judgement:
ivil Appeal No. 294 of 1982.
From the Judgment and Order dated 8.9.1981 of the Punjab and Haryana High Court in L.P.A. 857 of 1981.
439 P.P. Rao, R. Venkataramani, U.G. Pragasan and S.M. Garg for the Appellant.
Mahabir Singh, Subhash Sharma and C.M. Nayar for the Respondents.
The Judgment of the Court was delivered by RANGANATH MISRA, J.
This appeal is by special leave and is directed against the appellate judgment of a Division Bench of the Punjab and Haryana High Court upholding the decision of a learned Single Judge of that Court by dismiss ing the appeal in limine.
The Haryana Public Service Commis sion advertised the filling up of one Post of D.F.S.C. and 4 posts of District Food and Supplies Officers by direct recruitment.
The Commission prescribed, inter alia, that one of the essential qualifications shall be "five/three years ' experience as an executive officer in a commercial organisa tion of Government or Semi Government office before or after acquiring the academic degree" and the Special Secretary to Haryana Government in the Food and Supplies Department, on 20th of February, 1981, wrote to the Secretary of the Com mission affirming that position and added that: "Certain Inspectors/Sub Inspectors of this Department seem to have sent their appli cations (advance copies) to the Commission for these posts.
The work of Inspectors/ Sub Inspectors is of executive nature though they are not officers.
As such, in case the Commis sion feels that they fulfil the qualifications for the posts in question, this department have no objection to the names of the Inspec tors/Sub Inspectors who have applied directly to the Commission, to be considered for these posts.
" The Commission called the appellant and other similarly placed candidates for interview but required them to produce certificates from the State Government to the effect that they had the requisite experience of executive officer.
The State Government, however, did not issue such certificates and in their absence the Commission did not consider the Inspector and Sub Inspector candidates as having the requi site qualification for being candidates for the post.
The selection was undertaken excluding them.
Thereupon a writ petition was filed before the High Court claiming that the appellant had the requisite qualification having been an executive officer for the requisite period and his exclusion was unjustified and the selection made by the Com 440 mission was hit on account of infraction of the provisions of Article 16 of the Constitution.
The learned Single Judge negatived this stand and dismissed the writ petition and the Division Bench upheld the decision of the Single Judge by dismissing the appeal in limine.
In this appeal the sole question for consideration is whether Inspectors and Sub Inspectors of Food and Supplies Department are executive officers.
That they held executive posts and for the required period was conceded in Government letter of 21st of February, 1981.
It has, therefore, to be found out whether Inspectors and Sub Inspectors could be treated as officers.
The selected candidates were not made parties to the writ petition.
A civil miscellaneous petition has been filed to add them as party respondents to the appeal and that application had been placed for hearing along with the appeal.
Mr. P.P. Rao appearing in support of the appeal has contended that the post of Inspectors and Sub Inspectors belonged to the category of executive office and the High Court, therefore, came to a wrong conclusion.
In earlier years certain similarly situated Inspectors and Sub Inspec tors of the Department had been appointed on the basis that they satisfied the requirements of clause (c) of the adver tisement and there was no justification for a different basis when further recruitment was undertaken 1980.
None of the parties has placed any definition of the term 'Officer ' from any.
Haryana Statute.
It is not the contention of counsel appearing for any of the parties that the administrative orders gave a definition to the term.
In such a situation, the common parlance meaning of 'officer ' has to be accepted for the purpose of finding out whether Inspectors and Sub Inspectors held the post of Officer.
The ordinary dictionary meaning of the term 'Officer ' is: "a person appointed or elected to a position of responsibility or authority in a Govern ment, society etc." Stroud 's Judicial Dictionary (5th Edition) has given a variety of instance of "officer" with reference to different statutes.
Some of the instances given therein do support Mr. Rao 's stand that an Inspector or Sub Inspector would indeed be an 'officer ' inasmuch as under statutory orders made in exercise of powers conferred under the Essential Commodities Act on the State Government, authority has 441 been vested in these categories of officers to exercise jurisdiction.
Black 's Law Dictionary states: "In determining whether one is an 'officer ' or 'employee ', important tests are the tenure by which a position is held, wheth er its duration is defined by the statute or ordinance creating it, or whether it is tempo rary or transient or for a time fixed only by agreement; whether it is created by an ap pointment or election, or merely by a contract of employment by which the rights of the parties are regulated; whether the compensa tion is by a salary or fees fixed by law, or by a sum agreed upon by the contract of hir ing." A person invested with the authority of an office has been treated as an officer.
In Words and Phrases (Permanent Edition Volume 29A) an 'Officer ' has been stated to mean: "a person who is invested with some portion of the functions of government to be exercised for the public benefit." "If the powers and duties reposed in the incumbent of a position are such that he exercises the function of the sovereignty, the incumbent is an 'Officer ' regardless of the name by which he may be designated.
" If these tests are applied, the appellant who held an office and was clothed with functions of sovereignty was an offi cer.
In Articles 146 and 229 of the Constitution officers and servants of the Supreme Court and the High Court have re spectively been provided for.
In service jurisprudence even ministerial employees have been referred to as officers.
The terms 'officer ' and 'employee ' put together obviously signi fy the grade of the establishment or post held,, the officer being higher in grade to employee.
Keeping the nature and duty assigned to the Inspector or the Sub Inspector working in the Department to whom powers have been delegated, it cannot be doubted that the holders of posts of Inspector and Sub Inspector are officers.
We, therefore, accept the con tention of Mr. Rao that the appellant held the post of an officer and since the State had conceded 442 that it was an executive office and the appellant was hold ing the said post from April, 1973 till September, 1978, by 1980 when selection was be made he had the requisite quali fication.
Mr. Rao relied upon decisions of this Court in G.A. Monterio vs The State of Ajmer, ; and Bajrang Lal & Anr.
vs State of Rajasthan, ; in sup port of his plea that the appellant was an officer.
Both these cases were with reference to the definition of 'public servant ' in section 21 of the Indian Penal Code.
On principle, these decisions support the conclusion which we have reached.
Counsel appearing for the respondents did not attempt to contend that if the appellant had the requisite qualifica tion when selection was being made and he had been kept out on the wrong premises that he did not have the qualifica tion, he would be entitled to challenge the selection.
The selected candidates were, however, not impleaded as respond ents in the writ petition and attempt to implead them at this stage is bound to prejudice them.
They have now been in service for more than eight years and respondent No. 4 has even been holding a promotional post for some time.
We do not think in such a situation there would be any justifica tion to allow challenge to the recruitment of the respond ents.
At the same time the State had no justification to keep out the appellant from consideration.
The appellant was entitled to be considered for recruitment in 1980 and since his claim had been overlooked without justification, the State and the Haryana Public Service Commission are bound to consider his case now on the basis that he was entitled to recruitment in 1980.
Reliance was placed by Mr. Rao on some decisions of the this Court, as to the nature of relief that can be granted in a case of this type.
We do not think in the facts of this case, the ratio of the decisions can be applied as a guide line.
It has been brought to our notice that an enquiry was undertaken by Government against some of the selected candi dates on the allegation that forged/false certificates had been produced by them in support of qualification/eligibili ty and in the enquiry a prime facie case had been made out.
We express no opinion about it as it shall be for the State Government to deal with the question and the appellant 's appeal has nothing to do with it.
The appeal is allowed, the order of the learned Single Judge as also the appellate order are vacated and the State Government and the 443 Public Service Commission are directed to consider the appellant 's claim for recruitment on the basis of the noti fication for recruitment.
In case the appellant is found qualified, he shall be selected for the post and duly ap pointed.
The question of appellant 's seniority is left open to be dealt with by the State Government in consultation with the Public Service Commission.
The appellant shall have the cost of the appeal.
Hearing fee is assessed at Rs.3,000 to be recovered from the Respondent State only.
R.S.S. Appeal allowed.

summary/full:
The Haryana Public Service Commission advertised the filling up of 4 posts of District Food and Supplies Officers by direct recruitment, and prescribed "five/three years ' experience as an executive officer" as one of the essential qualifications.
The appellant who was working as Inspector/Sub Inspector in the Food and Supplies Department, applied for the post.
Some other Inspectors/Sub Inspectors also applied.
Subsequently, the Special Secretary to the Haryana Government in the Food and Supplies Department wrote to the Commission affirming, inter alia, that the work of Inspectors/Sub Inspectors of his Department was of executive nature though they were not officers.
The Commission, howev er, required the appellants to produce a certificate from the State Government to the effect that they had the requi site experience of executive officer.
The State Government did not issue such a certificate, and in its absence the Commission did not consider the Inspector and Sub Inspector candidates as having the requisite qualification.
Thereupon, the appellant filed a writ petition in the High Court claiming that he had the requisite qualifica tion.
The learned Single Judge dismissed the writ petition and the Division Bench dismissed the appeal therefrom.
Before this Court, it was contended on behalf of the appellant that the post of Inspectors and Sub inspectors belonged to the category of executive office, and that in earlier years certain similarly situated Inspectors and Sub Inspectors of the Department had been appointed on that basis.
438 Allowing the appeal, it was, HELD: (1) It was conceded in the Department 's letter to the Commission that 'the Inspectors/Sub Inspectors held executive posts.
[440B] (2) None of the parties has placed any definition of the term 'Officer ' from any Haryana Statute.
It is also not the contention of any of the parties that the administrative orders gave a definition to the term.
In such a situation, the common parlance meaning of 'officer ' has to be accepted for the purpose of finding out whether Inspectors and Sub inspectors held the pest of officer.
[440F] (3) In service jurisprudence even ministerial employees have been referred to as officers.
The terms 'Officer ' and 'employee ' put together obviously signify the grade of the establishment or post held, the officer being higher in grade to employee.
[441G] (4) A person invested with the authority of an office has been treated as an officer.
[441C D] (5) Keeping in view the nature and duty assigned to the Inspector or the Sub Inspector working in the Department to whom powers have been delegated, it cannot be doubted that the holders of pests of Inspector and Sub Inspector are officers.
[441G H] G.A. Monterio vs The State of Ajmer, ; and Bajrang Lal & Anr.
vs State of Rajasthan, ; , referred to.
(6) The appellant was entitled to be considered for recruit ment in 1980 and since his claim had been over looked with out justification, the State and the Haryana Public Service Commission are bound to consider his case now on the basis that he was entitled to recruitment in 1980.
In case the appellant is found qualified, be shall be selected for the post and duly appointed.
[442E]


judgement:
Appeal No. 128 of 1955.
Appeal by special leave from the judgment and order dated March 5, 1953, of the Bombay High Court in I. T. R. No. 40 of 1952.
H. N. Sanyal, Additional Solicitor General of India, K. N. Rajagopala Sastri and R. H. Dhebar, for the appellant.
B. R. L. Aiyangar, for the respondent.
April 28.
The Judgment of the Court was delivered by GAJENDRAGADKAR J.
This is an appeal by the Commissioner of Income tax, Bombay, by special leave and it raises a short question of law under section 33B of the Income tax Act.
The respondent assessee had been registered as a firm under section 26A of the Act for the year 1946 47.
For the assessment years 1947 48, 1948 49 and 1949 50, the Income tax Officer made the assessment on the respondent on June 7, 1949, June 7, 1949, and September 23, 1949, respectively under section 23(3) of the Act.
The Income tax Officer made an estimate about the profits of the respondent under the proviso to section 13 and computed the total income of the respondent at Rs. 95,053, Rs. 93,430 and Rs. 83,752 for the said years respectively.
The respondent had applied for and obtained renewal of registration of the firm.
The Income tax Officer had also passed an order under section 23(6) of the Act and allocated the shares of the various parties.
Against the said assessment orders the respondent preferred an appeal to the Appellate Assistant Commissioner.
On November 4, 1950, the Appellate 91 716 Assistant Commissioner reduced the respondent 's estimated profit by Rs. 28,250 in the assessment year 1947 48 and by Rs. 19,000 in the assessment year 1948 49.
The respondent 's appeal in regard to the assessment year 1949 50 was pending before the Appellate Assistant Commissioner.
Meanwhile it had come to the notice of the Commissioner of Income tax that the respondent firm which had been granted renewal of registration by the Income tax Officer was not a firm which could be registered under the Act as one of the partners of the firm was a minor.
The Commissioner then took action under section 33B(1) of the Act and issued notice to the respondent to show cause why the assessments made under section 23(3) of the Act and the registration granted under section 26A should not be cancelled.
After hearing the parties, the Commissioner passed an order under section 33B(1) on June 5, 1951 by which he cancelled the registration of the firm under section 26A and directed the Income tax Officer to make fresh assessments against the respondent as an unregistered firm for all the three years.
As a result of this revisional order passed by the Commissioner of Income tax, the Income tax Officer passed fresh orders.
The respondent preferred five appeals to the tribunal; two of these were against the orders passed by the Appellate Assistant Commissioner under section 31 and related to the assessment years 1947 48 and 194849; while the remaining three challenged the orders passed by the Commissioner of Income tax under section 33B(1) of the Act and related to the assessment years 1947 48, 1948 49 and 1949 50.
In these three appeals, with which we are concerned, the respondent had urged that the Commissioner was not competent in law to pass an order setting aside an assessment which had been confirmed or modified by the Appellate Assistant Commissioner; that the orders passed by the Commissioner under section 33B(1) were bad in law as they directed the Income tax Officer to pass an order in a particular manner and that the orders passed by the Income tax Officer subsequent to the cancellation of the respondent 's registration were bad in law as they were passed with 717 out giving notice to, or hearing, the respondent.
On January 2, 1952, the tribunal upheld the contentions raised by the respondent and allowed the appeals.
The appellant then moved the tribunal under section 66(1) of the Act for referring the questions specified in its application for the opinion of the High Court.
The tribunal accordingly framed the following three questions and referred them to the High Court of, Bombay: " 1.
Whether on the facts and circumstances of the case the Commissioner of Income tax acting under section 33B(1) can set aside the orders passed by the Appellate Assistant Commissioner, for the assessment years 1947 48 and 1948 49 ? 2.Whether on the facts and circumstances of the case the order passed by the Commissioner of Income tax dated 5th June, 1951, is bad in law as it directs the Income tax Officer to pass an order in a particular manner ? 3.Whether on the facts and circumstances of the case orders passed by the Income tax Officer dated 21 6 52 are bad in law, as fresh notices as required by Sections 22 and 23 of the Income tax Act were not given by the Income tax Officer to the assessee ? " This matter was heard by the High Court on March 5, 1953.
In regard to the assessments made for the years 1947 48 and 1948 49 the High Court held that the question raised by the appellant was concluded by the judgment already delivered by it in the Commissioner of Income Tax, Bombay North vs Tejaji Farasram Kharawala (1).
In Tejaji 's case the High Court had held that when an appeal is provided from a decision of the tribunal and the appeal court, after hearing the appeal, passes an order, the order of the original court ceases to exist and is merged in the order of the appeal court; and although the appeal court may merely confirm the order of the trial court, the order that stands and is operative is not the order of the trial court but the order of the appeal court.
In that view of the matter, since the Income tax Officer 's order (1) 718 granting registration to the respondent was assumed to have merged in the appellate order, the revisional power of the Commissioner could not be exercised in respect of it.
The same view has been taken in the majority decision of the Patna High Court in Durgabati and Narmadabala Gupta vs Commissioner of Income tax (1).
In respect of the Income tax Officer 's order renewing registration to the respondent for the year 1949 50, the High Court took the view that the revisional power of the Commissioner could not be exercised even in respect of this order because the propriety or the correctness of this order was open to consideration by the Appellate Assistant Commissioner in the respondent 's appeal then pending before him, Commissioner of Income tax vs Amritlal Bhogilal (subnom) (2).
In respect of this order the High Court had framed an additional question.
It was in these terms: " Whether the order of the Commissioner acting under section 33B(1) setting aside the order of the Income tax Officer where an appeal against that order was pending before the Appellate Assistant Commissioner was valid? " The High Court answered this additional question also in favour of the assessee.
In the result the High Court held that the Commissioner 's order cancelling the respondent 's registration for all the three years in question was invalid.
That is why the High Court did not think it necesssary to answer the remaining two questions framed by the tribunal.
The application subsequently made by the appellant to the High Court for a certificate under section 66A (2) was rejected by the High Court.
Thereupon the appellant applied for and obtained special leave from this Court on March 22, 1954.
The appellant 's contention is that the view taken by the High Court that the Commissioner of Income tax could not have exercised his revisional power in respect of the Income tax Officer 's order granting registration to the respondent with regard to all the three years in question is based on a misconstruction of the relevant provisions of s.33B of the Act.
Section 33B (1) which confers revisional power on (1) (2) 719 the Commissioner provides that the Commissioner may call for and examine the record of any proceeding under the Act and if he considers that any order passed therein by the Income tax Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and, after making and causing to be made such enquiry as he deems necessary, pass such order thereon as the circumstances of the case justify including an order enhancing or modifying the assessment or cancelling the assessment or directing a fresh assessment.
Sub section (2) provides that orders of re assessment made under section 34 cannot be revised under section 33B (1) and adds that the said revisional power cannot be exercised after the lapse of two years from the date of the order sought to be revised.
Sub section (3) gives the assessee the right to prefer an appeal to the appellate tribunal against the Com missioner 's revisional order within the prescribed period; and sub section
(4) provides for the procedure for filing such an appeal.
In the present appeal two short questions fall to be decided under section 33B (1).
Does the order passed by the Income tax Officer granting registration to the assessee firm continue to be an order passed by the Income tax Officer even after the assessee 's appeal against the assessment made by the Income tax Officer on the basis that the assessee was a registered firm has been disposed of by the Appellate Assistant Commissioner ? In other words, where the appeal preferred by an assessee against his assessment has been considered and decided by the Appellate Assistant Commissioner, does the order of registration along with the subsequent order of assessment merge in the appellate order ? If, in law, the order of registration can be said to merge in the final appellate order, then clearly the Commissioner 's revisional power cannot be exercised in respect of it.
This question arises in respect of the registration order in regard to the two assessment years 1947 48 and 1948 49.
The other question which also falls to be decided is whether the order of registration in respect of the assessment year 720 1949 50 can be made the subject matter of the exercise of the Commissioner 's revisional power even though the assessee 's appeal against the assessment for the said year is pending before the Appellate Assistant Commissioner at the material time.
There can be no doubt that, if an appeal is provided against an order passed by a tribunal, the decision of the appellate authority is the operative decision in law.
If the appellate authority modifies or reverses the decision of the tribunal, it is obvious that it is the appellate decision that is effective and can be enforced.
In law the position would be just the same even if the appellate decision merely confirms the decision of the tribunal.
As a result of the confirmation or affirmance of the decision of the tribunal by the appellate authority the original decision merges in the appellate decision and it is the appellate decision alone which subsists and is operative and capable of enforcement; but the question is whether this principle can apply to the Income tax Officer 's order granting registration to the respondent.
In dealing with this question it would be necessary first to refer to the relevant provisions of the Act in regard to the granting of registration.
Section 26A of the Act lays down the procedure for the registration of firms.
An application has to be made by the firm in that behalf specifying the particulars prescribed by the said section and by the material rules framed under the Act.
If registration is granted by the Income tax Officer it enables the Income tax Officer to adopt the procedure prescribed by section 23 (5) (a) for making assessment orders in respect of the registered firm.
If a firm is not registered the Income tax Officer is required to follow the procedure prescribed by section 23 (5) (b) in making assessment orders in respect of unregistered firms.
A firm is an assessee under section 2 (2) whether it is registered under section 26A or not.
The Act does not impose an obligation on firms to apply for and obtain registration.
The Act in terms does not purport to define the effect of registration nor does it enumerate the rights of parties on registration of firms.
Section 23 (5) (a) and (b) provide for, the machinery for 721 collecting or recovering the tax and in no sense can they be treated as charging sections.
Broadly stated, even if a firm is registered in pursuance of an application made under section 26A, no difference arises in the liability of the firm or its individual partners to be taxed for the total income as may be determined by the Income tax Officer under sections 3 and 4 of the Act.
The computation of taxable income is not at all affected by the machinery provided by section 23 (5).
The decision in Shapurji Pallonji vs Commissioner of Income Tax, Bombay (1) on which Mr. Ayyangar himself relied clearly brings out and emphasizes this position.
It is true that the Income tax Officer is empowered to follow the two methods specified in section 23 (5) (a) and (b) in determining the tax payable by registered and unregistered firms respectively and making the demand for the tax so found due; but this does not affect the computation of taxable income.
It is important to bear in mind that the order granting registration to an assessee firm is an independent and separate order and it merely affects or governs the procedure to be adopted in collecting or recovering the tax found due.
It is not disputed that the registration granted by the Income tax Officer to an assessee firm can be cancelled by him either under section 23 (4) or under r. 6B.
It is also clear that the Income tax Officer 's order granting registration can be cancelled by the Commissioner under section 33B (1).
The argument for the respondent, however, is that, as a result of the decision of the appeal preferred by him against the Income tax Officer 's order of assessment, the order of registration passed by the Income tax Officer in favour of the respondent has ceased to be the order passed by the Income tax Officer as such.
It is therefore necessary to inquire whether the order of registration passed by the Income tax Officer can be challenged by the department before the Appellate Assistant Commissioner where the assessee firm has preferred an appeal against the order of assessment.
The decision of this question would obviously depend upon the relevant provisions of the (1)[1945] 13 722 Act in respect of appeals to the Appellate Assistant Commissioner and the powers of the Appellate Assistant Commissioner.
Section 30 (1) gives the assessee the right to prefer appeals against the orders specified in the said section.
The assessee firm can, for instance, object to the amount of income assessed under section 23 or section 27.
The assessee firm can also object to the order passed by the Income tax Officer refusing to register it under section 23 (4) or section 26A.
It can likewise object to the cancellation by the Income tax Officer of its registration under section 23 (4).
It is significant that, whereas an appeal is provided against orders passed by the Income tax Officer under section 23 (4) or section 26A either refusing to register the firm or cancelling registration of the firm, no appeal can be filed by the department against the order granting registration.
Indeed it is patent that the scheme of the Act in respect of appeals to the Appellate Assistant Commissioner is that it is only the assessee who is given a right to make an appeal and not the department.
Thus there can be no doubt that the Income tax Officer 's order granting registration to a firm cannot become the subjectmatter of an appeal before the Appellate Assistant Commissioner.
The next question which must be considered is whether the Income tax Officer 's order granting registration to a firm can be challenged by the department during the hearing of the firm 's appeal against the final order of assessment made by the Income tax Officer ? The powers of the Appellate Assistant Commissioner are to be found in section 31 of the Act.
Section 31 (3) (a) authorises the Appellate Assistant Commissioner to confirm, reduce, enhance or annul the assessment under appeal.
Under section 31 (3) (b), wide powers are given to the appellate authority to set aside the assessment or direct the Income tax Officer to make fresh assessment after making such further enquiry as the Income tax Officer may think fit or as the Appellate Assistant Commissioner may direct.
The Appellate Assistant Commissioner is also given the authority, in the case of an order cancelling the registration of the firm under sub section
(4) of section 23 or 723 refusing to register a firm under sub section
(4) of section 23 or section 26A or to make a fresh assessment under section 27, to confirm such order or cancel it and direct the Incometax Officer to register the firm or to make a fresh assessment as the case may be.
This section further lays down that, at the hearing, of an appeal against the order of an Income tax Officer, the Income tax Officer shall have the right to be heard either in person or by his representative.
It is thus clear that wide powers have been conferred on the Appellate Assistant Commissioner under section 31.
It is also clear that, before the appellate authority exercises his powers, he is bound to hear the Income tax Officer or his represent.
ative.
It has been urged before us by Mr. Ayyangar that these provisions indicate that, in exercise of his wide powers the Appellate Assistant Commissioner can, in a proper case, after hearing the Income tax Officer or his representative, set aside the order of registration passed by the Income tax Officer.
We are not prepared to accept this argument.
The powers of the Appellate Assistant Commissioner, however wide, have, we think, to be exercised in respect of the matters which are specifically made appealable under section 30(1) of the Act.
If any order has been deliberately left out from the jurisdiction of the Appellate Assistant Commissioner it would not be open to the appellate authority to entertain a plea, about the correctness, propriety or validity of such an order.
Indeed, if the respondent 's contention is accepted, it would virtually give the department a right of appeal against the order in question and there can be no doubt that the scheme of the Act is not to give the department a right of appeal to the Appellate Assistant Commissioner against any orders passed by the Income tax Officer.
The order granting registration can be cancelled by the Income tax Officer himself either under r. 6B or under section 23(4).
It may be cancelled by the Commissioner in exercise of his revisional power under section 33 B; but it cannot be cancelled by the Appellate Assistant Commissioner in exercise of his appellate jurisdiction under section 31 of the Act.
It is true that, 92 724 in dealing with the assessee 's appeal against the order of assessment, the Appellate Assistant Commissioner may modify the assessment, reverse it or send it back for further enquiry ; but any order that the Appellate Assistant Commissioner may make in respect of any of the matters brought before him in appeal will not and cannot affect the order of registration made by the Income tax Officer.
If that be the true position, the order of registration passed by the Income tax Officer stands outside the jurisdiction of the Appellate Assistant Commissioner and does not strictly form part of the proceedings before the appellate authority.
Even after the appeal is decided and in consequence the appellate order is the only order which is valid and enforceable in law, what merges in the appellate order is the Income tax Officer 's order under appeal and not his order of registration which was not and could never become the subject matter of an appeal before the appellate authority.
The theory that the order of the tribunal merges in the order of the appellate authority cannot therefore apply to the order of registration passed by the Income tax Officer in the present case.
In this connection we may refer to the argument which Mr. Ayyangar seriously pressed before us.
He contended that, when the Appellate Assistant Commissioner hears the assessee 's appeal, he is himself computing the total taxable income of the assessee and, in discharging his obligation in that behalf, he may be entitled to consider all relevant and incidental questions.
In support of this argument Mr. Ayyangar referred us to the decision in Rex vs The Special Commissioner of Income Tax (ex parte Elmhirst) (1).
The point which arose before the King 's Bench Division in this case was whether, when a notice of appeal has been given, it was open to the assessee to withdraw his appeal and the Court held that once notice of appeal is given the appellate authority was entitled and indeed bound to see that a true assessment of the amount of the taxpayer 's liability was arrived at.
We are unable to see how this decision can really help the (1) 725 respondent in the present case.
When an appeal is taken before the Appellate Assistant Commissioner undoubtedly he is bound to examine the case afresh but that cannot bring within the purview of his appellate jurisdiction matters which are deliberately left out by the Act.
If section 30(1) does not provide for an appeal against a particular order, legislature obviously intends that the correctness of the said order cannot be impeached before the appellate authority.
The jurisdiction and powers of the appellate authority must inevitably be determined by the specific and relevant provisions of the Act.
In this connection it may be useful to compare the relevant and material features of the revisional powers conferred on the Commissioner by sections 33A and 33B respectively.
The Commissioner 's revisional power under section 33A cannot be exercised to the prejudice of the assessee in any case.
It can be exercised in respect of orders passed by any authority subordinate to the Commissioner; but in no case can the revisional order prejudicially affect the assessee.
It is significant that the explanation to section 33A expressly provides that the Appellate Assistant Commissioner shall be deemed to be an authority subordinate to the Commissioner.
In other words, in exercise of this revisional power the Commissioner may modify or reverse in favour of the assessee even the orders passed by the Appellate Assistant Commissioner.
The position Under section 33B, however, is different.
The Commissioner 's revisional power under section 33B can be exercised only in respect of orders passed by the Income tax Officer.
The appellate orders are outside the purview of section 33B.
That is one important distinction between the two revisional powers.
The other important distinction is that, whereas under section 33A the revisional jurisdiction cannot be exercised to the prejudice of the assessee, under section 33B the Commissioner can, in exercise of his revisional power, make orders to the prejudice of the assessee.
It is not disputed that under section 33B erroneous orders passed by the Income tax Officer which are prejudicial to the revenue can be revised by the Commissioner.
Now, 726 the Income tax Officer 's order registering the firm is not appealable and so it cannot become the subjectmatter of an appeal before the Appellate Assistant Commissioner.
Such an order can therefore be revised by the Commissioner under section 33B whenever he considers that it has been erroneously passed.
In the present case there is no doubt that the, respondent firm cannot be validly registered in view of the fact that one of its partners is a minor and so, on the merits, the Commissioner 's order is clearly right.
We must accordingly hold that the High Court was in error in taking the view that the Commissioner had no authority to set aside the registration order passed by the Income tax Officer granting registration to the respondent for the years 1947 48 and 1948 49.
The case in regard to the subsequent year 1949 50 presents no difficulty.
The appeal preferred by the respondent against the Income tax Officer 's assessment order in respect of this year was pending at the material time before the Appellate Assistant Commissioner; and so no question of merger arose in respect of the order granting renewal of registration for this period.
There can be no doubt that even on the theory of merger the pendency of an appeal may put the order under appeal in jeopardy but until the appeal is finally disposed of the said order subsists and is effective in law.
It cannot be urged that the mere pendency of an appeal has the effect of suspending the operation of the order under appeal.
The High Court, however, appears to have taken the view that the revisional power is an extraordinary power and can be exercised only for unusual and extraordinary reasons.
It was also assumed by the High Court that, in the pending appeal, the department would have an alternative remedy because, according to the High Court, the department could have challenged the validity or the propriety of the respondent 's registration and could have asked the Appellate Assistant Commissioner to cancel it.
As we have already pointed out, the department could not challenge the validity of the registration order in the assessee 's appeal before the appellate authority and so the argument that the. 727 department had an alternative remedy is not correct.
It is clear from the judgment of the High Court that it is the assumption that the department had an alternative remedy which weighed with the learned judges in reaching their final conclusion.
Then the argument that the extraordinary revisional power must be exercised only for extraordinary reasons is really not very material.
Whether or not the revisional power can be exercised in a given case must be determined solely by reference to the terms of section 33B itself.
Courts would not be justified in imposing additional limitations on the exercise of the said power on hypothetical considerations of policy or the extraordinary nature of the power.
We must, therefore, hold that the High Court was also in error in holding that the Commissioner was not authorised in cancelling the order of the respondent 's registration for the year 1949 50.
The result is that the view taken by the High Court must be reversed and the first question framed by the tribunal as well as the additional question framed by the High Court must be answered in favour of the appellant.
Then there remain two other questions which were framed by the tribunal but have not been considered by the High Court.
The learned counsel appearing for both the parties agree that we need not remit these two questions to the High Court with the direction that the High Court should deal with them in accordance with law; it has been conceded before us that, if the principal question about the Commissioner 's power under section 33B(1) to cancel the respondent 's registration is answered in favour of the appellant, then the two remaining questions would become academic and answers to them would also have to be in favour of the appellant.
It is true, by his order the Commissioner purported to set aside the assessment orders made under section 23(3) and section 55 and directed the Incometax Officer to make fresh assessments according to law for each of the years in question.
If this part of the order is literally construed it would clearly be open to the objection raised by the respondent.
The assessment orders passed by the Income tax Officer for the years 1947 48 and 1948 49 had been modified by the 728 Appellate Assistant Commissioner and in that sense they had ceased to be the orders of assessment passed by the Income tax Officer himself and so the Commissioner could not have exercised his revisional power under section 33B(1) in respect of the said appellate orders but we are inclined to think that the Commissioner did not intend to set aside the assessments in this sense.
It is clear from the order read as a whole that, having cancelled the respondents registration, the Commissioner wanted to direct the Income tax Officer to make suitable consequential amendment in regard to the machinery or procedure to be adopted to recover the tax payable by the respondent.
In fact it is conceded that, in his subsequent order, the Income tax Officer has accepted the figure of the taxable income of the respondent as determined by the appellate authority for the relevant years and has proceeded to act under section 23(5)(b) on the basis that the respondent is an unregistered firm.
Therefore we cannot hold that the order passed by the Commissioner is bad in law on the ground that " he directed the Income tax Officer to pass the order in a particular manner ".
The answer to question No. 2 would accordingly be in the.
negative.
Then as regards question No. 3, it is difficult to understand how this question can be said to arise from the proceedings before the tribunal.
This question challenges the validity of the procedure adopted by the Income tax Officer in passing fresh orders against the respondent.
This proceeding is clearly subsequent to the impugned order of the Commissioner under section 33B(1) and so we are unable to see how the tribunal allowed the respondent to raise this contention in appeals which had been filed by the respondent against the Commissioner 's order under section 33B(1).
Besides, it has been fairly conceded by Mr. Ayyangar before us that, when the Income tax Officer merely proceeded to adopt a different machinery to recover the tax due from the respondent in consequence of the cancellation of the respondent 's registration, there was no occasion or need to issue another notice against the respondent.
We must accordingly answer question No. 3 also in the negative.
729 In the result all the questions framed in this case are answered in favour of the appellant.
The order passed by the High Court is set aside and the appeal is allowed with costs throughout.
Appeal allowed.

dataset_name: IN-Abs

summary/full:
The respondent firm was assessed to income tax for the assessment years 1947 48, 1948 49 and 1949 50 under section 23(3).
The Income tax Officer renewed the registration of the firm under section 26A of the Income tax Act and passed an order under section 23(6) allocating the shares of the various partners.
The respondent preferred appeals against the orders of assessment to the Appellate Assistant Commissioner.
Oil November 4, 1950, the Appellate Assistant Commissioner partly accepted the appeals in respect of the assessment years 1947 48 and 1948 49 but the appeal in respect of the assessment year 1949 50 was still pending.
Meanwhile after issuing notice to the parties and hearing them the Commissioner, acting under section 33B(1), passed an order on June 5, 1952, cancelling the registration granted under section 26A on the ground that one of the partners of the firm was a minor, and directed the Income tax Officer to make fresh assessments for the three years.
The respondent preferred appeals to the Appellate Tribunal which were allowed.
On the application of the appellant the Tribunal referred, under section 66(1) of the Act, three questions to the High Court of Bombay.
In regard to the assessment years 1947 48 and 1948 49 the High Court held that the orders of the Income tax Officer granting registration had merged in the appellate orders of the Assistant Appellate Commissioner and the revisional power of the Commissioner under section 33B(1) could not be exercised in respect of them.
With regard to the renewal of registration for the year 1949 50 the High Court held that the Commissioner could not exercise his revisional power as the propriety of this order was open to consideration by the Appellate Assistant Commissioner in the respondent 's appeal pending before him.
The appellant obtained special leave and appealed: Held, that the Commissioner had the authority under section 33B(1) to set aside the orders of registration made by the Income tax Officer.
An order of the Income tax Officer granting registration was not appealable before the Appellate Assistant Commissioner.
Such an order could be cancelled by the Commissioner in exercise of his revisional powers under section 33B(1) ; but it could not be cancelled by the Appellate Assistant Commissioner even in the exercise of his appellate jurisdiction when dealing with an appeal by an assessee.
The theory that the order of a tribunal merges in the order of the appellate authority did not apply to the order of registration passed by the Incometax Officer.
Commissioner of Income tax, Bombay North vs Tejaji Farasram Kharawala, , referred to.
Durgabati and Narmadabala Gupta vs Commissioner of Income tax, , disapproved.
But the Commissioner has no power while exercising his revisional jurisdiction under section 33B(1) of the Act to set aside the assessment orders.
The Commissioner, in the present case, did 715 not really intend to set aside the assessment orders but merely to direct the Income tax Officer to make suitable consequential amendments in regard to the machinery or procedure.
to be adopted to recover the tax payable by the respondent.
The registration or non registration of a firm does not at all affect the computation of taxable income; it merely governs the procedure to be adopted in recovering the tax found due.
Shapurji Pallonji vs Commissioner of Income tax, Bombay, , referred to.


judgement:
Civil Appeal No. 43(NT) of 1975.
306 From the Judgment and Order dated 23.1.1974 of the Gujarat High Court in Income Tax Reference No. 78 of 1970.
T.A. Ramachandran, Mrs. J. Ramachandran and S.C. Patel for the Appellant.
C.M. Lodha, M.N. Tandon and Ms. A.S. Subhashini, for the Respondent.
The Judgment of the Court was delivered by VENKATACHALIAH, J.
This appeal by the assessee, The Alembic Chemicals Works Co. Ltd., arises out of and are directed against the judgment dated 23.1.1974, of the High Court of Gujarat in Income Tax Reference 78 of 1970, answer ing in favour of the Revenue a question of law referred to it under Section 256(1) of the Income Tax Act, 1961, (Act) by the Income Tax Appellate Tribunal.
On 8.6.1961, the assessee, a company engaged in the manufacture of antibiotics and pharmaceuticals was granted licence for the manufacture, on its plant, of the well known antibiotic, penicillin.
In the initial years of its venture the assessee was able to achieve only moderate yields from the pencillin producing strains used by it which yielded only about 5000 units of penicillin per millilitre of the culturemedium.
In the year 1963, with a view to increasing the yield of penicillin, the assessee negotiated with M/s. Meiji Seika Kaishna Limited ("Meiji" for short), a reputed enterprise engaged in the manufacture of antibiotics in Japan, which agreed to supply to the assessee the requisite technical know how so as to achieve substantially higher levels of performance of production of more than 10,000 units of penicillin per millilitre of 'cultured broth ' with the aid of better technology and process of fermentation and with better yielding penicillin strains developed by Meiji.
The negotiations culminated in an agreement dated 9.10.1963, whereunder Meiji, in consideration of the 'once for all ' payment of 50,000 U.S. dollars (then equivalent to Rs.2,39,625) agreed to supply to the assessee the "sub cultures of the Meiji 's most suitable penicillin producing strains", the technical information, know now and written description of Meiji 's process for fermentation of penicil lin alongwith a flow sheet of the process on a pilot plant; the design and specifications of the main equipments in such pilot plant; arrange for the visits to and training at assessee 's expense, 307 of technical representatives of the assessee to Meiji 's plant at Japan and to advise the assessee in the large scale manufacture of penicillin for a period limited to 2 years from the effective date of the agreement.
It was also stipu lated that the technical know how supplied by Meiji was to be kept confidential and secret by the assessee which was prohibited from parting with the technical know how in favour of others or to seek any patent for the process.
In the proceedings for assessment to Income tax for the assessment year 1964 65 the assessee claimed that Rs.2,39,625 paid under the agreement to 'Meiji ' was one laid out wholly and exclusively for the purpose of the business and claimed its deduction as a revenue expenditure.
The Income tax Officer, on the view that the expenditure was for the acquisition of an asset or advantage of an enduring benefit, held it to be a capital outlay and declined the deduction.
This view was affirmed by the Appellate Asst.
Commissioner in the assessee 's first appeal.
The Income tax Appellate Tribunal, Ahmedabad Bench, dismissed the further appeal of the assessee holding that the arrangements with Meiji envisaged the setting up of a large commercial plant for the production of the antibiotic modelled on the lines of the pilot plant and that, there fore, the out lay could not be treated as an expenditure laid out on and for purposes of the existing business, but must be regarded as one incurred for a new venture on a new process with a new technology on a new type of plant.
The Tribunal held that the payment was 'once for all payment ' and was made for the acquisition of a capital asset.
The Tribunal inter alia held: "The sub cultures and the information design and flow sheet etc., were to be fur nished once for all.
Meiji also agreed to advise the assessee in respect of any diffi culty the assessee may encounter in applying the subcultures and informations obtained by the assessee from Meiji to the large scale manufacture of penicillin.
It is apparent from the agreement and the correspondence which has been made available to us that Meiji agreed to give the designs etc., not only for a pilot plant but for the manufacture of penicillin according to Meiji 's process on commercial scale.
The assessee has to put in a larger plant modelled on the pilotplant." " . .
It is in consideration for Meiji 's agreeing to 308 supply the assessee with complete details of the technical know how, the design, subcul tures, flow sheet and written descriptions of the process once for all that the assessee paid to Meiji the stipulated sum of $ 50,000." " . .
It would thus appear that the payment was made for acquiring a capital asset in the shape of technical know how and other allied information.
It was not made in the course of carrying out of an existing business of the assessee but was for the purpose of setting up a new plant and a new process.
It would, therefore, appear that the revenue authorities have rightly treated the payment as of capital nature." " . .
The process which the assessee took over from Meiji was not the same as it was working heretofore.
In the present case the outlay was incurred for a complete replacement of the equipment of the business inasmuch us a new process with a new type of plant was to be put up in place of old process and old plant . . . ." (Underlining Supplied) 4.
At the instance of the assessee the Tribunal stated a case and referred the fol lowing question of law for the opinion of the High Court: "Whether the sum of Rs.2,39,625 was a revenue expenditure admissible to the asses see for the purpose of computation of its total income?" The High Court by the judgment under appeal answered the question in the negative and against the assessee.
This part of the judgment is assailed by the assessee in CA 43 of 1975.
The reasoning of the High Court in support of its conclusion was on the following lines: " .
It is true that the expenditure was manifestly laid out for the purpose of obtain ing benefits and advantages such as sub cul tures of penicillin producing strains, design of a pilot and exchange of technical personnel with a view to acquiring know how.
But the finding of the Tribunal, as we 309 read it, is that all the benefits which asses see received under the agreement were as a part of the transaction which was undertaken with the ultimate view of a setting up a new plant and a new process.
In view of the find ings recorded by the Tribunal, no conclusion other than that the expenditure was incurred once and for all with a view to bringing into existence an asset or advantage for the endur ing benefit of the manufacturing trade of the assessee is possible.
The expenditure was incurred for introducing a new process of manufacturing and with a view to installing a new plant, even if not immediately then at a later stage, and on that conclusion the only possible answer to the first question referred to us can be in the negative and against the assessee." (Emphasis Supplied) Before the High Court, the assessee also moved an application under Section 256(2) of the Act ITA No. 24 of 1971 for a direction to the Tribunal to refer another question of law, also stated to arise out of the order of the Tribunal.
The question of law respecting which the supplementary reference was sought was this: "Whether there was any evidence or material before the Tribunal to hold that (1) a completely new plant with a completely new process and new technical know how was ob tained by the assessee from Messrs Meiji under the said agreement, dated 9.10.1963; and (2) to work out that process separate plant or machinery had to be designed, constructed, installed and operated? The High Court dismissed this application observing that the Tribunal had no where recorded a finding to the effect that a completely new plant was obtained by the assessee from Meiji and that the finding of the Tribunal that under the agreement the assessee had obtained a new process and a new technical know now from Meiji was not without evidence.
Against the dismissal of ITA 24 of 1971 by the High Court, the assessee has preferred Civil Appeal No. 44 of 1975.
On 24.2.1987, this Court while directing the Tribunal to draw up a supplementary statement of the case and refer for the opinion of this Court the further question of law which, according to the assessee, arose out of the Tribu nal 's order and which was the subject matter of the asses see 's appeal in C.A. 44 of 1975, however, disposed of that 310 appeal formally, leaving the question of law arising out of the supplemental reference to be considered in the present appeal i.e. CA No. 43 of 1975.
The Tribunal has since sub mitted the supplementary statement of the case and has referred that question of law also.
This is how both the questions of law, are now before us.
While in regard to the first question the correctness of the opinion rendered by the High Court requires to be examined, the second question has to be answered for the first time as the reference is called by this court directly.
We have heard Shri T.A. Ramachandran, learned Senior Counsel for the assessee and Shri Lodha, learned senior counsel for the revenue.
In computing the income chargeable under the head "Profits and Gains of Business or Profession", section 37 of the 'Act ' enables the deduction of any expenditure laid out or expended wholly and exclusively for the purpose of the business or profession, as the case may be.
The fact that an item of expenditure is wholly and exclusively laid out for purposes of the business, by itself, is not sufficient to entitle its allowance in computing the income chargeable to tax.
In addition, the expenditure should not be in the nature of a capital expenditure.
In the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises it is well nigh impossible to formulate any general rule, even in generality of cases sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation.
Howev er, some broad and general tests have been suggested from time to time to ascertain on which side of the line the out lay in any particular case might reasonably be held to fall.
These tests are generally efficacious and serve as useful servants; but as masters they tend to be over exact ing.
One of the early pronouncements which serves to indicate a broad area of distinction is City of London Contract Corporation vs Styles, where Bowen, L.J. indicated that the out lay on the "acquisition of the con cern" would be capital while an outlay in "carrying on the concern" is revenue.
In Vallambrosa Rubber Co. vs Farmer, Lord Dunedin suggested as 'not a bad crite rion ' the test that if the expenditure is 'once for all ' it is capital and if it is 'going to recur every year it is revenue.
In the oft quoted case on the subject, viz, British Insulated Helsby Cables Ltd. vs Atherton, Viscount Cave L.C. said: "But when an expenditure is made, not only once and for 311 all, but with a view to bringing into exist ence an asset or an advantage for the enduring benefit of trade, I think that there is very good reason (in the absence of special circum stances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital." .8.
In Assam Bengal Cement Co. Ltd. vs Commissioner of Income tax, [1955]27 ITR 34, this Court observed: "If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure.
If on the other hand it is made not for the purpose of bring ing into existence any such asset or advantage but for running the business or working it with a view to produce the profits, it is a revenue expenditure." "The aim and object of the expendi ture would determine the character of the expenditure whether it is a capital expendi ture or a revenue expenditure." In Sitalpur Sugar Works Ltd. vs Commissioner of Income tax, [1963] 49 ITR (SC) 160; Lakshmiji Sugar Mills Co. Ltd. vs Commissioner of Income tax, and in Travancore Cochin Chemicals Ltd. vs Commissioner of Income tax, the enunciation made in Assam Bengal Cement Company 's case , which in turn, referred with approval to Lord Cave 's dictum was affirmed.
In Sun News Papers Ltd. & Associated News Papers Ltd. vs Federal Commissioner of Taxation; , Dixon J while indicating that the distinction between revenue and capital corresponds with the distinction between the "busi ness entity, structure or organisation set up or established for the earning of profit" on the one hand and "the process by which such an organization operates to obtain regular returns" on the other, however, went on to say that: "The business structure or entity or organiza tion may assume any of an almost infinite variety of shapes and it may be difficult to comprehend under one description all the forms in which it may be manifested . " 312 The learned judge further observed: " . .
There are, I think, three matters to be considered, (a) the character of the advan tage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment . . " 9.
In Regent Oil Co. Ltd. vs Strick, Lord Reid emphasised the futility of a strict application of and exclusive dependence on any single principle in the search for the true position and pointed out the difficulty arising from taking too literally the general statements made in earlier cases and seeking to apply them to a different case which their authors certainly did not have in mind.
The Learned Lord also identified as another source of difficulty the tendency in some cases to treat some one criterion as paramount and to press it to its logical conclusion without proper regard to the other factors in the case.
Lord Reid further said: "So it is not surprising that no one test or principle or rule of thumb is paramount.
The question is ultimately a question of law for the court, but is a question which must be answered in the fight of all the circumstances which it is reasonable to take into account, and the weight which must be given to a par ticular circumstance in a particular case must depend rather on common sense than on strict application of any single legal principle.
" The question in each case would necessarily be whether the tests relevant and significant in one set of circum stances are relevant and significant in the case on hand also.
Judicial metaphors, it is truly said, are narrowly to be watched, for, starting as devices to liberate thought they end often by enslaving it.
The non determinative quali ty, by itself, of any particular test is highlighted in B.P. Australia vs Commr.
of Taxation of the Commonwealth of Australia, Lord Pearce said: "The solution to the problem is not to be found by 313 any rigid test or description.
It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other.
One considera tion may point so clearly that it dominates other and vaguer indications in the contrary direction.
It is a common sense appreciation of all the guiding features which must provide the ultimate answer . " (Emphasis Supplied) The idea of 'once for all ' payment and 'enduring bene fit ' are not to be treated as something akin to statutory conditions; nor are the notions of "capital" or "revenue" a judical fetish.
What is capital expenditure and what is revenue are not eternal varities but must needs be flexible so as to respond to the changing economic realities of business.
The expression "asset or advantage of an enduring nature" was evolved to emphasise the element of a sufficient degree of durability appropriate to the context.
The words of Rich J. in Herring vs Federal Commissioner of Taxation, 1946.72 CLR 543, dealing with an analogous provision in sec.
51 of Income tax Assessment Act of Australia may be re called. " . .
Lord Cave L.C., in using the phrase 'enduring benefit ' in British Insulated and Helsby Cables Ltd. vs Atherton, 1926 A.C. 205,213 (HL), was not thinking of advantages that are permanent.
There is a difference between the lasting and the everlasting.
The time over which the thing 'endures ' is a matter of degree and one element only to be considered.
Horses in the old days and motor trucks in these days are plant and their acquisition for the purpose of transport in business usually involves a capital expendi ture.
But the horses were not immortal any more than the trucks have proved to be . . " 10.
Shri Ramachandran submitted that the approach to the question by the Tribunal was influenced by an erroneous assumption that Meiji 's agreement envisaged the imperative of a totally new plant, for the exploitation of Meiji 's improved fermentation technology.
Learned counsel invited our attention to the following passage in the order of the Tribunal where this postulate is found: "On the other hand, a completely new plant with a completely new process and a completely new technical know how was obtained by the assessee from Meiji and it 314 was in consideration of obtaining this techni cal know how that the assessee made the pay ment of $ 50,000." Shri Ramachandran submitted that the Tribunal had failed to take into account that even before the agreement, the assessee had set up a plant for the production of penicillin at an out lay of more Rs.66 lakhs and that the purpose of the agreement with Meiji was only to increase the yield; of penicillin and that no new venture envisaging the setting up of a new plant was ever intended by the assessee.
The pro duction of penicillin which was the established line of business of the assessee, says learned counsel, was to be improved upon with the use of an improved process of fermen tation with new penicillin producing strains isolated and developed by Meiji so as to increase the unit yield of penicillin per milli litre of the culture medium.
The supply of the technical know how and the flow sheet of the process and the written description of the specifications of the pilot plant from Meiji were incidental to and for the effec tive exploitation of the high penicillin yielding strains of the culture to be supplied by Meiji.
Learned counsel submit ted that the whole range of the operations envisaged by the agreement, pertained to the area of the "profit earning process" and not the "profit earning machinery or apparatus".
The cost relationship between what was involved in the improvisation of the process and the investment on the plant did, says counsel, indicate that the extant "profit earning machinery" was not sought to be supplanted.
Learned counsel also urged that there was no material for the Tribunal to hold that the use of new process and tech nology from Meiji amounted to a new venture not already in the line of the assessee 's existing business or that it required the erection of a new plant discarding and sup planting the huge investment already existing.
Learned counsel submitted that it was no body 's case that with the introduction of the Meiji process of fermentation with improved penicillin strains the existing plant and machinery of over Rs.66 lakhs had become obsolete and irrelevant or that the assessee had had to set up an altogether new plant to work out the improvised Meiji process of fermentation.
Learned counsel for the Revenue, however, sought to maintain that all the criteria relevant to the question indicated that the assessee had acquired a new technical know how for a new process which required the setting up of a new plant.
There was, according to Shri Lodha, a new venture based on a new technology and know how of unlimited duration which required a new plant for its commercial exploitation.
There were, according to Shri Lodha, both the acquisition of 315 an enduring asset, and the commencement of a new venture.
On a consideration of the matter we are persuaded to hold that there was no material for the Tribunal to record the finding that the assessee had obtained under the agree ment a 'completely new plant ' with a completely new process and a completely new technical know how from Meiji.
Indeed, the High Court recognised the fallacy in this assumption of the Tribunal that a completely new plant was obtained by the assessee, though, however, the High Court attributed the inaccuracy to what it considered to be some inadvertence or misapprehension on the part of the Tribunal in that regard.
But the High Court was inclined to the view that a complete ly new process and technical know how was obtained from Meiji under the agreement.
Certain assumptions fundamental to, and underlying, the approach of the High Court are that the agreement dated 9.10.1963 envisaged a new process and a new technology so alien to the extant infrastructure, equip ment, plant and machinery in the assessee 's enterprise as to amount to an entirely a new venture unconnected with and different from the line of assessee 's extant business.
It is in that sense that the expense was held not incurred for the purposes of the day to day business of the assessee but for acquiring a new capital asset.
The business of the assessee from the commencement of its plant in 1961, it is undisputed, was the manufacture of penicillin.
Even after the agreement the product manufac tured continued to be penicillin.
The agreement with Meiji stipulated the supply of the "most suitable sub cultures" evolved by Meiji for purposes of augmentation of the unit yield of penicillin milli litres of the culture medium.
Scientific literature on the bio synthesis of penicillin indicates that penicillin is derived from a fermentation process.
Some penicillins are obtained from direct fermenta tion and some others by a combination of fermentation and subsequent chemical manipulation of the fermentation product.
The manufacturing process, it is stated, consists of four processes: Fermentation, isolation, chemical modifi cation and finishing.
Referring to the common basis of commercial production of penicillin in the New Encyclopaedia Britannica, (Micropaedia, Vol.
VII) it is mentioned: "penicillin, antibiotic, the discovery of which in 1928 by Sir Alexander Fleming marked the beginning of the antibioticera.
Fleming observed that colonies of Staphylococ cus aureus (the pus producing bacterium) failed to grow in those areas of a culture that had been accidentally contaminated 316 by the green mold Penicillium notatum.
After isolating the mold, he found that it produced a substance capable of killing many of the common bacteria that infect human beings.
This antibacterial substance, to which Fleming gave the name penicillin, was liberated into the fluid in which the mold was grown.
This proc ess is the basis of all commercial production of penicillin . . " (p. 850) (Emphasis Supplied) In Encyclopedia of Chemical technology (Kirk Othmer) III Edn.
2 it is found mentioned: " .
The specific characteristics of the industrial microbial strains, media, and fermentation conditions cannot be described in detail since these facts are considered trade secrets.
The origin of strains, and general principles of culture maintenance, fermenta tion equipment, innoculum preparation, media, and fermentation conditions for penicillin and cephalosporin production, are public knowledge and are reviewed here.
. . . . . Fleming 's original strain of P. notatum provided only low yields of penicillin . . .
Superior penicil lin producing strain of P. chrysogenum have since been obtained by random screening of variant strains following mutation induction.
All of the present day high yielding industri al strains are descendants of the NRRL 1951 strain. . " "Once a high yielding strain has been isolat ed, it is essential that the organism be maintained so that it remains viable and capable of producing the antibiotic at its original rate (54) . . .
Under suit able conditions highyielding strains can be preserved for many years without loss of viability or antibiotic producing ability . . " (p. 899 90) We are inclined to agree with Shri Ramachandran that there was no material for the Tribunal to hold that the area of improvisation was not a part of the existing business or that the entire gamut of the 317 existing manufacturing operations for the commercial produc tion of penicillin in the assessee 's existing plant had become obsolete or inappropriate in relation to the exploi tation of the new sub cultures of the high yielding strains of penicillin supplied by Meiji and that the mere introduc tion of the new bio synthetic source required the erection and commissioning of a totally new and different type of plant and machinery.
Shri Ramachandran is again fight in the submission that the mere improvement in or updating of the fermentation process would not necessarily be inconsistent with the relevance and continuing utility of the existing infra structure, machinery and plant of the assessee.
It would, in our opinion, be unrealistic to ignore the rapid advances in Researches in antibiotic medical microbiology and to attribute a degree of endurability and permanance to the technical know how at any particular stage in this fast changing area of medical science.
The state of the Art in some of these areas of high priority.
research is constantly updated so that the know how cannot be said to be the element of the requisite degree of durability and none phemerality to share the requirements.
and qualifications of an enduring capitalasset.
The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeon holing an outlay, such as this as capital.
The circumstance that the agreement in so far as it placed limitations on the right of the assessee in dealing with the know how and the conditions as to non partibility, confidentiality and secrecy of the know how incline towards the inference that the right pertained more to the use of the know how than to its exclusive acquisi tion.
In the present case, the principal reason that influ enced the option of the High Court was that the initiation and exploitation of the new process brought in their wake a new venture requiring an altogether new plant.
We are afraid, this view may not be justified.
Clauses 2, 4 and 6 of the agreement provide: "(2) For and in consideration of the subcultures, design, flow sheet and written description to be furnished by Meiji to ALEM BIC PURSUANT to paragraph (1) hereof, Alembic shall pay to MEIJI in advance and in lump sum, such as amount as MEIJI is able to collect Fifty thousand U.S. Dollars ($ 50,000) net in Tokyo after deducting any taxes and charges to be imposed in India upon MEIJI with respect to the said payment to MEIJI.
" 318 "4.
MEIJI will give advice, to the extent considered necessary be MEIJI, on any diffi culty ALEMBIC may encounter in applying the subcultures and informations obtained by ALEM BIC from MEIJI to the large scale manufacture.
The above provision shall be in force after MEIJI 's receipt of the amount set forth in paragraph (2) hereof until the end of two (2) years from the effective date of this agree ment . " "(6) Any of the subcultures and informations obtained by ALEMBIC from MEIJI shall be re garded as strictly confidential by ALEMBIC and its personnel and shall be used by ALEMBIC only in its Penicillin G plant in India, and shall not be disclosed to any other person, firm or agency, governmental or private.
Alembic shall take all reasonable steps to ensure that such subcultures and information will not be communicated.
ALEMBIC shall take all possible precautions against the escape from its premises of the strain obtained from MEIJI of propagated therefrom.
ALEMBIC shall not apply for any patent to any country in relation to any of the subcultures and information obtained by ALEMBIC from MEIJI." As notified earlier the Tribunal in the course of its order, held: " .
Meiji agreed to give the designs etc., not only for a pilot plant but for the manufacture of penicillin according to Meiji 's process on commercial scale.
The assessee has to put in a larger plant modelled on the pilotplant." (Emphasis Supplied) Having regard to the terms of Clause 4 of the agreement, this conclusion is non sequitur.
The improvisation in the process and technology in some areas of the enterprise was supplemental to the existing business and there was no material to hold that it amounted to a new or fresh venture.
The further circumstance that the agreement pertained to a product already in the line of assessee 's established business and not to a new product indicates that what was stipulated was an improvement in the operations of the existing business and its efficiency and profitability not removed from the area of the day to day business of the assessee 's established enterprise.
319 14.
It appears to us that the answer to the questions referred should be on the basis that the financial outlay under the agreement was for the better conduct and improve ment of the existing business and should, therefore, be held to be a revenue expenditure.
Reference may also be made to the observations of this Court in C.I.T.v.
CIBA of India Ltd.; , at 705.
There is also no single definitive criterion which, by itself, is determinative whether a particular outlay is capital or revenue.
The 'once for all ' payment test is also inconclusive.
What is relevant is the purpose of the outlay and its intended object and effect, considered in a common sense way having regard to the business realities.
In a given case, the test of 'enduring benefit ' might break down.
In Commissioner of Income tax, Bombay vs Associated Cement Co. Ltd., (JT 282 2 287 at 290) this Court said: " . .
As observed by the Supreme Court in the decision in Empire Jute Co. Ltd. vs Com missioner of Income Tax, [1980] 124 I.T.R.S.C.p. 1 that there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down.
It is not every advantage of enduring nature acquired by an assessee that brings the case within the principles laid down in this test.
What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test . " 15.
In the result, for the foregoing reasons the appeal succeeds and is allowed and the question of law referred to the High Court for its opinion in Income Tax Reference No. 78 of 1970 is answered in the affirmative and against the revenue.
The judgment under appeal is set aside.
, Likewise, the supplementary question of law raised in ITA 24 of 1971 before the High Court and now constituting the subject matter of the supplementary reference made by the Tribunal to this Court is answered in the negative and against Revenue.
The appeal is accordingly allowed, but with no order as to costs.
G.N. Appeal al lowed.

summary/full:
The appellant assessee, a company engaged in the manu facture of penicillin, in order to increase its production, entered into an agreement with a Japanese firm (Meiji) for supply of sub cultures of penicillin producing strains, technical know how, training, written description of the process on a pilot plant, design and specifications of the main equipment in such pilot plant, and to advise the asses see in the largescale manufacture of penicillin for a limit ed period of two years.
As per the agreement, the assessee paid Rs.2,39,625 to Meiji and claimed the same as revenue expenditure in its Income tax assessment for the assessment year 1964 65.
Disallowing the claim the Income Tax Officer held that the expenditure was for the acquisition of an asset or advantage of an enduring benefit and thus a capital outlay.
The Appel late Assistant Commissioner confirmed the order of the Income Tax Officer.
The further appeal of the assessee was dismissed by the Income Tax Appellate Tribunal holding that the payment made to Meiji was 'once for all payment ' made for the acquisition of a capital asset.
At the instance of the assessee, the Tribunal referred to the High Court, the question as to whether the sum paid to Meiji was a revenue expenditure.
The High Court answered the question in the negative.
The present appeal is against that order of the High Court.
The assessee also moved an application before the High Court 303 seeking a direction to the Tribunal to refer another ques tion of law as to whether a new plant was obtained or in stalled by the assessee consequent upon the agreement.
Declining to interfere, the High Court observed that the Tribunal has not recorded a finding to the effect that a completely new plant was obtained by the assessee and the Tribunal 's decision that the assessee, had obtained a new process and a new technical know how from Meiji was not without evidence.
Against the above order of the High Court, the assessee preferred an appeal to this Court, which was formally dis posed of with a direction to the Tribunal to draw up a supplementary statement of the case and refer for the opin ion of this Court, the further question of law as sought for by the assessee; and such a question to be considered in the present appeal.
On behalf of the assessee, it was submitted that the Tribunal was influenced by an erroneous assumption that the agreement, envisaged the setting up of a new plant, whereas the objective of the agreement was only to increase the yield of penicillin in the existing plant itself.
The Revenue contended that there was a new venture based on a new technology and know how of unlimited duration which required a new plant for its commercial exploration.
Allowing the appeal, HELD: 1.
The financial outlay under the agreement was for the better conduct and improvement of the existing business 'and should, therefore, be held to be a revenue expenditure.
There is also no single definitive criterion which, by itself, is determinative whether a particular outlay is capital or revenue.
The 'once for all ' payment test is also inconclusive.
What is relevant is the purpose of the outlay and its intended object and effect, considered in a common sense way having regard to the business reali ties.
The rapid strides in science and technology in the field should make this Court a little slow and circumspect in too readily pigeon holing an outlay, such as this, as capital.
The circumstance that the agreement in so far as it placed limitations on the right of the assessee in dealing with the know how and the conditions as to non partibility, confidentiality and secrecy of the know how incline towards the inference that the right pertained more to the use of the know how than to its exclusive acquisition.
[319A, B C; 317D E] CIT vs CIBA of India Ltd., ; ; CIT, Bombay vs 304 Associated Cement Co. Ltd., JT 282 (2) 287, relied on.
The idea of 'once for all ' payment and 'enduring benefit ' are not to be treated as something akin to statuto ry conditions; nor are the notions of "capital" or "revenue" a judicial fetish.
What is capital expenditure and what is revenue are not eternal verities but must needs be flexible so as to respond to the changing economic realities of business.
The expression "asset or advantage of an enduring nature" was evolved to emphasise the element of a sufficient degree of durability .appropriate to the context.
[313C] Herring vs Federal Commissioner of Taxation, ; , referred to.
In computing the income chargeable under the head "Profits and Gains of Business or Profession", section 37 of the Income tax Act enables the deduction of any expenditure laid out or expended wholly and exclusively for the purpose of the business or profession, as the case may be.
The fact that an item of expenditure is wholly and exclusively laid out for purposes of the business, by itself, is not suffi cient to entitle its allowance in computing the income chargeable to tax.
In addition, the expenditure should not be in the nature of a capital expenditure.
In the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises it is well nigh impossible to formulate any general rule, even in generality of cases sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation.
Howev er, some broad and general tests have been suggested from time to time to ascertain on which side of the line the out lay in any particular case might reasonably be held to fail.
These tests are generally efficacious and serve as useful servants; but as masters they tend to be over exact ing.
The question in each case would necessarily be whether the tests relevant and significant in one set of circum stances are relevant and significant in the case on hand also.
[310C F; 312G] City of London Contract Corporation vs Styles, ; Vallambrosa Rubber Co. vs Farmer, ; British Insulated Helsby Cables Ltd. vs Atherton, ; Assam Bengal Cement Co. Ltd. vs Commissioner of Income tax, ; Sitalpur Sugar Works Ltd. vs Commissioner of Income tax, [1963] 49 ITR (SC) 160; Laksh miji Sugar Mills Co. Ltd. vs Commissioner of Income tax, ; Travancore Cochin Chemicals Ltd. vs Commissioner of Income tax, ; Sun News Papers 305 Ltd. & Associated News Papers Ltd. vs Federal Commissioner of Taxation, ; ; Regent Oil Co. Ltd. vs Strick, and B.P. Australia vs Commr.
of Taxa tion of the Commonwealth of Australia, ; re ferred to. 4.
The improvisation in the process and technology in some areas of the enterprise was supplemental to the exist ing business and there was no material to hold that it amounted to a new or fresh venture.
The further circumstance that the agreement pertained to a product already in the line of assessee 's established business and not to a new product indicates that what was stipulated was an improve ment in the operation of the existing business and its efficiency and profitability not removed from the area of the day to day business of the assessee 's established enter prise.
[318G H] 5.
There was no material for the Tribunal to record the finding that the assessee had obtained under the agreement a 'completely new plant ' with a completely new process and a completely new technical know how from Meiji.
Indeed, the High Court recognised the fallacy in this assumption of the Tribunal that a completely new plant was obtained by the assessee, though, however, the High Court attributed the inaccuracy to what it considered to be some inadvertence or misapprehension on the part of the Tribunal in that regard.
But the High Court was inclined to the view that a complete ly new process and technical know how was obtained from Meiji under the agreement.
Certain assumptions fundamental to, and underlying, the approach of the High Court are that the agreement envisaged a new process and a new technology so alien to the extent infra structure, equipment, plant and machinery in the assessee 's enterprise as to amount to an entirely new venture unconnected with and different from the line of assessee 's extant business.
It is in that sense that the expense was held not incurred for the purposes of the day to day business of the assessee but for acquiring a new capital asset.
But mere improvement in or updating of the fermentation process would not necessarily be inconsistent with the relevance and continuing utility of the existing infra structure, machinery and plant of the assessee.
[315A D; 317B] The New Encyclopaedia Britannica, Micropaedia, Vol.
II; Encyclopedia of Chemical Technology, Kirk Othmen, 3rd Edn.
2, referred to.