Commissioner of Income-Tax, Excess Profits Tax, Hyderabad, Andhra Pradesh v. V. Jagan Mohan Rao & Ors.

Judgment

CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 893 to 892 and 1381 to 1386 of 1966. Appeals from the judgment and order dated December 7, 1962 of the Andhra Pradesh High Court in Case Referred No. 24 of 1956. D. Narsaraju, P. Ramrao, K. R. Chaudhuri and K. Rajendra Chaudhuri, for the appellants (in C.As. Nos. 893 to 898 of 1966) and the respondents (in C.As. Nos. 1281 to 1386 of 1966). Jagdish Swarup, Solic;itor-General, S. K. Aiyar and R. N. Sachthey, for the respondent (in C.As. Nos. 893 to 898 of 1966) and the appellant (in C.As. Nos. 1381 to 1386 of 1966). The Judgment of the Court was delivered by Ramaswami, J, The assessee who 1s the Kartha of a Hindu Undivided Family was assessed in that status for the relevant assessment years, 1944-45, 1945-46, 1946-47 not only to incometax but also to excess profits tax.

On February l, 1941 he pnrchased from Randhi Appalaswamy (hereinafter referred to as the vendor) a spinning mill known as Sri Satyanarayana Spinning SUPRBIE COURT REPORTS ( 1970] I S.CR. Mills, Rajahmundry for a sum of Rs. 54, 7 31. The purchase w~s made at a period when there was litigation between the wns of the vendor and the vendor in respect of the spinning mill and other properties. The sons had filed a suit against the father, the vendor, claiming the schedule properties including the mill as joint family properties and for partition of the same. The vendor claimed that the properties were his self-acquired properties. The District Judge, Rajahmundry held that the properties were the self-acquired properties of the vendor and dismissed the suit cf the plaintiffs. Against the judgment of the District Judge an appeal was filed in tl1e M<idras High Court, being A. S. No. J 75 of 1938.

While the appeal was pending, on February 1, 194 1 the assessee purchased the mill from the vendor who purported tc ·.-:!! the same as the sole owner. In A. S. No. 175 of 1938 the Madr'" High Court held that the properties of the vendor were not hi; self-acquired properties but were joint family properties in which the plaintiffs had a two thirds share. Against this judgment the vendor preferred an appeal to the Privy Council. While that appeal was pending the assessee had submitted returns for the relevant assessment years. However, before the assessments were taken up the asscssee entered into a compromise with the plaintiffs on September 7, 1945 by virtue of which he got a release of the interest of the vendor's sons on payment of Rs. 1, 15,000. While the appeal was pending before the Privy Council the plaintiffs had applied to the High Coun for recovery of their share of the profits.

The High Court appointed the assessee as the Receiver directing him to deposit the profits in the High Court. The assessec deposited a sum of Rs. 1,09,613 for the year 1944-45, Rs. 31,087 for the year 1945-46 and Rs. 4,775 for the year 1946-47. Under the compromise the assessec was entitled to withdraw these amount~ on payment of Rs. 1, 15,000. The Privy Council decided the appeal on July 2, 1947 reversing the order of the High Court and restoring that of the District Judge holding that Appalaswamy was the absolute owner of the mill and the sons had no right, title or interest therein. On receipt of the Privy Council's decision which finally determined the rights of the panics and the ownership of the assessee in the mill, the Income-tax Officer issued on March 2, 1948 a notice under s. 34 pf the Income-ta~ Act in respect of Rs. 1,09,613 received by the assessee as lease income of the mill. It was contended for the assessec (I) tha· the proceedings initiated under s.

34 of the Act for the ye2. 1944-45 assessment were invalid in law as there was no new information leading to the discovery that income had escaped assessment, (2) that in any event the assessce was entitled to set c.J the sum of Rs. 1,15,000 paid to the sons of Appalaswamy under the compromise: approv~ by. the High Cou~ .for releasing their rights. 1f any, m the mill agamst the assessee s mcome from the mill. Th~ ,, C.l.T. v. JAOAN MOHAN (Ramaswami, J.) Im:ome-tax Officer rejected these contentions and treated the whole amount of Rs. 1,15,000 as paid toward capital expenditure in acquiring an asset. The Appellate Assistant Commissioner rejected the appeal of the assessee. The Tribunal affirmed the order of the Appellate Assistant Commissioner.

It held in the first place that the assessee had not disclosed the impugned source of income from the mill in his original assessment, that the matter as to fae assessee's ownership of the mill was sub-judice and that the decision of the Privy Council constituted information not only o,f law but also as to the factum of the ownershio of the Mill and the income therefrom. The Tribunal expressed the view thnt the sum of Rs. 1,15,000 could not be allowed to be set off against the assessee's income from the mill as it was an ex gra:ia payment to the sons of Appalaswamy who had no right, title or interest in the mill and it was paid in order to perfect a supposed defective title and as such was of capital nature. Thereafter the Income-tax Appellate Tribunal stated a case to the High Court under s. 66(2) of the In,dian Income-tax Act, 1922 on the following questions of law: "R. A. No. 779 which relates to the assessment year 1944-45: ( 1)

Whether on the facts and in the circumstances of the case, in respect of the assessment year 1944-45, the, assessment made on the assessee in the status of a Hindu undivided family in respect of income received by him as Receiver could be justified notwithstanding the provisions of section 41 of the Act ? ( 2) Whether, on the facts and in the circumstances of the case, the assessment of the entire income of Rs. 1,09,613 in the hands of the assessee is valid in the face of the compromise memo, dated 7-9-1945 approved by the Court ? ( 3) Whether, on the facts and in the circumstances of the case, the assessee is not entitled to set oJf Rs. l, 15 ,000 being the aniount paid to the minors for releasing their rights in the prnperty from out of the amount received from the mill ? R. A. No. 780 w!)ich relates to assessment year 1945 46: ( n Whether on the facts and in the circumstances of the case, the assessment made under section 34 of the Act is valid in law ? (2)

Whether on the facts and in the circumstances of the case, in respect of the assessment year 1945-46, St:PREME COlJRT REPORTS [1970] l S.C.ll.. the assessment on the assessee in the status of a Hindu undivided family in respect of the income received by him as Receiver could be justiticd notwithslanding the provisions of Section 41 of the A ct ? (3) Whether, on the facts a .tl in the circumstance' of the case, the assessment of the entire income of Rs. 31,087 in the hands of the asses"cc i> valid in the face of the compromise memo, dated 7-9-1945 approved by the Court ? ( 4) Whether, on the facts and in the circumstances of the case, the assessee is not entitled to set oil Rs. 1, 15,000 being the amount paid to !he minors for releasing their rights in the property from out of the amoun• rec~ived from the mill ~ R.A. No. 781 which rebtcs to a-sc"mcnt year 1946-47 : ( 1)

Whether, on the facts and in the .:ircumstances of the case, in respect of the assessment year I 946-47 the assessment on the assessee in the status of a Hindu undivided family in respect of income recci·1cd by him as Receiver could be justified, notwithstanding the provisions of section 41 of the Act ? (2) Whether, on the facts and in the circumstances of the case. the assessment of the entire income of Rs. 4,775 in the hands of the as;c"ec is valid in the face of the compromise memo, dated 7-9-1945 approved by the Court ? (3) Whether on the facts and in the circums•;mces of the case, the assessee is not entitled to set oR' Rs. 1,15,000 being the amount paid to the minors for releasing their right in the rrorerty from out or the amount received from the Mill?" The Appellate Tribunal poinlcd out in tho statement of 1hc case that question No. I in R.A. No. 780 for the assessment year 1945-46 pertained to the earlier a>sc«mcnt year 1944-45 in R.A. No. 779 and al><> that question No. 2 in R.A. Ne:"

780 and R.A. No. 779 for the assessment year l 94~-46 ::nd the corresponding excess profits tax assessment did not arise in that year but pertained to the earlier assessment vear I 944-45 in RA. No. 779 and the corresponding excess r'rofits tax assessment in R. :\. 1\o. 782. The High Court answered question Js:os. l and 2 in R. A. No. 779 and qucs1ion No. l in R. A. No. no in the affirm~tive. 8 ll C.I.T. v. JAGAN MOHAN (Ramarwami, !.) The High Court held that re-"assessment proceedings have been validly initiated under s. 34 of the Act. The High Court tound that the assessment on the assessee in the status of Hind11 Undivided Fautily in respect of income received by him as Receiver was proper. The High Court thought that the basis of the comprontise in the Madras High Court enter~d into between assessee and the minor sons of the veudor Appalaswamy wherem the assessee paid Rs. 1,15,000 to the minor sons cannot be ignored.

The High Court negatived the contention of the Income-tax Department that the sum of Rs. 1,15,000 was pai\I to cure a supposed defect in the title and that it_ was a capital payment. Upon . the interpretation of the terms of1he compromise the High Court took the view th,at the· amount of·Rs. 1,15,000 was paid partly towards acquisition of capital asset and partly towards the discharge of the claim towards profits and hence it should he apportioned towards capital and income in the proportion of 90/85. C.As. Nos. 1381 to 1386 of 1966 ~re brought by certificate from the judgment of the High Court on behalf of the Comntissioner of Income-tax and C.A. Nos. 893 to '898 of 1966 were brought by special lea\>e from the same judgment to this Court on behalf of the assessce. After the Amen<)ing Act· of 1939 and before the Amending Act of 1948 Section 34 stood as follows : " ( 1)

If in consequence of definite information which has come into his possession the Income-tax Officer, discovers that income, profits or gains chargeable to income-tax have escaped assessment in any year, or have been under-assessecj, or have been assessed at too low a rate, or have been the subject of excessive relief under this Act the Income-tax Officer may in any case in which he has reason (()1believe that the assessee has concealed the particnlars o'f his income or deliberately furnished inaccurate particulars thereof at anv time within eight years, and· in ·any ·oiher case at any· time within f~ur years of the end lilft~at year, serve on th~ person hable to pay tax on such mcome profits or gams or in the case of a company on' .the principal officer thereof a notice containing all or any of the requirements which ' may be included in a nc\tice under sub-section (2) of section 22, and may proceed to llssess or re-assess such income, profit or _gains, ~nd the provisions of this Act, shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section.

(2) No order of assessment under section 23 or of assessment or re-assessment under sub-section (.1) of this SUPREME COURT R&PORTS ( 1970] I S.C.R. section shall be made after the expiry, in any case to -- which clause ( c) of sub-section ( 1) of section 28 applies. of eight years, and in any_ othe.r .case, of four y~ars from the end of the year, m wh1c11 the income, profits or gains were first' assessable. The first question ads.in~ in this case is whether the proceediI?g under s. 34 is legally vahd. It was contended by Mr. Narasara1u that the decision of the Privy Council could not be said to be definite information within the meaning of the section. It was said that the~Illcome-tax Officer was fully aware of the circumstances of the 'case and the assessee had placed all the relevant facts before .him namely thr t under the High· Court'~ judgment the vendor was only enti!ld to one-third share of the income pending the decision of the appeal before the Privy Council.

Jn our opinion there is no justification for this argument. It is not true to say that the assessee brought all the relevant facts before the Income-tax Officer. On the contrary he deliberately suppressed the fact that there was a compromise between himself and the plaintiffs under which h~ was entitled to the whole of the income from the mill. At any rate the Privy Council's decision whiCh determined the rights of the 'parties irrespective of the compromise did constitute definite information within the meaning of s. J4 of the Income-tax Act. This view is borne out by the deeis!Ori of this Court in Maharaja Kumar Kamal s;,1gh v. Commissio11er of bico111e·-1ax.(')

Jn that case tl)c Income-tax Officer had, following the decision of the High Court i~~ Kamakhya Narain Singh's case(') omitted to bring to assessment for the year 1945-46 the sum of Rs. ,93,G04 reQ!_esenting interest on ai·mars of rent due io the assessce in respect of agricultural land on the ground that . the amount was agricultural income. Subsequently the Privy Cou!l- . -ciI, on appeal from that decision held that interest on arrears of rent prryablc in respect of agricultural land was not agricultural income. As a result of this· decision the Income-tax Officer initiated re-a>sessment proceedings under s. 34(l)(d) of the Income-tax Act and brought the amount of Rs. 93,604 to tax. In these circumstances it was held by this Court firstlv that the word infornlation ins. 34(1) (b) included information as to the true rrn.i" correct state of the law, and so would cover information a>' to relevant judicial decisions, secondly that 'escape' in s.

34 (1) was not confinec! to cases where no return had been submitted bv the assessee or where income had not been assessed owin~ io in- ..ctvertence or oversight or other' laclina attributable to th~ asse:;sing authorities. But even in a ,case where a return had been (I) 35 l.T.R. I I (2) 14 f.T.R. r-. C.I.T. v. JAOAN MOHAN (Ramaswami, !.) submitted, if the Income-tax Officer had erroneously failed· to tax a part of the assessable income, it was a case ~~ere that part. of the income had escaped assessment. The dec1s10n of the Privy Council therefore, was held to be information within the meaning of s. 34,(l) (b) and the proceedings for re-assessment were validly initiated. In our opinion. the principle of this deci~ion .g?~erns the present case and it must be held that the proceedmgs m1Uated under s. 34 for the assessment year 1944-45 were legally valid ..

It was stated on behalf· of the appellant that in 9ny case the Income-tax Office!" could have legitimately assessed, one-third share of the income which was due to the assessee according to the judgment of the Madras High Court and there was escape only to· the extent of two-third share of the income. This argument is not of much avail to the appellant because once proceedings under s. 34 are taken to be validly initiated with regard to two-third share of the income, the jurisdiction of the Income-tax Officer cannot be confined only to that portion of the income. Section 34 in terms states that once the Income-tax Officer decides to reopen the assessment he could do so within the period prescribed by serving on the person liable to pay tax a notice containing all or any of the requirements which may be included in a notice under s.

22(2) and may proceed to assess or re-assess such income, profits or gains. · It is, therefore, manifest that once assessment is reopened by isstting a notice under sub-s. (2) of s. 22 the previous under-assessment is set aside and the whole 9ssessment proceedings start afresh. _ When once valid proceedings are started under s. 34 (1 )(b) the Income-tax Officer had not only the jurisdiction but it was his duty to levy tax on the entire income that had escaped assessment during that year. The second question involved in this case is whether the High Court was right in holding that any portion of the amount of Rs. 1,15,000 wa~ li!lble to be treated as business expenditure. It is well established that where money is paid to perfect a title or as consideration for getting rid of a defect in the 1;t1e or a threat of litigation the payment would be capital payment and not revenue payment. What is essential to be seen is whether the amount of Rs. 1,15,000 was ,Paid for'l:iringing into existence a right or asset of an enduring nat\)re.

In other words if the asset which is acquired is in its character a capital asset, then any sum paid to acquire it must surely be capital outlay. Money paid in consideration of the acquisition of n source of profit or in.come is capital expenditure both on principle and authority. In Atherton v. British Insulated and Helsby Cables Ltd. (1) Viscount Cave said : "But where an expenditure is made, not only once for all, but with a view to bringing into existence an (1) [1926] A.C. 205, 213. 7 3~ [1970) I SCR. asset or an advantage for the enduring benefit of a trade, J think that there is very good reason (in the absence of sp.:cial circumstances leading to an opprisitc conclusion) for treating such an expenditure as properly attrib1i:ablc not to revenue but to capital." In Commissioner of Taxes v. Nclzanga Conso!idtlled Copper Mines Ltd.(1) Lord Radcliffr observed at p. 960:

"Courts have stressed. the importance of observing a demarcation between the cost of creating, acquiring or enlarging the permanent (which dCles not mean perpetual) structure of which the income is to be the produce or fruit and the cost of earning that inco1ne itself or performing the incomc·e:irning operations. Probably thi, is as illuminating a line of di .. tinction as the law by itself is likely to achieve.'' It is, howel'cr, contended on behalf of the asscssce that the amount of Rs. I, 15,000 was paid partly for the acquisiuon of capital asset and partly to discharge the claim towards profits and hence there should be an apportionment of the amount, It i,; not possible to accept this contention. It appears from the order of the High Court that the value of the mi!! was fixed at Rs. 1,15,000 after taking into consideration the fact that the mil; was built on a leasehold premises. The value of the machinery was fixed at Rs. 1,36,000 and the leasehold interest.was fixed at Rs. 14.000.

On this basis the share of the minors was taken to be Rs. 90,000. Jn respect of the profits the claim of the plaintiffs was taken to be Rs. 85,000. The total claim was therefore Rs. 1.75,000 so that the offer of Rs. I, 1.5,000 for the release of the claim of the plaintiffs in the mill was held to be fair. The High Court, thererore, certified the compromise to be for the benefit of the minor plain· tiffs. In the cour;e of its order, dated September 7, 1945 the High Court observed : "There are, however, numerous risks which the continuance of the litigation would necessarily involve. The Privy Council might hold that the mill was the se!F- acquired property of the fath~r. in which case the plaintiffs would get nothing and would incur a liability for costs. It might also be held that, though the property was the Family property, the father was e.ntitled as the natural guardian to sell the interests of minor sons in discharge of a binding family obligation.

There is the further possibility that by the time the litigation ends the property will have deteriorated and its value will have (I) [I %1) A.C. 94~. C.I.T. v. JAGAN MOHAN (Ramaswami, 1.) been materially reduced by the termination of the lease of the land. Taking all these contingencies into consideration we are of opinion that the offer made by the purchaser of Rs. 1,15,000 for the release of the clrum, if any, of the two sons in the mill sold to him by their father is a fair offer, the acceptance of which would be beneficial to the minor second plaintift." It is true that the :High Court took into consideration the income from the mill in testi!)g whether the offer made by the purchaser of Rs. 1,15,000 for the release of the claim of the plaintiffs was a fair offer. But that does not mean that the sons of Appalaswamy were given as a result of the compromise a share in the profits of the assessee. It is clear from the circumstances of this case that the payment of Rs. 1;15,000 was made by the assessee in order to perfect his title to capital asset and the assessee is not entitled to set off any portion of the amount as attributable to the lease money.

It was a lump sum payment for acquisition of a capital asset and the claim of the plaintiffs for the lease money from the property was merely ancillary or incidental to the claim to the capital asset. In our opinion the High Court was in error in· holding that tlie amount should be apportioned between capital and income. In ·the result so far as questions 3 and 4 in R.A. 779, questions, 1 and 2 in R.A. 780 and questions 2 and 3 in R.A. 781 are concerned the answer is that the entire amount of Rs. 1,15,000 should. b~ treated as capital payment and the assessee is not entiled to exclude from the income sought to be assessed in his hands any portion of that amount. We accor~ingly allow C.A. Nos. 1381 to 1386 of 1966 to the extent indicated above. C.A. Nos. 893 to 898 of 1966 are dismissed. There will be no order as to costs in either of two sets of appeals. · G.C. C.A. Nos. 1381 to 1386/66 allowed. C.A. Nos. 893 to 898/66 dismissed. LISSup CI/69-3 I. 1 ._,