judgement:
Appeal No. 94 of 1954.
Appeal from the judgment and order dated August 17, 1951 of the Calcutta High Court in Appeal from Original Order No. 81 of 1959.
A.V. Viswanatha Sastri and P.K. Ghosh, for the appellant.
P.K. Chatterjee and P.K. Bose, for the respondents.
The Judgment of the Court was delivered by Subba Rao, J.
This appeal on a certificate granted by the High Court of Calcutta raises the question of the interpretation of section 5(2)(a) (ii) of the Bengal Finance (Sales Tax) Act, 1941 (Bengal Act VI of 1941), hereinafter called the Act.
The material facts are as follows: The appellant is a public limited ' company registered as a dealer under the Act, having its registered place of business at Calcutta.
In respect of the accounting year ending with 31st December 1954, in the return for the year the assessee had shown its gross turnover at Rs. 70,99,928 10 0 and claimed exemption under two heads, namely, (i) under section 5(2)(a)(i) of the Act Rs. 1,33,730 6 6; and (ii) under section 5(2)(a)(ii) thereof Rs. 69,65,979 9 6.
After deducting the said amounts from the gross turnover the assessee showed its taxable turnover at Rs. 218 9 0 and deposited the tax of Rs. 9 12 6 on the said amount in the treasury.
The Commercial Tax Officer by notice dated April 22, 1955, fixed August 4, 1955, for hearing the assessee in respect of its return.
Under section 5(2)(a)(ii), the appellant in order to claim exemption thereunder had to furnish declaration forms duly filled in and ' signed by registered dealers to whom the goods were sold by it.
After taking some adjournments of the enquiry it appears that in the second week 'of January 1957 the assessee found that its file containing 147 declaration forms received ' from its dealers in respect of the goods received from it was missing.
The assessee, it is said, made various attempts to get duplicate forms of declaration from the dealers, but, on account of circumstances over which it had no 628 control and because of the unhelpful and hostile attitude of the Commercial Tax Officer within whose jurisdiction the said dealers functioned, it was not able to furnish the duplicate forms for all the declarations that were lost.
On August 8, 1957, the assessee applied to the Commercial Tax Officer under section 21A of the Act for summoning the dealers to produce the necessary documents in order to prove that they had issued the declaration forms to it, but the said ' officer did not issue the requisite summons to the parties concerned.
The assessee then flied an application to the Commissioner of Commercial Taxes, West Bengal, for directions to issue duplicate declaration forms, but that application was rejected.
The revision filed to the Revenue Board was also dismissed.
On November 21, 1957, the Commercial Tax Officer made an order of assessment disallowing the assessee 's claim for exemption in respect of the said sales made to the purchasing registered dealers amounting to Rs. 22,46,006 0 6 and levied on it additional tax of Rs. 1,49,778 4 6.
The assessee thereafter flied a petition under article 226 of the Constitution in the High Court of Calcutta for issuing an order directing the respondents, i.e., the Commercial Tax Officer and the Commissioner of Commercial Taxes.
West Bengal, not to implement the said assessment order.
The said application came up, at the first instance, before Sinha, J., who dismissed the same.
On appeal, a Division Bench of the said High Court confirmed the order of Sinha, J. Hence the present appeal.
At the outset we must make it clear that in the view we are taking on the construction of section 5 of the Act we do not propose to go into the question whether the department was responsible for preventing the assessee from furnishing duplicate forms of the declarations alleged to have been lost or on the question whether the department went wrong in not summoning the dealers to produce the relevant documents to establish that the declaration forms alleged to have been lost were in fact issued ' by them.
The only question, therefore, that arises is whether under section 5(2)(a)(ii) of the Act the furnishing of the declaration forms issued by the purchasing dealers was a condition for claiming the exemption thereunder.
In substance section 5(2)(a)(ii) exempts from taxable turnover all sales to a registered dealer of goods of the class or classes specified in the certificate of registration of the dealer as being intended for the purposes mentioned, therein.
But the said exemption is made subject to a proviso.
Under that proviso, in the case of such sales a declaration form duly filled up and signed by the registered dealer to whom the goods are sold and containing the prescribed particulars on a prescribed form obtainable from the prescribed authority has to be furnished ' in the prescribed manner by the dealer who sells the goods.
Under r. 27A of the Bengal Sales Tax Rules, 1941, hereinafter called the Rules, a dealer who wishes to claim the said exemption shall on demand produce such a declaration in writing 629 signed by the purchasing dealer.
Sub r.
(2) thereof enjoins on a dealer not to accept and on the purchasing dealer not to give a declaration except in the form prescribed.
The other rules make stringent provisions to prevent the misuse of the said forms.
The argument of Mr. A.V. Viswanatha Sastri, learned counsel for the appellant, may be briefly stated thus: The substantive part of section 5(2)(a)(ii) of the Act provides for the exemption in respect of certain sales to a dealer if the sales are made to a registered dealer for the purposes mentioned thereunder.
The proviso to the said subclause prescribes in effect that the declaration form in the manner prescribed is the best evidence to prove that the sales were for the said purposes.
The proviso cannot be construed as laying down a condition for giving the exemption, but only as a directory provision to subserve the substantive provision in a reasonable way.
If so construed, a dealer is not precluded in a case where the proviso cannot be strictly complied with from producing other relevant evidence to prove that the sales to the registered dealers were for the purposes mentioned in the said sub clause.
This conclusion is sought to be supported on the basis of the expression "on demand" in r. 27A which, according to the learned counsel, indicates that the production of the prescribed declaration is not obligatory but only to be made if a demand is made by the authority concerned.
The learned Solicitor General, on the other hand, contends on behalf of the respondents that a dealer can claim exemption under the said sub clause, but if he seeks exemption he must comply strictly with the conditions under which the exemption can be granted.
He argues that the clear terms of the clause, read with the proviso, impose a condition on a dealer for claiming exemption.
Section 5(2)(a)(ii) of the Act in effect exempts a specified turnover of a dealer from sales tax.
The provision prescribing the exemption shall, therefore, be strictly construed.
The substantive clause gives the exemption and the proviso qualifies the substantive clause.
In effect the proviso says that part of the turnover of the selling dealer covered by the terms of sub cl.
(ii) will be exempted provided a declaration in the form prescribed is furnished.
To put it in other words, a dealer cannot get the exemption unless he furnishes the declaration in the prescribed form.
It is well settled that "the effect of an excepting or qualifying proviso, according to the ordinary rules of construction, is to except out of the preceding portion of the enactment, or to qualify something enacted therein, which but for the proviso would be within it": see "Craies on Statute Law", 6th Edn., p. 217.
If the intention of the Legislature was to give exemption if the terms of the substantive part of sub cl.
(ii) alone are complied ' with, the proviso becomes redundant and otiose.
To accept the argument of the learned counsel for the appellant is to ignore the proviso altogether, for if his contention be correct it will lead to the position that if the declaration form is furnished, well and good; but, if not furnished, other evidence can be 630 produced.
That is to rewrite the clause and to omit the proviso.
That will defeat the express intention of the Legislature.
Nor does r. 27A support the contrary construction.
The expression "on demand" ' only fixes the point of time when the declaration forms are to be produced; otherwise the rule would be inconsistent with the section.
Section 5(2)(a)(ii) says that the declaration form is to be furnished by the dealer and r. 27A says that it shall be furnished on demand, that is to say it fixes the time when the form is to be furnished.
This reconciles the provisions of r. 27A with those of section 5 (2)(a)(ii) of the Act, whereas the construction suggested by the learned ' counsel introduces an incongruity which shall be avoided.
Section 21A on which reliance is placed has no bearing on the question to be decided.
It only empowers the Commissioner or any person appointed to assist him under sub s (1) of section 3 to take evidence on oath etc.
It can be invoked only in a case where the authority concerned is empowered to take evidence in respect of any particular matter; but that does not enable him to ignore a statutory condition to claim exemption.
Sub rules (3) and (4) of r. 27A are not helpful to the appellant.
They provide only safeguards against abuse of the declaration forms by the purchasing dealers; they do not enable the selling dealer to either directly apply or to compel the purchasing dealers to apply for duplicate forms; nor do they enjoin on the appropriate authority to give the selling dealer a duplicate form to replace lost one.
We realise that the section and the rules as they stand may conceivably cause unmerited hardship to an honest dealer.
He may have lost the declaration forms by a pure accident, such as fire, theft etc., and yet he will be penalised for something for which he is not responsible.
But it is for the Legislature or for the rule making authority to intervene to soften the rigour of the provisions and it is not for this Court to do so where the provisions are clear and unambiguous.
There is an understandable reason for the stringency of the provisions.
The object of section 5(2)(a)(ii) of the Act and the rules made thereunder is self evident.
While they are obviously intended to give exemption to a dealer in respect of sales to registered dealers of specified classes of goods, it seeks also to prevent fraud and ' collusion in an attempt to evade tax.
In the nature of things, in view of innumerable transactions that may be entered into between dealers.
it will wellnigh be impossible for the taxing authorities to ascertain in each case whether a dealer has sold the specified goods to another for the purposes mentioned in the section.
Therefore, presumably to achieve the twofold object, namely, prevention of fraud and ' facilitating administrative efficiency, the exemption given is made subject to a condition that the person claiming the exemption shall furnish a declaration form in the manner prescribed under the section.
The liberal construction suggested will facilitate the commission of fraud and introduce administrative inconveniences, both of which the provisions of the said clause seek to avoid.
631 The decision of this Court in The State of Orissa vs M.A. Tulloch and Co. Ltd.(1) does not help the appellant.
That decision was concerned with section 5(2)(a)(ii) of the Orissa Sales Tax Act, 1947.
That section was similar in terms to section 5(2)(a)(ii) of the Act in question, but there was no proviso to that section in the Orissa Act similar to the one found in the present section.
That makes all the difference, for it is the proviso that imposes the condition.
But under r. 27(2) made under the Orissa Act "a dealer shall produce a true declaration in writing by the purchasing dealer or by such responsible person as may be authorized in writing in this behalf by such dealer that the goods in question are specified in the purchasing dealer 's certificate of registration as being required for resale by him or in the execution of any contract." This Court held that the said mandatory provision was inconsistent with section 5(2) (a)(ii) of the Orissa Sales Tax Act; and to avoid that conflict it reconciled both the provisions by holding that the rule was only directory and, therefore, it would be enough and if it was substantially compiled with.
The said provisions may afford a guide for amending the relevant provisions of the Act and the rules made thereunder, but do not furnish any help for construing them.
Before parting with the case we must make it clear that we are not expressing any opinion on the bona fides of the appellant or the appropriate sales tax authorities, for we have not scrutinized the evidence in that regard.
In the result, the appeal fails and is dismissed with costs.
Appeal dismissed.
[1964] 7S.C.R.810.

summary/full:
The appellant a public limited company sought exemption under section 5(2)(a)(ii) of the Bengal Finance (S.ales Tax) Act, 1941 in respect of certain sales.
However, it could not produce before the commercial tax officer the declaration forms from the purchasing dealers required to be produced under the proviso to that sub clause because the said forms were lost.
The appellant tried to set duplicate forms from the purchasing dealers but without success.
His application under section 21A to summon the dealers with the relevant documents was rejected by the Commercial Tax Officer and the higher authorities also refused to issue directions for the issue of duplicate declaration forms.
The Commercial Tax Officer thereafter passed an assessment order without allowing.
the said exemption.
Against that order the appellant filed a writ petition under article 226 and thereafter a Letters Patent appeal but failed to get redress.
It then appealed to this Court with certificate.
It was contended on behalf of the appellant that the exemption granted under the substantive sub clause (ii) could be claimed by the production of other relevant evidence if the declaration forms could not be produced; the proviso to that sub clause requiring the production of the said forms was only directory as was also proved by the use of the words "on demand" in section 27A. HELD: The exemption could be claimed only by the production the declaration forms as laid down in the proviso.
(i) The effect of an excepting proviso is to except from the main clause something.
which but for the proviso would be within it.
Craies on Statute Law quoted: If the intention of the Legislature was to give exemption if the terms of the substantive part of sub clause (ii) above are complied with, the proviso.
becomes redundant and otiose.
If the proviso is treated as merely directory it will lead to the position that if the declaration form is furnished well and good; but if not furnished other evidence can be produced.
That is to rewrite the clause and to omit the proviso.
That will defeat the express intention of the legislature.
[622H 630A] There is an understandable reason for the stringency of the provisions.
The object of section 5(2)(a)(ii) of the Act and the rules made thereunder is self evident.
While they are obviously intended to give exemption to a dealer in respect of sales to registered dealers of specified classes of goods, it seeks also to prevent fraud and collusion in an attempt to evade tax.
[630G] 627 State of Orissa vs
M.A. Tulloch & Co. Ltd. (1964) 15 S.T.C. 641, distinguished.
(ii) The words "on demand" in r. 27A only fix the time when the declaration forms are to be produced; they do not mean that their production is not obligatory.
[630A B] (iii) Section 21A only empowers the Commissioner or any person appointed by him to take evidence on oath etc.
It can be invoked only in a case where the authority concerned is empowered to take evidence in respect of a particular matter, but that does not enable him to ignore a statutory condition to claim exemption.
[630C D] (iv) Sub rules (3) and (4) of section 27A do not enable the selling dealer to either directly apply or to compel the purchasing dealers to apply for duplicate forms nor do they enjoin on the appropriate authority to give the selling dealer a duplicate form to replace the lost one.
This may cause hardship but the remedy lies with the Legislature only.
[630E, F]


judgement:
Criminal Appeal No. 43 of 1965.
Appeal by special leave from the judgment and order dated November 10, 1964 of the Allahabad High Court in Criminal Revision No. 2097 of 1963.
B.C. Misra, for the appellant.
O.P. Rana, for the respondent.
The Judgment of the Court was delivered by Sarkar, J.
This appeal raises a question of construction of sub section
(1) of section 16 of the .
The sub section in providing for punishment for breaches of the Act states, "for a second offence, with imprisonment for a term which may extend to two years and with fine".
In respect of the first offence it provides for a smaller sentence.
The question is whether the appellant was liable to punishment for a second offence.
The order of this Court granting leave to appeal confined it only to that question.
It appears that on an earlier occasion the appellant kept fonds tuff for sate in a container without covering it as required by sub r.
(3) of r. 49 of the rules made under the Act and was thereupon convicted under section 16 and sentenced to a fine of Rs. 40/ as tot a first offence.
This time he has been convicted for selling foodstuff which had been coloured with a dye the use of which was prohibited by r. 28 of the same rules.
Learned counsel for the appellant stated that the present was not a second offence.
If we have understood his arguments correctly, and we confess to some difficulty in understanding them, he said that the second offence contemplated is an offence constituted by the same kind or type of act for which he had been convicted under the Act on an earlier occasion.
According to him, if the present conviction was for keeping foodstuff intended for sale in a container not covered as required by sub r.
(3) of r. 49, then only it would have been for a second offence, but as the conviction in the present case was for selling foodstuff coloured with prohibited dye, it was not for a second offence.
This contention does not seem to us to be acceptable.
This real question is, What do the words 'second offence ' mean? Learned 808 counsel for the appellant referred us to Webster 's New World Dictionary where one of the meanings of the word 'second ' has been stated to be 'of the same kind as another '.
That meaning cannot be attributed to that word in the sub section.
It increases the penalties as the offences are 'first ', 'second ' or 'third '.
Thus it states, "for a third and subsequent offences, with imprisonment for a term,, which may extend to four years and with fine".
The word 'subsequent ' makes it clear that the words 'first ', 'second ' and 'third ' were intended to indicate things happening one after another in point of time.
Sub section (2) of section 16 also leads to the same conclusion.
It says, "If any person convicted of an offence under this Act commits a like offence afterwards", the subsequent conviction and the penalty imposed with his name and address may be published in a newspaper at his expense.
The word "afterwards" clearly indicates that the statute was contemplating offences committed subsequently and was indicating a sequence of time.
In the dictionary to which learned counsel referred, the meaning on which he relies is illustrated by the following sentence, "There has been no second Shakespeare".
It seems plain to us that the meaning conveyed by the word 'second ' in this sentence cannot be attributed to the word 'second ' as used in the sub section.
Then as regards the word "offence" in the expression "second offence", we find no justification for confining it to an offence constituted by the same type or kind of conduct as the previous offence.
The sub section does not say "second offence" of the same type; the latter words are not there.
The object of the sub section clearly is to prevent repetition of offences.
That is why for the offence subsequently committed a heavier sentence is provided.
We cannot imagine what object would have been served by seeking to stop the repetition of the same type of conduct only.
The Act no doubt intends to prevent the doing of various acts by punishing them.
That object is better served by imposing a heavier penalty when a person repeats any of such offensive acts.
The gravamen of the charge of a second offence is the repetition of any offence under the Act and not the repetition of one of the various types of offences mentioned in it.
Any interpretation which would not carry out the object of the Act would be unnatural.
We, therefore, think that the words "second offence" mean any offence under the Act committed by a person after his conviction earlier for any one of the offences punishable under the Act.
It was said that it would be strange if the Act intended to impose a heavier punishment for a second offence which might be 'of a trivial nature while the first offence which might have been of a serious nature entailed a lighter punishment.
This contention is fallacious.
There is no foundation in the Act for distinguishing between trivial and serious offences, for the Act provides the same punishment for each offence under it.
If the punishment is 809 the same, it would follow that the statute considered them to be of the same seriousness.
The weakness of this argument will further appear if we consider a case where the first offence was of what is called a trivial nature and the second, of a serious nature though constituted by different acts.
It would be equally strange if the Act in such a case contemplated the same punishment for the subsequent and serious offence as would be the case if the subsequent offence was not a "second offence" .
This contention lends no support to the interpretation suggested by learned counsel for the appellant.
Learned counsel then said that the word "offence" has to be understood as defined in section 2(38) of the , and therefore means any act or omission made punishable by any law for the time being in force.
If we substitute this definition for word "offence" in the provision now under consideration, it will mean an act made punishable by the law.
That law must be the present Act.
This does not assist learned counsel 's contention at all; it really goes against him.
The word "offence" no doubt refers to an offence under the Act.
It cannot possibly mean any offence under any other Act.
This view has invariably been taken in all the cases which have been cited to us: see City Board, Saharanpur vs Abdul Wahid(1) and Chuttan vs State.(2) In In re Authers(3) it was said, "where the legislature passes a statute and imposes a penalty of 501.
for a first offence, it must mean, in the absence of express words to the contrary, that the conviction for the first offence must be under that Act, and the second conviction under the same Act; if it were otherwise, it would be idle to introduce the warning of a lower penalty for the first offence, and to impose a higher penalty for the second.
" This case supports our interpretation of the words "second offence" based on the object of the Act.
Learned counsel for the appellant no doubt agrees that the second offence must refer to an offence under the Act but he says that since it would amount to adding the words "under the Act", it would justify the addition of further words implying that the second offence had to be of the same type as the first.
This is a wholly unfounded contention.
the offence contemplated in the expression "second offence" has to be under the Act because that arises from the object of the Act and.
as we shall later show, from the necessary implication of the structure of the sub section.
There is no such reason to confine the second offence to an offence of the same type.
We have so far been dealing only with that portion of sub section
(1) of section 16 which concerns the penalty for the second offence.
Considering the sub section as a whole we find that it supports the (1) A.I.R. 1959 All.
(2) A.I.R. 1960 All. 629.
(3) , 349.
810 interpretation of the expression "second offence" which has appealed to us.
It says that if any person does any of the acts mentioned in cls.
(a) to (g) in it, he shall be punishable for the first offence with a certain penalty, for the second offence with a higher penalty and for the third a still higher penalty.
It is clear that the acts or omissions mentioned in the different clauses constitute offences for which the penalties are provided.
From this structure of the subsection the implication necessarily arises that the penalties were imposed for offences under the Act only.
Now cl.
(a) deals with a person importing, manufacturing for sale, storing, selling, or distributing any article of food in contravention of the provisions of the Act or of any rule made thereunder.
This clause contemplates the breaches of various provisions of the Act and the rules, which are numerous.
It covers various types of conduct, act or omission, each of which is punishable and each of which is, therefore, an offence.
Turning next to that part of the sub section which prescribes penalties, we find it provides increasing degrees of punishment for the second offence and the third and subsequent offences.
It follows that an offence contemplated in this part of the statute and with it we are now directly concerned would be constituted by any of the acts which would come within el.
(a) and likewise within all the other clauses following it.
We have pointed out that the acts and omissions contemplated there are of diverse kinds.
The words "second offence" must, therefore, mean any act which is an offence under any of the clauses in the sub section which has been done later in point of time after a conviction for an offence under the Act, no matter whether the acts or omissions constituting the two offences are of the same type or not.
The appellant must, therefore, be held to have committed the second offence within the meaning of the sub section on the present occasion and was liable to have the heavier punishment awarded to him.
The sentence awarding such punishment is unexceptionable.
The appeal fails and it is hereby dismissed.
Appeal dismissed.

dataset_name: IN-Abs

summary/full:
The appellant having been once convicted under the for keeping foodstuff for sale in a container without covering it, was for a second time convicted for selling foodstuff which had been coloured with a prohibited dye.
Treating the latter conviction as a "second offence" under section 16(1) of the Act the Trial Court sentenced the appellant to two years imprisonment.
Having failed to get redress in the High Court he appealed to this Court by special leave.
It was contended on behalf of the appellant that the "second offence" contemplated by section 16(1) was an offence of the same kind as the first and not any offence under the Act.
HELD: (i) The word second in the expression "second offence" in section 16(1) means second in time and not second of the same type.
The section does not say "second offence" of the same type; the latter words are not there.
On the other hand from the phrase 'subsequent offences ' used in the section in respect of offences subsequent to the third one, it is clear that the words 'first ', 'second ' and 'third ' were intended to indicate things happening one after another in point of time.
[808 B] The object of the sub section is clearly to prevent repetition of offences.
That is why for the offence subsequently committed a heavier sentence is provided.
No object could have been served by seeking to stop the repetition of the same type of conduct only.
[808 E F] (ii) There is no foundation in the Act for distinguishing between trivial and serious offences and then arguing that the Act could not have intended to impose a heavier punishment for a second offence which might be of a less serious nature than the first.
The Act provides the same punishment for each offence under it.
If the punishment is the same, it would follow that the statute considered them to be of the same seriousness.
[808 H] (iii) The second offence must be an offence under the Act although it is not specifically so stated.
Section 16(1) says that if any person does any of the acts mentioned in cls.
(a) to (g) in it, he shall be punishable for the first offence with a certain penalty, for the second offence with a higher penalty, and for the third a still higher penalty.
It is clear that the acts or omissions mentioned 807 in the different clauses constitute the offences for which the penalties are provided.
From this structure of the sub section the implication necessarily arises that the penalties were imposed for offences under the Act only.
[809 E F] City Board, Saharanpur vs Abdul Wahid, A.I.R. (1959) All.
695, Chuttan vs State, A.I.R. (1950) All.
629 and In re Authers, , referred to.


judgement:
il Appeals Nos. 144 145 of 1964.
Appeals from the order dated November 16, 1960 of the Mysore High Court in Income tax Reference No. 3/1959.
N.D. Karkhanis and R.N. Sachthey, for the appellant (in both the appeals).
K. Ganapathy lyer, for the respondent (in both the appeals).
772 The Judgment of the Court was delivered by Sikri, J.
These two appeals pursuant to a certificate granted by the High Court of Mysore under section 66 A(2) of the Income tax Act, 1922, are directed against its judgment answering the question referred to it in favour of the respondent assessee.
The question referred to is: "Whether the assessee, Mohandas Sadhuram, can be granted registration under Section 26 A of the Indian Income Tax Act on the basis of the partnership deed made on 1 4 1952 for the assessment year 1953 54 and on the basis of the said deed read with the supplementary deed on 1 4 1953 for the assessment year 1954 55".
The respondent, M/s Shah Mohandas Sadhuram, hereinafter referred to as the assessee, is a firm.
The assessee claimed registration under section 26 A of the Indian Income Tax Act on the strength of a Partnership Deed executed on 'April 1, 1952.
As the answer to the question in part turns on the construction of the deed, the relevant Clauses may be set out here.
The Partnership Deed first describes the parties and then recites: "Whereof the above four members were till this day members of a Joint Family, whereof yesterday that is on 31 3 1952 the said four members have become divided not only in interest but also by metes and bounds, each of the said members taking to his share one fourth (1/4) of the said joint family assets and liabilities as detailed in the books of account as maintained by the firm known as Seth Mohandas Sadhuram and whereof we the first and second members have decided to constitute all the said four members as a partnership admitting the third and fourth members thereof to the benefits of the said partnership but not to the liabilities thereunder".
The first and second members referred to in the recital are Atmaram and Doulatram, both majors.
The other relevant clauses are as follows: "(4) The said firm is agreed to do business of Banking and Commerce (which term includes all that is usually and customarily is understood to be done thereunder) and also to deal in Automobiles business.
The Automobiles business having been started by the said first and second members under the name and style of Vijaya Automobiles, Mysore, when they were members of the said joint family as a partnership venture apart from the said family, it is agreed between us now that the said Automobiles business shall hereafter be continued to be done under the name and style of Vijaya Automobiles as part of the said firm.
773 (7) It is agreed that the capital contribution of each member will be equal and the accounts to be maintained to.
indicate the said capital contribution.
will show what each member has so contributed in the personal capital ledger account.
(8) It is further agreed that after debiting all working expenses inclusive of those referred to in para 6 supra.
the profits of the firm less six pies per every rupee of ' profits which will be reserved for Charity Fund will be distributed pro rata according to the proportion of capital investment as detailed of each member.
all to be paid to his account in the books of account.
from where each member can draw.
The losses are agreed to be shared by the members in the like manner.
The share of profits for the 3rd and 4th member will be.
paid to them.
the said profits to be credited to theft accounts, and from there their maintenance charges and other expenses of necessities if any may be drawn by the said Guardian from the said accounts.
(10) It is agreed that the duration of this partnership will be for a period of one year, i.e. from 1st of April, 1952 to 31st March, 1953, and the members might agree to continue the said partnership even thereafter under these terms or on terms to be determined then.
(11) It is agreed that the profits and losses of the Bombay branch and other branches if any outside the State of ' Mysore will be credited or debited separately in the books of account of these branches and final allocation made in those books of account, as distinct from the profits and losses of the firm in State of Mysore.
(12) It is agreed that the first and the second members do maintain proper accounts as is customarily to be maintained".
For the assessment year 1953 54.
the Income Tax Officer rejected the application for registration on the ground that "in the case of the assessee.
the minors are made parties to a contract by the eldest brother acting on their behalf.
The minor has actually been debited with a share of loss.
Taking these facts into account.
I hold that the partnership is not entitled to the benefits of registration".
For the assessment year 1954 55, he also rejected the application but added this further ground that "a supplementary deed of partnership extending the life of the partnership beyond 1 4 1953 for a further period at the will of the partners is filed.
This is on 10 annas stamp paper.
(The supplementary deed rests on clause.
10 of the original deed.) I have already held that the original deed is not registerable.
The supplementary deed cannot confer any fresh rights in the matter".
774 The Appellate Assistant Commissioner, on appeal, upheld the orders of the Income Tax Officer in respect of both the assessment years.
On further appeal, the Appellate Tribunal, following the decision of the Madras High Court in Jakka Devayya and Sons vs Commissioner of Income tax, Madras(1) construed the deed as having admitted the minors only to the benefits of the partnership.
It accordingly held that the assessee was entitled to be registered for both the years.
At the instance of the Commissioner of Income Tax, the Tribunal referred the question already set out above to the High Court.
The High Court, following its judgment in Income Tax Reference No. 2 of 1959, which is the subject matter of appeal before us in The Commissioner of Income Tax Madras vs M/s Shah Jethaji Phulchand(2) answered the question in favour of the assessee.
The main reason given in that judgment of the High Court is "that an instrument of partnership entered into between persons, some of whom are by law incompetent to contract, as might happen if one of them is a minor, is not necessarily null and void, and in a case like the present one, where the execution of the instrument of partnership on behalf of a minor by his guardian was for the purpose of admitting the minor to the benefits of partnership, no question of the invalidity of the instrument can properly arise".
Mr. Karkhanis, the learned counsel for the appellant contends that on a proper construction of the deed it is clear that the minors have been made partners, and therefore the deed is not valid.
He relies on clauses 4, 7, 8, 10, 11 and 12 of the Partnership deed, set out above, to establish that the minors were admitted as full partners.
He further urges that a guardian is not entitled to contract on behalf of a minor and the deed is consequently void.
This Court held in Commissioner of Income Tax, Bombay vs Dwarkadas Khetan & Co.(3) that the income tax officer was only empowered to register a partnership which was specified in the instrument of partnership and it was not open to the Department to register a partnership different from that which was formed by the instrument.
It further held that section 30 of the Indian Partnership Act was designed to confer equal benefits upon the minor by treating him as a partner, but it did not render a minor a competent and full partner, and any document which made a minor full partner could not be regarded as valid for the purpose of registration.
But the facts in that case were that in the instrument of partnership Kantilal Kasherdeo was described as a full partner entitled not only to a share in the profits but also liable to bear all the lossess including loss of capital.
It was also provided that "all the four partners (1) 22 I.T.R. 26t (2) Civil Appeals Nos. 146 147 of 1964; judgment delivered on April 15, 1965.
(3) (+ ) 775 were to attend to the business, and if consent was needed, all the partners including the minor had to give theft consent in writing.
The minor was also entitled to manage the affairs of the firm, including inspection of the account books, and ' was given the right to vote, if a decision on votes had to be taken".
As Hidayatullah J. observed, "in short, no distinction was made between the adult partner and the minor and to all intents and purposes, the minor was a full partner, even though under the partnership law he could only be admitted to the benefits of the partnership and not as a partner".
Does this deed then make the minors full partners or does it only confer benefits of partnership on them? Is any clause of the deed void? Before we discuss these questions it is necessary to consider what are the incidents and true nature of 'benefits of partnership ' and what is a guardian of a minor competent to do on behalf of a minor to secure the full benefits of partnership tO a minor.
First it is clear from sub s.(2) of section 30 of the Partnership Act that a minor cannot be made liable for losses.
Secondly, section 30, sub. s (4) enables a minor to sever his connection with the firm and if he does so, the amount of his share has to be determined by evaluation made, as far as possible, in accordance with the rules contained in section 48, which section visualises capital having been contributed by partners.
There is no difficulty in holding that this severance may be effected on behalf of a minor by his guardian.
Therefore, sub s.(4) contemplates that capital may have been contributed on behalf of a minor and that a guardian may on behalf of a minor sever his connection with the firm.
If the guardian is entitled to sever the minor 's connection with the firm, he must also be held to be entitled to refuse to accept the benefits of partnership or agree to accept the benefits of partnership for a further period on terms which are in accordance with law.
Sub Section (5) proceeds on the basis that the minor may or may not know that he has been admitted to the benefits of partnership.
This sub section enables him to elect, on attaining majority, either to remain a partner or not to become a partner in the firm.
Thus it contemplates that a guardian may have accepted the benefits of a partnership on behalf of a minor without his knowledge.
If a guardian can accept benefits of partnership on behalf of a minor he must have the power to scrutinise the terms on which such benefits are received by the minor.
He must also have the power to accept the conditions on which the benefits of partnership are being conferred.
It appears to us that the guardian can do all that is necessary to effectuate the conferment and receipt of the benefits of partnership.
It follows from the above discussion that as long as a partnership deed does not make a minor full partner a partnership deed cannot be regarded as invalid on the ground that a guardian has purported to contract on behalf of a minor if the contract is for the purposes mentioned above.
776 Let us then examine the partnership deed in the light of these principles.
It need hardly be stated that the partnership deed must be construed reasonably.
The recital set out above expressly states that it is the major members who had decided ' to constitute the partnership and admit the minors to the benefits of the said partnership, The rest of the clauses must be construed in the light of this recital.
Clause 4 only states the business to be carried on and the name of the business.
It seems to us that the expression 'it has been agreed between us ' has reference to the agreement mentioned in the recital.
Regarding clause 7, which deals with capital contribution, it is urged that a guardian is not entitled to agree to contribute capital.
We are unable to agree.
If it is one of the terms on which benefits of partnership are being conferred either the guardian must refuse to accept the benefits or he must accept this term.
In some cases such an agreement by a guardian may be avoided by the minor, if it was not entered into for his benefit, but the agreement will remain valid as long as it is not avoided by the minor.
Regarding clause 10, Mr. Karkhanis submits that this embodies a clear agreement enabling the minor to continue the said partnership even thereafter under these terms or on terms to be determined then, and therefore this clause is void.
We can find no defect in this clause.
The duration of a partnership has to be fixed between the major members, and the guardian on behalf of a minor may agree to accept the benefits of the partnership only if the duration is to the benefit of the minor.
Clause 10 enables the guardian to accept the benefits of partnership under these terms or under such other terms as may be determined.
If the terms determined in future are similar, no objection can be taken; if on the other hand the terms determined later are in contravention of law, the partnership deed will be held to be bad.
Clause 11 has reference to the manner of keeping accounts and a guardian is entitled to assent to the mode of keeping accounts.
In our opinion, the partnership deed, reasonably construed, only confers benefits of partnership on the two minors and does not make them full partners.
The guardian has agreed to certain clauses in order to effectuate the decision of the major members to confer the benefits of the said partnership to the minors.
Accordingly we hold that the Income Tax authorities should not have declined to register the firm.
We may mention that the supplementary deed dated April 1, 1953, has not been included in the statement of the case, but it is common ground that nothing turns on any of the clauses in the supplementary deed.
Accordingly, agreeing with the High Court, we hold that the firm is entitled to be registered under section 26 A of the Income Tax Act, and the answer to the question referred is in the affirmative.
The appeals are dismissed with costs, one set of hearing fees.
Appeals dismissed.

summary/full:
The assessee firm claimed registration under section 26A of the Indian Income Tax Act on the strength of a partnership deed executed between four partners of which two were minors.
The Income Tax Officer refused registration on the ground that the minors were made parties to a contract by the eldest brother acting on their behalf and the minor had actually been debited with a share of loss.
This was upheld by the Appellate Assistant Commissioner, but the Appellate Tribunal, on a further appeal.
construed the deed as having admitted the minors only to the benefits of the partnership, and accordingly held that the assessee was entitled to be registered.
In reference, the High Court answered the question in favour of the assessee.
In appeal by certificate to this Court, the Revenue contended that (i) a guardian is not entitled to contract on behalf of a minor and the deed was consequently void, and (ii) the partnership deed made the minors as full partners.
HELD: The assessee firm was entitled to be registered under the Income tax Act.
[776 H] (i) As long as a partnership deed does not make a minor full partner a partnership deed cannot be regarded as invalid on the ground that a guardian has purported to contract on behalf of a minor.
A guardian can do all that is necessary to effect the conferment and receipt of the benefits of partnership.
So he must have the power to scrutinse the terms on which such benefits are received by the minor.
He must also have the power to accept the conditions on which the benefits of partnership are being conferred.
[775 G H] (ii) The Partnership deed reasonably construed.
only conferred benefits of partnership on the two minors and did not make them full partners.
Case law referred to.


judgement:
ppeal No. 150 of 1964.
Appeal from the judgment and order dated March 22, 1960, of the Assam High Court in Income tax Reference No. 7 of 1959.
N.D. Karkhanis and R.N. Sachthey, for the appellant.
Sampat Ayyangar and J.P. Goyal, for the respondent.
The Judgment of the Court was delivered by Subba Rao, J.
By a registered lease deed dated March 31, 1950, the assessee company, respondent herein, leased out two tea estates named "Panbari Tea Estate" and "Barchola Tea Estate", along with machinery and buildings owned and held by it, in Darrang, in the State of Assam, to a firm named Messrs. Hiralal Ramdas for a period of ten years commencing from January 1, 1950.
The lease was executed in consideration of a sum of Rs. 2,25,000/as and by way of premium and an annual rent of Rs. 54,000/ to be paid by the lessee to the lessor.
The premium was made payable as follows: Rs. 45,000/ to be paid in one lump sum at the time of the execution of the lease deed ' and the balance of Rs. 1,80,000/in 16 half yearly instalments of Rs. 11,250/ on or before January 31 and July 31 of each year.
The annual rent of Rs. 54,000/ was payable as follows: Rs. 1,000/ per month to be paid on or before the last day of each month, making in all Rs. 12,000/ per year, and the balance of Rs. 42,000/ on or before December 31 of each year.
On February 25, 1957, for the assessment year 1952 53, the Income tax Officer made the assessment treating the instalment of Rs. 11,250/ paid towards the premium in the relevant accounting year as a revenue receipt of the assessee.
On appeal, the Appellate Assistant Commissioner confirmed the order of the Income tax Officer.
On further appeal, the Income tax Appellate Tribunal also held that the premium was really the rent payable under the lease deed and, therefore, it was chargeable to income tax.
At the instance of the assessee, the Tribunal referred the following question to the High Court under section 66(1) of the Income tax Act, 1922, herein after called the Act: "Whether on the facts and in the circumstances of the case and upon the construction of the terms of the lease, dated 31st March 1950, the sum of Rs. 11,250/ received by the assessee during the year of account is revenue or capital receipt".
813 The High Court held that the said sum of Rs. 11,250/ received by the assessee during the year of account was a capital receipt and answered the question accordingly.
On a certificate issued by the High Court, this appeal has been filed by the Revenue in his Court.
The short question that arises in this appeal is whether the amount described as premium in the lease deed is really rent and, therefore, a revenue receipt.
Before we look at the lease deed it will be convenient to notice briefly the law pertaining to the concept of premium, which is also described as salami.
The distinction between premium and rent was brought out by the Judicial Committee in Raja Bahadur Kamakshya Narain Singh of Ramgarh vs Commissioner of Income tax, Bihar & Orissa (1) thus: "It (salami) is a single payment made for the acquisition of the right of the lessee to enjoy the benefits granted to them by the lease.
That general right may properly be regarded as a capital asset, and the money paid to purchase it may properly be held to be a payment on capital account.
But the royalties are ' on a different footing It is true that in that case the leases were granted for 999 years; but, though it was one of the circumstances, it was not a decisive factor ,in the Judicial Committee coming to the conclusion that the salami paid under the leases was a capital asset.
This Court in Member for the Board of Agriculture Income tax, Assam vs Sindhurani Chaudhurani (2) defined "salami" as follows: "The indicia of salami are (1) its single non recurring character and (2) payment prior to the creation of the tenancy.
It is the consideration paid by the tenant for being let into possession and can be neither rent nor revenue but is a capital receipt in the hands of the landlord.
" It is true that in that case the payment was paid in a single lump sum, but that was not a conclusive test, for salami can be paid in a single payment or by instalments.
The real test is whether the said amount paid in a lump sum or in instalments is the consideration paid by the tenant for being let into possession.
This Court again in Chintamani Saran Nath Sah Deo vs Commissioner of Income tax, Bihar & Orissa(1) considered all the relevant decisions on the subject in the context of licences granted to the assessee to (1) , 519.
(2) 814 prospect for bauxite in some cases for 6 months and in others for a year or two and observed: "The definition of salami was a general one, in that it was a consideration paid by a tenant for being let into possession for the purpose of creating a new tenancy.
" Applying that test this Court held in that case that under the said licences there was a grant of a right to a portion of the capital of the licensor in the shape of a general right to the capital asset.
In view of these three decisions it is not necessary to multiply citations.
Under section 105 of the Transfer of Property Act, a lease of immovable property is a transfer of a right to enjoy the property made for a certain time, express or implied or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms.
The transferor is called the lessor, the transferee is called the lessee, the price is called the premium, and the money, share service or other thing to be so rendered is called the rent.
The section, therefore, brings out the distinction between a price paid for a transfer of a right to enjoy the property and the rent to be paid periodically to the lessor.
When the interest of the lessor is parted with for a price, the price paid is premium or salami.
But the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent.
The former is a capital income and the latter a revenue receipt.
There may be circumstances where the parties may camouflage the real nature of transaction by using clever phraseology.
In some cases, the so called premium is in fact advance rent and in others rent is deferred price.
It is not the form but the substance of the transaction that matters.
The nomenclature used may not be decisive or conclusive but it helps the Court, having regard to the other circumstances, to ascertain the intention of the parties.
Bearing the said principles in mind let us scrutinize the lease deed dated March 31, 1950.
Under that document interest in two large tea estates comprising 320 acres and 305 acres respectively under tea, along with the bungalows, factory buildings, houses, godowns, cooly lines and other erections and structures, was parted by the lessor to the lessee for a period of 10 years; and during that period the lessee could enjoy the said tea estates in the manner prescribed in the document.
Under the document, therefore, there was a transfer of substantive interest of the lessor in the estates to the lessee and a conferment of a right on the lessee to use the said estates by exploiting the same.
Under cl. 4 of the lease deed for the transfer of the right a premium of Rs. 2,25,000/ had to be 815 paid to the lessor and for using the estates the lessee had to pay.
an annual rent of Rs. 54,000/ .
Both the premium and the rent were payable in instalments in the manner provided in the document.
The parties were businessmen presumably well versed in the working of tea estates.
They must be assumed to have known the difference between the two expressions "premium" and "rent"; and they had designedly used those two expressions to connote two different payments.
The annual rent fixed was a considerable sum of Rs. 54,000/ and the premium, when spread over 10 years, would work out to Rs. 22,500/ a year.
There is no reason, therefore, to assume that the parties camouflaged their real intention and fixed a part of the rent in the shape of premium.
The mere fact that the premium was made payable in instalments cannot obviously be decisive of the question, for that might have been to accommodate the lessee.
Nor is cl. 8 of the lease deed, on which strong reliance is placed by the learned counsel for the Revenue, a pointer to the contrary.
It reads: "(1) If any of the aforesaid instalments towards the premium or annual rent shall remain unpaid for two months after becoming payable (whether formally demanded or not) or if the lessee shall make default in payment to the Lessor any other sum or any part thereof in due dates or in observing or performing any of the covenants, conditions or stipulations hereinbefore contained and on the part of the Lessee to be paid, observed and performed or if the Lessee 's firm is dissolved except for reconstruction or if any of the partners of the Lessee is adjudicated insolvent then and in any such cases it shall be lawful for the Lessor immediately or at any time or times thereafter upon the demised Tea EStates and premises or any part thereof in the name of the whole to re enter and thereupon this demise shall absolutely determine but without prejudice to the rights of the Lessor to damages or compensation in respect of any breach of Lessee covenants herein contained and all other rights and remedies including the right to recover the balance of the instalment unpaid premium or rent payable in that particular year.
" The argument is that in the case of default contemplated in this clause it shall be lawful for the lessor to re enter and in that event in terms of cl. 8 he will be entitled only to recover the balance of the instalment of unpaid premium and not the entire balance of the premium.
This construction, though it appears to be plausible at first sight, really ignores the main terms of the lease.
The default clause is pressed into service to destroy the main term of the lease.
Under el. 1 of the lease deed the sum of Rs. 2,25,000/ is the consideration by way of premium to be paid by the lessee to the lessor.
Under cl. 4 thereof the said entire premium has to be 816 paid in instalments; under cl. 8 the lessor has the option to terminate the lease and re enter the premises in the circumstances mentioned therein without prejudice to all his rights under the document.
One of his rights is to recover the premium in instalments.
The fact that one of the rights saved is his right to recover the balance of the instalment of unpaid premium cannot possibly deprive him of all his _other rights which are also expressly saved thereunder.
The drafting of the clause is not artistic and is rather confused; but in the context of the other clauses it cannot be so construed as to override.
or come into conflict with, the main terms of the lease deed.
Thirdly, it was contended that the income the lessor was getting under the lease after 1950, i.e., after the execution of the lease deed, viz., the total of the instalments of premium and rent, was not higher than the profits he was getting before the lease and that was an indication that what was rent really was split up into premium and rent for ulterior purposes.
This argument is based upon the following data collected from the published accounts of the assessee company: Year ended Profit Deprecia Net Divided tion Profit (tax free) (1) (2) (3) (4) (5) Rs. Rs. Rs. % 31st March 1947 . 60,186 8,665 51,521 9 31st March 1948 . 33,118 7,872 23,246 9 31st March 1949 . 31,581 7,475 24,106 6 31st March 1950 . 47,734 17,868 29,866 12 31st March 1951 . 71,888 17,726 54,162 6 31st March 1952 . 33,213 15,527 17,686 6 31st March 1953 . 69,550 15,410 54,140 6 In the accounts of the year to 31st March 1952 there are the following three items of expenditure: Rs. Transit charges . . 10,605 Legal Expenses . . 7,518 Gratuity to Managing Director . 10,000 28,123 Before comparing the figures given for the two periods, i.e., the period before March 1950 and the period thereafter, it is necessary to add back the said three items of expenditure totalling 817 Rs. 28,123/ to the net profit of the year ended with 31st March, 1952; if they were added, instead of Rs. 17,585/ , the profit would be Rs. 45,809/ .
A comparative study of the said figures discloses a higher return in the second period than during the earlier period.
But an attempt is made to show that the figures of the later period include other items and if they are deducted the net profit would be comparable with that in the earlier period, but there is no agreed data for this attempt and it is not possible on the material placed before us to scrutinize the figures.
In the absence of the relevant material it is not possible to accept the argument built upon the said figures.
The result is that there is no material placed before us, either direct or circumstantial, to displace the description given in the lease deed to the said amounts as premium and to hold that they are not in fact premium but only rent.
Indeed, the circumstances mentioned supra confirm the said description.
In the result we hold that the High Court has given a correct answer to the question submitted to it by the Income tax Appellate Tribunal.
The appeal is dismissed with costs.
Appeal dismissed.

summary/full:
The assessee leased out its tea estates for a period of ten years in consideration of a sum as and by way of premium and an annual rent to be paid by the lessor to the assessee.
As premium a part the sum was paid at the time of the execution of the lease and the balance was spread over in ten annual instalments; and the annual rent was payable in monthly instalments.
The annual instalment paid as premium was taxed by the Income Tax authorities as revenue receipt of the assessee.
On reference, the High Court held to be capital gains.
In appeal by certificate.
HELD: The annual instalment paid as premium was capital gains.
When the interest of the lessor is parted for a price the price paid is premium or salami.
But the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent.
The former is a capital income and the latter a revenue receipt.
There may be circumstances where the parties may camouflage the real nature of the transaction by using clever phraseology.
In some cases, the so called premium is in fact advance rent and in others rent is a deferred price.
It is not the form but the substance of the transaction that matters.
The nomenclature used may not be decisive or conclusive but it helps the court, having regard to the other circumstances, to ascertain the intention of the parties.
Premium can be paid in a single payment or by instalments.
The real test is whether the said amount paid in a lump sum or in instalments is the consideration paid by the tenant for being let into possession. [813 H; 814 E G] Raja Bahadar Kamakshya Narain Singh of Ramgarb vs Commissioner of Income tax, Bihar and Orissa, , Member for the Board of Agriculture Income tax Assam vs Sindhurani Chaudhurani, , and Chintamani Saran Nath Sah Deo vs Commissioner of Income tax, Bihar and Orissa, (1961)41 I.T.R. 506, applied.
The parties, who were businessmen well versed in their trade, must be assumed to have ,known the difference between the two expressions "premium" and 'rent , and they had designedly used those two expressions to connote two different payments.
The annual rent fixed was a considerable sum of Rs. 54,500/ and the premium, when spread over 10 years would work out to Rs. 22,500/ a year.
There was no reason, therefore, to assume that the parties camouflaged their real intention and fixed a part of the rent in the shape of premium.
The L/P(D)5SCII 13 812 mere fact that the premium was made payable in instalments could not obviously be decisive of the question, for that might have been to accommodate the lessee.
[815 B, C] The construction based on the clause in the lease deed that on the de.fault in the payments of the instalments of the premium or rent, the lessor shall be entitled to recover the balance of the unpaid premium and not the entire balance of the premium, really ignores the main terms of the lease.
In the context of the other clauses, this clause could not be so construed as to override or come into conflict with the main terms of the lease deed.
[815 H, 816B]


judgement:
vil Appeals Nos. 633 and 634 of 1964.
Appeals from the judgement and order dated July 23 and 24, 1962 of the Bombay High Court in Income tax Reference No. 61 of 1961.
A. V. Viswanatha Sastri, S.N. Vakil, T.A. Ramachandran, 1.
B. Dadachanji, O.C. Mathur and Ravinder Narain, for the appellant (in both the appeals).
Niren De, Additional Solicitor General, R. Ganapathy lyer and R.N. Sachthey, for respondent (in both the appeals).
A.V. Vishwanatha Sastri, M.N. Shroff and 1.
N. Shroff, for the Intervener (in all the appeals).
The Judgment of the Court was delivered by Subba Rao, J.
The appellant, the Poona Electric Supply Co., Ltd., hereinafter called the Company, carried on the business of distribution of electricity in the city of Poona under a licence issued by the Government.
Under the relevant provisions of the , (Act 54 of 1948), hereinafter called the Act, the Company 's "clear profit" in any year should not, as far as possible, exceed the amount of "reasonable return" as defined under the Act.
The excess, if any, after making some deductions, the Company has to distribute to its consumers in the form of rebate.
During the assessment years 1953 54 and 1954 55 the Company claimed deduction of two amounts of Rs. 42,148/ and Rs. 77,138/ for the said two years from its taxable income as they were credited to "Consumers Benefit Reserve Account".
The Income tax Officer disallowed the claim; and on appeal the Appellate Assistant Commissioner agreed with the Income tax Officer.
On a further appeal, the Income tax Appellate Tribunal accepted the contention of the appellant and allowed the deductions.
At the instance of the Revenue, the Tribunal submitted the following question of law to the High Court of Judicature at Bombay for its opinion: "Whether the two sums of Rs. 42,1481 in the assessment year 1953 54 and Rs. 77,138/ in the assessment year 1954 55 were deductible in computing income, profits and gains from the assessee 's business assessable to tax.
" 820 A Division Bench of the said High Court answered the question in the negative and against the appellant.
The present appeals have been filed by the Company after obtaining the requisite certificate from the High Court.
The argument of Mr. A.V. Viswanatha Sastri, learned counsel for the appellant, may be summarised thus: (1) There is a distinction between commercial profit of a company and "clear profit" under the Act one is arrived at on commercial principles and the other is regulated by the statute; the real profit of a company under section 10(1) of the Indian Income tax Act can be determined only after excluding the amount statutorily transferred to the "Consumers Benefit Reserve Account", for that amount represents a rebate to the customers of the excess amount collected from them.
(2) As the reservation of a part of the said excess is a statutory condition subject to which the Company carries on its business, it is an expenditure wholly and exclusively incurred for the purpose of the Company 's business and, therefore, it is an allowance deductible under section 10(2)(xv) of the Income tax Act for computing the profit of the Appellant 's business.
(3) The Company follows the mercantile system of accounting and, therefore, the amount of rebate so reserved is deductible for arriving at the commercial profit of the Company in the year when the statutory liability arises and not when the amount is actually paid; and in the present case the statutory liability for the said two amounts arose in the accounting years of 1952 and 1953.
Learned Additional Solicitor General contended that (1) under the relevant provisions of the Act the transference of a part of the said excess to the consumers benefit reserve account would only amount to apportionment or distribution of the profit after it has been earned and, therefore, it is not a deductible item for ascertaining the profit of the Company under section 10(1) of the Income tax Act; (2) the said amounts could not be said to be an expenditure wholly and exclusively incurred for the purpose of the business, as the expenditure was not incurred either during the course of the business or for the purpose of earning the profits of the business, but was only apportioned or distributed from and out of the profits already earned.
To appreciate the rival contentions and to arrive at a satisfactory solution it will be necessary to notice the relevant provisions of the Act and of the Income tax Act.
The gist of the relevant provisions may be stated thus: No person can supply electric energy in any area unless he has obtained a licence from the State Government under section 3(1) of the (9 of 1910).
The Act, i.e., The , provides for the rationalization of the production and supply of electricity and generally for taking 821 measures conducive to electrical development.
One of its main objects is to prevent such licensees from charging unreasonable rates to the detriment of the consumers.
Under section 57(1) of the Act the provisions of the Sixth Schedule and the table appended to the Seventh Schedule thereto are deemed to be incorporated in the licence of every licensee.
Paragraph I of the Sixth Schedule imposes a duty on every such licensee to so adjust his rates for the sale of electricity by periodical revision that his clear profit in any year shall not, as far as possible, exceed the amount of "reasonable return".
The expressions "clear profit" and "reasonable return" are defined.
Under Para.
II thereof if the clear profit of a licence in any year of account is in excess of the amount of reasonable return, one third of such excess, not exceeding 7 1/2% of the amount of reasonable return, shall be at the disposal of the undertaking; one half of the said excess shall either be distributed in the form of a proportional rebate on the amounts collected from the sale of electricity and meter rentals or carried forward in the accounts of the licensee for distribution to the consumers in future in such manner as the State Government may direct.
It is, therefore, clear from these provisions that for the purpose of rationalization of rates and keeping them under control the licence is directed to adjust his rates in such a way that his clear profit in any year shall not, as far as possible, exceed the amount of reasonable profit; but if an excess is collected, the licensee shall distribute half of that excess in the form of a proportional rebate to the consumers or carry forward the same in his accounts for future distribution to the consumers.
Briefly stated, the scheme of the provisions is that a part of the excess collected is returned to the consumers by way of a rebate.
The question is whether the amount so returned or returnable by the licensee to his consumers is deductible for ascertaining his taxable income from his business under section 10(1) or section 10(2)(xv) of the Income tax Act.
Learned Additional Solicitor General took us though the various paragraphs of the Sixth Schedule to the Act and argued that under them the licensee 's clear profit was arrived at after all the deductions were made, including the appropriations for all taxes on income and profits and, therefore, the distribution of a part of the excess was only a distribution out of the profits.
There is plausibility in this argument and at the first blush it appears to be attractive.
But there is an obvious fallacy underlying the argument and that arises from the fact that the argument equates the expression "clear profit" with that of commercial profits.
The object of the Act and that of the Sixth Schedule thereto, as aforesaid, is to statutorily rationalize and regulate the rates chargeable for the energy supplied in the interest of the public and for electrical development.
The rules embodied in the Sixth Schedule to the Act are intended only to achieve that object.
Under the said rules certain appropriations and certain deductions have to be made to.
arrive at the clear profit; otherwise the items may be manipulated 822 to sustain a demand for abnormal rates.
The rules have no concern with income tax; though for the purpose of arriving at the clear profit the taxes paid are also deductible.
If this distinction is borne in mind, the problem presented is easily and readily solved.
Under section 10 (1) of the Income tax Act, tax shall be payable by an assessee under the head "profits and gains of business" in respect of profits and gains of any business carried on by him.
The said profits and gains are not profits regulated by any statute, but profits in a business computed on business principles.
They are business profits and not statutory profits.
They are real profits and not notional profits.
The real profit of a businessman under section 10(1)of the Income tax Act cannot obviously include the amounts returned by him by way of rebate to the consumers under statutory compulsion.
It is as if he received only from the consumers the original amount minus the amount he returned to them.
In substance there cannot be any difference between a businessman collecting from his constituents a sum of Rs. Y in addition to Rs. X by mistake and returning Rs. Y to them and another businessman collecting Rs. X alone.
The amount returned is not a part of the profits at all.
In this context some of the decisions cited at the Bar may be of some help.
In Pondicherry Railway Co., Ltd. vs Commissioner of Income tax, Madras(1).
under an agreement with the French Colonial Government the railway company had to pay to the said Government half of its net profits calculated as provided thereunder.
One of the questions that arose in the appeal was whether the appellant company was entitled to deduct the payments made under the agreement with the said Government as being expenditure incurred solely for the purpose of earning such profits within section 10(9) of the Income tax Act.
In dealing with the question, Lord Macmillan observed: "A payment out of profits and conditional on profits being earned cannot accurately be described as a payment made to earn profits.
It assumes that profits have first come into existence.
But profits on their coming into existence attract tax at that point, and the revenue is not concerned with the subsequent application of the profits.
" The learned Lord, after citing with approval the principle laid down by Lord Chancellor Halsbury in Gresham Life Assurance .Society vs Styles(2), proceeded to observe: "The word 'profits ' I think is to be understood in its natural and proper sense. in a sense which no commercial man would misunderstand.
But once an individual or (1) , 251 252, 252.
(2) 823 a company has in that proper sense ascertained what are the profits of his business or his trade, the destination of those profits or the charge which has been made on those profits by previous agreement or otherwise is perfectly immaterial.
The tax is payable upon the profits realized, and the meaning to my mind is rendered plain by the words 'payable out of profits.
" The distinction between payment out of profits and a payment to earn profits is unexceptionable.
The difficulty is to ascertain in each case whether a particular payment falls under one or other of the two categories.
The statement in the aforesaid observations that a payment conditional on profits being earned cannot be a payment made to earn profits has been modified and explained by the Privy Council in The Indian Radio and Cable Communications Cornpony, Ltd., vs The Commissioner of Income tax, Bombay Presidency & AdenC).
There, their Lordships were dealing with a case of a joint venture by two companies; and Lord Maugham pointed out thus: "It may be admitted that, as Mr. Latter contended, it is not universally true to say that a payment the making of which is conditional on profits being earned cannot properly be described as an expenditure incurred for the purpose of earning such profits.
The typical exception is that of a payment to a director or a manager of a commission on the profits of a company.
" To that extent the principle laid down by Lord Macmillan in the case of Pondicherry Railway Co.(2) has been modified.
Lord Macmillan himself in a later decision in The Union Cold Storage Co. Ltd., vs Adamson (H. M. Inspector of Taxes)(3) explained his observations in the Pondicherry Railway Co. 's case (2).
There, the appellant company leased lands and premises abroad under a deed reserving a particular rent per annum.
The deed provided that if at the end of any financial year it was found that after providing for this rent the result of the Company 's operations was insufficient to pay both interest on its charges and debentures and dividends at fixed rates on its preference shares and also at least 10 per cent, on its ordinary shares, the rent for the year was to be abated to the extent of the deficiency, repayment of rent already paid being made if necessary.
The question raised in that case was whether such repayments made were allowable as deductions in assessing the Company 's income to income tax.
The House of Lords held that they were allowable deductions.
When the observations of Lord Macmillan in the Pondicherry Railway Co. 's case(2) were pressed upon the House in support of the contention (1) , 277.
(2) L.R. 58 A.C. 239.
(3) , 331.
824 on behalf of the Revenue, Lord Macmillan explained his earlier observations thus: "When, therefore, in the passage referred to by the Attorney General in the Pondicherry case I said that "a payment out of profits and conditional on profits being earned cannot accurately be described as a payment made to earn profits", I was dealing with a case in which the obligation was, first of all, to ascertain the profits in a prescribed manner, after providing for all outlays incurred in earning them, and then to divide them.
Here the question is whether or not a deduction for rent has to be made in ascertaining the profits, and the question is not one of the distribution of profits at all.
" Though a contractual term of payment of rent operated after the profits were ascertained and on the insufficiency to meet certain obligations was discovered, the House of Lords did not find any difficulty in holding that the deductions for rent were made only for ascertaining the profits and not for distributing the same.
The decision of the Court of Appeal in British Sugar Manufacturers, Ltd. vs Harris (Inspector of Taxes(1) is rather instructive.
There, a company carrying on a manufacturing business agreed with two other companies to pay them a stated percentage of its "net profits" in consideration of their giving to the company the full benefit of their technical and financial knowledge and experience, and giving to the company and its directors advice to the best of their ability.
The question arose whether in computing the profits of the company for the purpose of income tax, the company was entitled to deduct the sums so paid as being money wholly and exclusively laid out or expended for the purposes of the trade within Rule 3(a) of Cases I and II.
Greene, M.R., pithily observed thus: "Once you realise that as a matter of construction the word "profits" may be used in one sense for one purpose and in another sense for another purpose, I think you have the real solution of the difficulties that have arisen in this case.
" Applying that test, the Master of the Rolls held that: "In the present case there are two funds of so called profits which come into the picture.
The first one is the fund which has to be ascertained for the purposes of calculating the 20 per cent . . . .
Now when that amount has been ascertained, that fund has ceased to have any usefulness at all, and it then becomes necessary to ascertain what are the divisible profits, and for that purpose, to take another account, which not only would bring in depreciation, but would also take into (1) , 105, 106, 108 109.
829 account the sum that had been paid out to the Skoda works, and the Corporation upon the taking of the first account.
" Romer, L.J., put the test in a different way when he said: "Is the payment that has to be made by the trader under the contract in question a mere division of profits with another party or is it a payment to the other party, the amount of which is ascertained by reference to the profits?" MacKinnon, L.J. stated much to the same effect thus: "The whole question in this, as in other cases, is whether this, which is an annual payment, is an annual payment to be taken into account in order to ascertain the profits, or is it an annual payment payable out of the profits after they have been ascertained? I think the true facts of this case are that it is of the former character.
The difficulty in the case arises largely because of the necessary ambiguity in the word "prof its" and the fact that in this agreement "profits" as a word does appear; but "profits", as I think, quite clearly of a different description from the annual profits or gains with which one is concerned in assessing the income tax.
" This decision accepts the principle that a contract or a statute may provide for the ascertainment of two profits for different purposes and the question to be decided in each case is whether the amount claimed as deduction is payable out of the real profits.
The Judicial Committee again in Raja Bejoy Singh Dudhuria vs Commissioner of Income tax, Calcutta(1) emphasized the concept of real income in the context of payment of income tax.
Lord Macmillan, speaking for the Board, after adverting to the Imperial System of income tax legislation, proceeded to observe: "The correlative of the obligation to return as income sums which are really charges upon the taxpayer 's income is the right to reimbursement of the tax on such charges.
The Indian Income tax Act makes no similar provision for the deduction of tax at the source and the consequent reimbursement of the taxpayer in the case of such a charge as that to which the revenues of the appellant are subject . . . . . that the omission from the Indian Act of any such provision points rather to an intention to tax, in Lord Davey 's Phrase, only "the real income" of.
the taxpayer, than to an intention to impose, without right of reimbursement, a tax on what is a charge upon his income." (1) L.R. (1933) 60 I.A. 196, 202.
826 The concept of "real income" is also expounded in the decision of the Bombay High Court in H.M. Kashiparekh & Ca.
Ltd. vs Commissioner of Income tax, Bombay North (1).
There, under the managing agency agreement the managing agent was under a duty to forgo up to one third of its commission where the profits of the managed company were not sufficient to pay a dividend of 6 per cent.
The contention of the Revenue that such a surrender of the commission under the provisions mentioned in the agreement was not deductible for the purpose of income tax was negatived.
The principle has been succinctly stated in the head note thus: "The principle of real income is not to be subordinated as to amount virtually to a negation of it when a surrender or concession or rebate in respect of managing agency commission is made, agreed to or given on grounds of commercial expediency, simply because it takes place some time after the dose of an accounting year.
In examining any transaction and situation of this nature the court would have more regard to the reality and speciality of the situation rather than the purely theoretical or doctrinaire aspect of it.
It will lay greater emphasis on the business aspect of the matter viewed as a whole when that can be done without disregarding statutory language.
" Now let us look at two of the cases on which strong reliance is placed on behalf of the Revenue.
In Mersey Docks and Harbour Board vs Lucas(3) the harbour board was empowered by Act of Parliament to levy dock dues to be applied in maintaining the concern and in paying interest on moneys borrowed; any surplus income remaining after meeting these charges was directed to be applied in forming a sinking fund to extinguish the debt incurred in the construction of the docks.
It went to reduce the capital liability.
The question was whether the sum carried to the sinking fund, and the surplus carried to the following year 's accounts, were "profits" within the meaning of the Income tax Acts.
The House of Lords held that the surplus was profit assessable to the incometax.
In this case the surplus income formed the sinking fund and was utilised to pay off the debts of the harbour board; therefore, the Court rightly held that the said amount was utilised by the board from and out of its profits and, therefore, the said surplus could not be an allowable deduction.
The decision of the Queen 's Bench Division in Paddington Burial Board vs Commissioners of Inland Revenue(3) was also based on the same principle.
Under a public Act of Parliament a burial ground was provided out of the poor rates, and fees were charged to persons using it; any (1) , 707.
(2) (3) 827 surplus of income over expenditure was applied in aid of the poor rates as required by the Act.
It was held that the surplus was a profit assessable to income tax.
It will be seen that the burial ground was managed on behalf of the Parish of Paddington and the surplus was applied for the benefit of the parishners.
In the words of Day, J., it was a business carried on for the benefit of the rate payers of the parish of Paddington.
This case also, therefore, dealt with payments out of profits utilised for the benefit of those on whose behalf the business was conducted.
In Young (H. M. Inspector of Taxes) vs Racecourse Betting Control Board(1) the question that arose was whether the Racecourse Betting Control Board was entitled in computing the profits of the trade of totalisatot operator for the years 1953 54 and 1954 55 to deduct certain payments.
The Board would be entitled, under the appropriate statutes, to deduct payment of moneys wholly and exclusively laid out or expended for the purpose of trade.
It was held in that case that the said payments were all voluntary payments and were not made for the purpose of the trade.
This decision has no bearing on the question raised before us.
The said decisions lead to the following results: Income tax is a tax on the real income, i.e., the profits arrived at on commercial principles subject to the provisions of the Income tax Act.
The real profits can be ascertained only by making the permissible deductions.
There is a clear cut distinction between deductions made for ascertaining the profits and distributions made out of profits.
In a given case whether the outgoings fall in one or the other of the heads is a question of fact to be found on the relevant circumstances, having regard to business principles.
Another distinction that shall be borne in mind is that between the real and the statutory profits, i.e., between the commercial profits and statutory profits.
The latter are statutorily fixed for a specified purpose.
If we bear in mind these two principles there will be no difficulty in answering the question raised.
The appellant company is a commercial undertaking.
It does business of the supply of electricity subject to the provisions of the Act.
As a business concern its real profit has to be ascertained on the principles of commercial accountancy.
As a licensee governed by the statute its clear profit is ascertained in terms of the statute and the schedule annexed thereto.
The two profits are for different purposes one is for commercial and tax purposes and the other is for statutory purposes in order to maintain a reasonable level of rates.
For the purposes of the Act, during the accounting years the assessee credited the said amounts to the "Consumers Benefit Reserve Account".
They were part of the excess amount paid to it and reserved to be returned to the consumers.
They did not form part of the asessee 's real profits.
So, to arrive at the taxable income of the assessee from the business (1) (D)5SCI 14 828 under section 10(1) of the Act, the said amounts have to be deducted from its total income.
In this view it is not necessary to express our opinion on the question whether the said amounts would be allowable deductions under section 10(2)(xv) of the Act.
The next question is whether the amounts so reserved for future payment were deductible in computing the income, profits or gains from the assessee 's business for the assessment years 1953 54 and 1954 55.
It is not disputed that the assessee adopts the mercantile system of accounting.
The liability to return the amounts was incurred by the assessee during the relevant accounting years.
This Court held in Calcutta Co. Ltd., vs Commissioner Income tax, West Bengal(1) that where an assessee maintained his accounts on mercantile basis, the accrued liability and the estimated expenditure which it would incur in discharging the same could be deducted from the income of the accounting year in which the said liability accrued.
Indeed, this legal position was not contested on behalf of the Revenue.
In the result we answer the question referred to the High Court in the affirmative and in favour of the assessee.
The order of the High Court is set aside.
The appeals are allowed with costs.
Appeals allowed.

summary/full:
The appellant company was a commercial undertaking, doing the business of supply of electricity subject to the provisions of .
For the purpose of rationalization of rates and keeping them under control, the licensee was directed by the Act to adjust the rates in such a way that the clear profit in any year did not exceed the amount of reasonable return as defined in the Act; but that if an excess was collected, the licensee should distribute half of that excess by way of rebate to the consumers, or carry the amount forward in the accounts for distribution to the consumers.
For the purposes of the Act, during the accounting years, the assessee credited certain amounts which formed part of the excess collected to the "Consumers Benefit Reserve Account", and claimed deduction of those amounts from the taxable income.
The Income Tax Officer and the Appellate Assistant Commissioner disallowed the claim, but the Tribunal allowed the deductions.
The High Court, on a reference, held against the assessee.
In it appeal to this Court the appellant contended that there was a distinction between commercial accurancy,.
As a ' profit" under the and that the real or commercial profit under section 10(1) of the Income Tax Act, 1922, could be determined only after excluding the amounts statutorily transferred to the "Consumers Benefit Reserve Account", for, that amount represented a rebate to the consumers, of the excess amount: collected from them.
HELD: As a business concern the real profit of the appellant had to be ascertained on the principles of commercial accountancy.
As a licensee governed by the statute its "clear profit" was ascertained in terms of the statute and the schedule annexed thereto.
The two profits are for different purposes one for commercial and tax purposes and the other for statutory purposes in order to maintain a reasonable level of rates.
The amounts for which deduction was claimed were a part of the excess amount paid to the assessee and reserved to be returned to the consumers.
They did not form part of the assessee 's real profits, and therefore, to arrive at the taxable income of the assessee from the business, under section 10(1) of the Income tax Act the said amounts had to be deducted from its total income.
[827G 828A] The income tax is a tax on the real income, that is the real profits arrived at on commercial principles subject to the provisions of the Income tax Act.
The real profit can be ascertained only by making the permissible deductions.
There is a clear cut distinction between deductions made for ascertaining the profits and distributions made out of profits.
It is a question of fact to be found on the relevant circumstances, having regard to business principles.
Another 819 distinction that should be borne in mind is that between the real and the statutory profits, that is between the commercial profits and statutory profits.
The latter are statutorily fixed for a specified purpose.
The real profit of a businessman under section 10(1) of the Incometax Act, cannot ,obviously include the amounts returned by him by way of rebate to the consumers, under statutory compulsion, from the statutory profits.
[822C, 827E, F] Case law referred to.