Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME-TAX, EXCESS PROFITS TAX, HYDERABAD,
Vs.
RESPONDENT:
V. JAGAN MOHAN RAO & ORS.
DATE OF JUDGMENT:
31/07/1969
BENCH:
ACT:
Indian Income-tax Act, 1922, s, 34 and s.
10(2)(xv)--Decision of Privy Council settling legal
dispute--Whether constitutes ’definite information’ within
meaning of s. 34--Purchase of mill by assessee--Vendor’s
sons disputing his right to sell--Assessee paying sons a
consolidated sum for release of their claims--Sum so paid
whether allowable business expenditure under s. 10(2)
(xv).
HEADNOTE:
The assessee purchased a spinning mill in 1941 from a
vendor claiming to be its sole proprietor. In a suit filed
by the vendor’s sons the trial court had held that the suit
property including the aforesaid spinning mill was the
vendor’s self-acquired property. When the assessee
purchased the mill an appeal against the trial court’s
judgment was pending in the High Court ’the High Court
decided that the property was not the self-acquired property
of the vendor but was coparcenary property in which the sons
had two thirds interest. The vendor filed an appeal before
the Privy Council. During its pendency the assessee entered
into a compromise with the vendor’s sons whereby they
agreed to release their two thirds interest in the mill and
its profits for a sum of Rs. 1.15,000. The compromise was
certified by the High Court. In 1947 the Privy Council
decided that the property including the spinning mill was
the self-acquired property of the vendor. On receipt of this
decision which finally determined the rights of the
parties and assessee’s ownership of the mill, the Income-tax
Officer issued a notice under s. 34 of the Indian income-tax
Act, 1922 for the assessment year 1944-45 and assessed the
income from the mill for that year and for the two
subsequent assessment years in the hands of the assessee.
The assessee’s objection that the decision of the Privy
Council was not ’definite information’ within the meaning of
s. 34 was rejected as also the assessee’s claim that the sum
of Rs. 1,15,000 paid to the vendor’s sons in pursuance of
the compromise should be set off as an expense against the
income from the mill for the year in question. The
Appellate Assistant Commissioner and the Tribunal upheld the
Income-tax Officer’s order. The High Court in reference
held that the notice under s. 34 was valid but that the
payment of Rs. 1,15,000 was made partly towards acquisition
of a capital asset and partly towards the discharge of the
claim for profits and the part apportionable towards the
profits was allowable as revenue expenditure. The assessee
as well as the Revenue appealed to this Court.
HELD: (i) In Maharaja Kumar Kamal Singh’s case this
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Court held that the word information s. 34(1)(b) included
information as to the true and correct state of the law, and
so would cover information as to relevant judicial
decisions. It was further held that even in a case where a
return had been submitted, if the Income-tax Officer had
erroneously failed to tax a part of the assessable income,
it was a case when that part of the income had escaped
assessment. The decision of the Privy Council was therefore
held to be information within the meaning of s. 34(1)(b).
The principle laid down in Maharaja Kumar Kamal Singh’s case
governed the present case and it must be held that the
proceedings initiated under s. 34 for the assessment year
1944-45 were legally valid. [732 G-733 B]
727
Maharaja Kumar Kamal Singh v. Commissioner of Income-
tax, 35 I.T.R. 1, followed and applied.
Kamakhya Narain Singh’s case, 14 I.T.R. 6, referred to.
The contention that only two thirds of the income could
be said to h,rye escaped assessment because the one-third
share of the vendor could have been validly assessed the
Income-tax Officer on the basis of the High Court’s
judgment, could not be accepted. When once valid
proceedings are started under s. 34(1)(b) read with s. 22(2)
the previous under-assessment is set aside and the whole
assessment proceedings start afresh. The Income-tax Officer
then has not only the jurisdiction but the duty to levy tax
on the entire income that has escaped assessment in that
year. [733 C-E]
It is well-established that where money is paid to
perfect a title or as consideration ’for getting rid of a
defect in title or a threat of litigation the payment would
be a capital payment and not a revenue payment. Money paid
in consideration of the acquisition of a source of profit or
income is capital expenditure both on principle and
authority. [733 F-G]
Atherton v. British Insulated awl Helsby Cables Ltd.
[1926] A.C. 205, 213 and Commissioner of Taxes v. Nchanga
Consolidated Copper Mines Ltd. [1964] A.C. 948, referred to.
It was true that in the present case the High Court took
into consideration income from the mill in testing whether
the offer made by the purchaser of Rs. 1,15,000 for the
release of the claim of the plaintiffs v, as a fair offer.
But that did not mean that the sons of the vendor were given
as a result of the compromise a share in the profits of the
assessee. It was clear from the circumstances of the case
that the payment was made by the assessee in order to
perfect his title to a capital asset, and no portion of it
could therefore could be set off against the profit. [735 C]
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, Solicitor-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).
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The Judgment of the Court was delivered by
Ramaswami, J. The assessee who Is 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 1, 1941 he purchased from Randhi Appalaswamy
(hereinafter referred to as the vendor) a spinning mill
known. as Sri Satyanarayana Spinning
728
Mills, Rajahmundry for a sum of Rs. 54,731. The purchase
was made at a period when there was litigation between the
sons 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 of
the plaintiffs. Against the judgment of the District Judge
an appeal was filed in the Madras High Court, being A.S. No.
175 of 1938. While the appeal was pending, on February 1,
1941 the assessee purchased the mill from the vendor who
purported to sell the same as the sole owner. In A.S. No.
175 of 1938 the Madras High Court held that the properties
of the vendor were not his 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 assessee entered into a compromise with the
plaintiffs on September 7, 194S 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 Court 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 assessee
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 assessee was entitled to
withdraw these amounts 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 parties
and the ownership of the assessee in the mill, the Income-
tax Officer issued on March 2, 1948 a notice under s. 34 of
the Income-tax Act in respect of Rs. 1,09,613 received by
the assessee as lease income of the mill. It was contended
for the assessee (1 ) that the proceedings initiated under
s. 34 of the Act for the year 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 assessee was entitled to set off the sum of
Rs. 1,15,000 paid to the sons of Appalaswamy under the
compromise approved by the High Court for releasing their
rights. if any, in the mill against the assessee’s income
from the mill. The
729
Income-tax Officer rejected these contentions and treated
the whole amount of Rs. 1,15,000 as paid toward capital
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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 the
assessee’s ownership of the mill was sub-judice and that the
decision of the Privy Council constituted information not
only of law but also as to the factum of the ownership of
the Mill and the income therefrom. The Tribunal expressed
the view that 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 gratia 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 Indian 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 off Rs. 1,15,000 being the
amount paid to the minors for releasing their
fights in the property from out of the amount
received from the mill ?
R.A. No. 780 which relates to assessment
year 1945 -46:
(1) 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,
730
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
justified notwithstanding the provisions of
Section 41 of the Act ?
(3) Whether, on the facts and in the
circumstances of the case, the assessment of
the entire income of Rs. 31,087 in the hands
of the assessee is 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 off Rs. 1,15,000 being the
amount paid to the minors for releasing their
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rights in the property from out of the amount
received from the mill ?
R.A. No. 781 which relates to assessment
year 1946-47:
(1) Whether, on the facts and in the
circumstances of the case, in respect of the
assessment year 1946-47 the assessment 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. 4,775 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 off Rs. 1,15,000 being the
amount paid to the minors for releasing their
right in the property from out of the amount
received from the Mill ?;’
The Appellate Tribunal pointed out in the statement of
the case that question No. 1 in R.A. No. 780 for the
assessment year 1945-46 pertained to the earlier assessment
year 1944-45 in R.A. No. 779 and also that question No. 2 in
R.A. No. 780 and R.A. No. 779 for the assessment year 1945-
46 and the corresponding excess profits tax assessment did
not arise in that year but pertained to the earlier
assessment year 1944-45 in R.A. No. 779 and the
corresponding excess profits tax assessment in R.A. No. 782.
The High Court answered question Nos. 1 and 2 in R.A.
No. 779 and question No. 1 in R.A. No. 780 in the
affirmative.
731
The High Court held that re-assessment proceedings have been
validly initiated under s. 34 of the Act. The High Court
found that the assessment on the assessee in the status of
Hindu Undivided Family in respect of income received by him
as Receiver was proper. The High Court thought that the
basis of the compromise in the Madras High Court entered
into between the assessee and the minor sons of the vendor
Appalaswamy wherein 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 paid -to cure a supposed defect in the
title and that it was a capital payment. Upon the
interpretation of the terms of the compromise the High Court
took the view that 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 be apportioned towards capital and income in the
proportion of 90/85. C.As. Nos. 1381 to 1386 of 1966 are
brought by certificate from the judgment of the High Court
on behalf of the Commissioner of Income-tax and C.A. Nos.
893 to 898 of 1966 were brought by special leave from the
same judgment to this Court on behalf of the assessee.
After the Amending 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
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have been under-assessed, 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 ease in which he
has reason to believe that the assessee has
concealed the particulars of his income or
deliberately furnished inaccurate particulars
thereof at any time within eight years, and in
any other case at any time within four years
of the end of that year, serve on the person
liable to pay tax on such income profits or
gains 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 notice under sub-section (2) of
section 22, and may proceed to assess or re-
assess such income, profit or gains, and the
provisions of this Act, shall. so far as tony
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
732
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 other case, of four years from the
end of the year, in which the income, profits
or gains were first assessable.
The first question arising in this case is whether the
proceeding under s. 34 is legally valid. It was contended
by Mr. Narasaraju 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 Income-tax
Officer was fully aware of the circumstances of the case and
the assessee had placed all the relevant facts before him
namely that under the High’ Court’s judgment the vendor was
only entitled to one-third share of the income pending the
decision of the appeal before the Privy Council. In our
opinion there is no justification for tiffs 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 he 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. 34
of the Income-tax Act. This view is borne out by the
decision of this Court in Maharaja Kumar Kamal Singh v.
Commissioner of Income-tax. (1) In that case the Income-tax
Officer had, following the decision of the High Court in
Kamakhya Narain Singh’s case("’) omitted to bring to
assessment for the year 1945-46 the sum of Rs. 93,604
representing interest on arrears of rent due to the assessee
in respect of agricultural land on the ground that the
amount was agricultural income. Subsequently the Privy
Council, on appeal from that decision held that interest on
arrears of rent payable in respect of agricultural land was
not agricultural income. As a result of this decision the
Income-tax Officer initiated re-assessment proceedings under
s. 34(1)(d) of the Income-tax Act and brought the amount of
Rs. 93,604 to tax. In these circumstances it was held by
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this Court firstly that the word information in s. 34(1)(b)
included information as to the true and correct state of the
law, and so would cover information as to relevant judicial
decisions, secondly that ’escape’ in s. 34(1) was not
confined to cases where no return had been submitted by the
assessee or where income had not been assessed owing to
inadvertence or oversight or other lacuna attributable to
the assessing authorities. But even in a case where a
return had been
(1) 35 I.T.R. 1. (2) 14 I.T.R. 6.
733
submitted, if the Income-tax Officer had erroneously failed
to tax a part of the assessable income, it was a case where
that part of the income had escaped assessment. The
decision of the Privy Council, therefore, was held to be
information within the meaning of s. 34( 1 ) (b) and the
proceedings for re-assessment were validly initiated. In
our opinion the principle of this decision governs the
present case and it must be held that the proceedings
initiated under s. 34 for the assessment year 1944-45were
legally valid. It was stated on behalf of the appellant
that in any case the income-tax Officer 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 issuing a notice under sub-s. (2)
of s. 22 the previous under-assessment is set aside. and the
whole assessment 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 was liable 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 title 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 bringing into existence a right or
asset of an enduring nature. 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 a source
of profit or’ income 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.
734
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asset or an advantage for the enduring benefit
of a trade, I think that there is very good
reason (in the absence of special
circumstances leading to an opposite
conclusion) for treating such an expenditure
as properly attributable not to revenue but to
capital."
In Commissioner of Taxes v. Nchanga Consolidated Copper
Mines Ltd.(1) Lord Radcliffe observed at p. 960:
"Courts have stressed the importance of
observing a demarcation between the cost of
creating, acquiring or enlarging the permanent
(which does not mean perpetual) structure of
which the income is to be the produce or fruit
and the cost of earning that income itself or
performing the income-earning operations.
Probably this is as illuminating a line of
distinction as the law by itself is likely to
achieve."
It is, however, contended on behalf of the assessee that
the amount of Rs. 1,15,000 was paid partly for the
acquisition of capital asset and partly to discharge the
claim towards profits and hence there should be an
apportionment of ,’.he amount. It is not possible to accept
this contention. It appears from the order of the High
Court that the value of the mill was fixed at Rs. 1,15,000
after taking into consideration the fact that the mill 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. In 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. 1,15,000 for the release of the claim of the plaintiffs
in the mill was held to be .fair. The High Court.
therefore, certified the compromise to be for the benefit of
the minor plaintiffs. In the course 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 null was the selfacquired
property of the father, 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 entitled 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
(1) [1964] A.C. 943.
735
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 claim, 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 plaintiff."
It is true that the High Court took into consideration the
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income from the mill in testing 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 the 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 be
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 accordingly 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.
Sup CI/69--3
736