 1956.
The maintenance allowance payable to her was also kept as a charge over the immovable property.
The fact that D did not sign the arbitration agreement as such would not vitiate the arbitration proceedings. 'She did not raise any objection to the arbitration proceedings or the subsequent award.
Ac cording to counsel she died three years ago.
In the circumstances the question whether her rights were prejudicially affected by the award was purely academic [31 E] (ii) An award given on a reference during the pendency of a suit relating to a dispute which is the subject matter of reference without obtaining the order of the Court cannot be enforced.
The underlying reason for the same is to avoid conflict of jurisdiction.
However according to section 47 of the , an arbitration award otherwise obtained may with the consent of all the parties interested be taken into consideration 29 as a compromise or adjustment of a suit by any court before which the suit is pending. ' In such an event, the Award is enforced as a compromise or adjustment of the suit because all the interested parties give their consent to the award.
When however, as in the present case, no suit is pending with respect to the subject matter of dispute and the parties choose to refer a dispute to the arbitrators, it is not essential that the parties should signify their consent to the award before the same can be enforced.
Agreement and consent are imperative only at the stage of referring the dispute to arbitrators but not at the stage of the award.
[31H 32D].
Jagaldas Damodar Modi & Co. vs Pursottam Umedbhai & Co., A.I.R. 1953 690, held in applicable.
(iii) A dispute is referred to arbitration because the parties agree to such a reference and the mere fact that the property which is the subject matter of dispute was also the subject matter of earlier litigation, cannot prevent the parties to refer the dispute about that property to arbitration.
What is.
referred to arbitrators in such a case is the fresh dispute and although the finding of the Court in the previous litigation may have a bearing on the dispute referred to the arbitrators, it would not stand in the way of reference of the fresh dispute to the arbitrators.
[32 F]