Law of Income-Tax14.139.60.114:8080/jspui/bitstream/123456789/3240/1/037... · 2016. 8. 25. · ing of income-tax rates on the slabs of income from Rs. 10,000 to Rs. 20,000, (2) the

Law of Income-Tax Mahesh C. Bijawat*

I, iNTRODUTION

THE INCOM-TAX LAW in India is becoming more complicated every year. The spate of amendments has made a mockery of a stable lax system, and a learned author has very lucidly pointed this out;

the provisions of the Income-tax Act nowadays are like a railway ticket—good only for one journey in time from the 1st April of one year to the 31st March of the next, and sometimes not even for the whole of that journey.1

The Income-tax Act of 1961 which replaced the 1922 Act, has been so much mutilated that is becoming difficult to locate the relevant provisions. The year 1969, perhaps not wishing to be left behind by its predecessors, witnessed such an onslaught and the Finance Bill 1969, sought to make a number of changes.2

The most significant of the propsed changes were, (1) the raising of income-tax rates on the slabs of income from Rs. 10,000 to Rs. 20,000, (2) the raising of the limit of exemption from tax on *he income derived from dividends by Indian companies from Rs. 500 to Rs. 1,000, (3) the levy of 10 per cent excise duty on fertilizers and 20 per cent on power driven pumps. However, the most controversial measure was the levy of wealth tax on agricultural property, for the first time. The then Finance Minister, justified it on the ground that the exemption of such property from tax so far, had encouraged the richer professional and business classes to purchase agricultural land, and that he could see no reason to exempt wealth in the form of agricultural property while taxing other productive wealth. This levy raised a hue and cry from all quarters and the constitutional validity of the measure was also questioned. The Attorney-General of India clarified the position and ultimately, the Finance Minister bowing slightly to public opinion exempted farm land from wealth tax upto Rs, 1.5 lakhs, and he also dropped the excise duty on power driven pumps.

* MA. (Agra), LL.B. (Banaras), LL.M., I.S.D. (Yale); Reader in T aw, Banaras Hindu University.

1. Kanga & Palkhivala, The Law and Practice of Income Tax "Preface" *6th ed. 1969).

2. The Finance Bill, 1969 proposed amendment of 15 sections and one schedule, substitution of two sections and the insertion of three new sections.

www.ili.ac.in The Indian Law Institute

LAW OF INCOME-TAX 53

With substantial increase in the income of the agricultural sector during the last decade and its exemption from tax, the crushing burden of taxation on the urban sector which cannot be increased much further and the need for more revenue by the government, the only alternative left to the government was to tap the agricultural sector, which had hitherto remained untapped. The government was courageous enough to take the plunge and once having taken it, it is bound to extend the sphere of taxation in this area.

While presenting the Finance Bill in February, 1969, the Finance Minister had mentioned that later on in the year he proposed to bring forward a comprehensive Amendment Bill for incorporating the provisions indicated in the Budget speech as well as some of the recommendations given in the Bhoothalingam Report, the Public Accounts Committee Report and the Report of the Administrative Reforms Commission. The Taxation Laws (Amendment) Bill, 1969, was notified for public opinion in May, 1969.3 It has been referred to a Select Committee of the Parliament and is likely to come up in 1970.

This Bill proposes extensive changes in the Income-tax Act.4

Some of the important amendments are as follows: (1) The amortisation of certain preliminary expenses incurred by an Indian company at anytime after March 31, 1969;5 (2) the conversion by an individual after March 31, 1965, of his self-acquired property into the property of the joint Hindu family of which he is a member, will club the income from the converted property with the total income of the individual, so far as it is attributable to the interest of the individual, the spouse or minor son of the individual in the joint tamily property.8 The area of self-assessment has been enlarged by requiring payment of tax on self assessment within thirty days of furnishing of return in every case where tax payable on the basis of the return exceeds Rs. 100 as against Rs. 500 at present.7 In view of his new provision of self-assessment, section 141 dealing with

3. The Taxation Laws (Amendment) Bill (No. 49 of 1969) was published in the Gazette of India. Extraordinary, Part 11-Section 2, No 33, r. 499 dated May 20, 1969. The Bill will hereafter he referred to as the hill.

4. The Bill proposes amendment in 49 sections and two schedules, inserts 9 new sections and one schedule; substitutes 8 sections and omits 2 sections of the Income-tax Act, 1961.

5. § 35 D, proposed to be inse ted vide cl. 8 of the Bill. 6. § 64 (2) to be inserted by cl. 14 of the Bill. 7. *> 140A to be substituted by cl. 31.


54 ANNUAL SURVEY OF INDIAN LAW 1969

provisional assessment, is proposed to be dropped. Keeping in mind the recommendations made by the Bhoothalingam Committee regarding firms, the bill proposes to discontinue the system of registration of firms from the assessment year 1970-71 and replace it by a new system of recognition of firms.8 The pros and cons of this new provision have been thrashed out by the experts on taxation law and it is yet to be seen whether the government will take notice of the opinion of these experts.

One point which becomes evident after observing the changes brought about or proposed to be made in the Income-Tax Act in 1969, is that the Indian government is still searching for a magic wand which will cure all the economic ills of the society. It seems that the government still refuses to recognise the fact that a stable tax system is absolutely necessary for the economic development of this country. Frequent and kaleidoscapic amendments to the tax laws, especially the Income-tax Act, will lead to economic disaster in a short time.

The number of income tax cases decided by the various High Courts and Supreme Court has been on the increase during the last five years.9 In 1969, 255 High Court cases and 58 Supreme Court cases were reported in the Income Tax Reports. Most of these cases arose under the Income-tax Act, 1922. Some of these cases relates to assessments made in the forties and fifties. Many provisions of the 1922 Act have not found a place in the 1961 Act, and hence the cases decided on such provisions are of academic interest only. The important decisions of the Supreme Court only, will be taken up for review in the following pages.

II. ADVENTURE IN THE NATURE OF TRADE

The definition of 'business' given in section 2 (13) of the Income-tax Act, 1961 includes "any adventure. . .in the nature of trade." This phrase has been the cause of much litigation in England as well as in India.10 The issue whether a particular, activity constituted an 'adventure in the nature of trade' came up

8. ^ 186A and 186B to be inserted by cl. 43. 9. In 1950 thee were 94 income tax cases, in 1955-164, in 1960-177,

in 1965-284 and in 1969-313. These include cases both in the High Courts and the Supreme Court.

10. For a detailed study of this topic see the present author's article 'Adventure in the Nature of Trade—An Instrument to Expand the Tax Net," 2r> Taxation 123 (1968).


LAW OF INCOME TAX 55

before the Supreme Court in P. M. Mohammed Meerakhan v. C.LT.11

Here the assessee had purchased a large area of land for Rs. 6 lakhs, and had paid an advance of Rs. 11,000. The balance was to be paid before a certain date. The assessee divided this land into plots and sold it to different purchasers for a sum of Rs. 5,18,500. One plot measuring 104 acres, he retained for himself. The income-tax officer calculated that the assessee had made a profit of Rs. 1,25,000 from this venture and taxed it as income accruing from an adventure in the nature of trade. The assessee contended that the income was not taxable and secondly even assuming that it was an adventure in the nature of trade, the profits ought to have been calculated when the entire sale was complete.

The Court rejected both the contentions of the assessee. In its judgment it referred to a number of leading English and Indian cases on "adventure in the nature of trade," wherein certain principles have been laid down to determine when an activity would come under the 'adventure' category. In summing up the Court observed:

it is not possible to evolve any single legal test or formula which can be applied in determining whether a transaction is an adventure in the nature of trade or not. The answer to the question must necessarily depend in each case on the total impression and effect of all the relevant factors and circumstances found therein and which determine the character of the transaction.32

Looking to all the circumstances of the case the Court came to the conclusion that the assessee had derived profits from an adventure in the nature of trade in that the division of the land into 23 plots and the sale to 22 purchasers indicated "scheming and organization on the part of the assessee." Regarding the method of computation adopted by the income-tax officer to determine the profits, the Court felt that each year is a self contained year for income-tax purposes and profit is taxed on the basis of each year. Even if one plot is retained, the profit can be assessed in that year in which the sale took place after valuing the cost of the plot retained by the assessee. Hence, the asscssee's contention that the profits be determined only after the whole land has been sold, was rejected.

III. INCOME AND CAPITAL

The distinction between income and capital receipts has been the subject matter of numerous cases, and yet every year, cases come up before the Courts to decide whether a particular item of

11. H969) 73 I .T .R. 735. 12. Id. at 742.


*6 ANNUAL SURVEY OF INDIAN LAW 1969

income is in the nature of revenue receipt or capital receipt. In the year under review, the Supreme Court had to decide this very point in at least five cases. In Durga Das Khanna v. C.I.T.1* the appellant nad taken on lease certain premises for a term of 99 years with a right to assign the lease and alter the structure of the premises so as to convert it into a cinema hall. After spending Rs. 35,000 he needed more money, for which he entered into a lease by which he demised the building to the lessee for 30 years. The lessee agreed to pay Rs. 55.200 to the appellant towards the cost of erecting the cinema house. The rent agreed to be paid was Rs. 2,100 per month. The lease did not contain any condition or stipulation from which it could be inferred that the sum of Rs. 55,200 had been paid by way of advance rent. Nor was there any provision for its adjustment towards rent or for its repayment by the appellant. The income-tax officer levied a tax on Rs. 55,200 considering it to be the income of the appellant. The tribunal held that the receipt of the sum was in the nature of advance payment of rent, and this was upheld by the High Court. The Supreme Court reversed this decision and held that the sum of Rs. 55,200 was a capital amount and hence not taxable. The Court pointed out that the amount paid to the appellant was in the nature of a premium of 'salami' and it had the charateris-tics of a capital receipt. Prima facie premium or salami is not income and it is for the income tax authorities to show that facts existed which would make it a revenue payment.

In C.I.T. v. Madan Gopal Radhey Lal^ it was held that bonus shares received by an assessee from a company, which had power under its articles of association to capitalise the profits and issue bonus shares, is not income in the hands of the assessee but capital; thus the sale proceeds of such bonus shares arc not income but realization of capital assets. The fact that such an assessee is dealing in stock and shares, shall not make the receipt of bonus shares in his hands, ipso facto, stock in trade and the sale proceeds thereof as income. However, as the Tribunal had found in this case that the sale proceeds of the bonus shares were received in the course and as part of the assessee's business in shares, the Court held that the sale proceeds were taxable. In Juggilal Kamlapat v. C./.T.15

while deciding whether a sum of money was in the nature of revenue receipt or capital receipt, the Court underlined an important principle

VS. (1969) 72 I .T .R . 796. 14. (1969) 73 I T.R. 652. 15. (1969; 73 I T.R. 702.



of law that the Court had the power to go behind a transaction and find out its true nature, especially when some devise was being used for tax-evasion. The brief facts were, that the appellant was a firm which was appointed managing agents of a company. The company terminated the managing agency of the firm and gave it to a new company in which the majority shares were held by the partners of the appellant firm. The managed company paid a compensation of Rs. 2 lakhs to the firm for the immature termination of the managing agency and the firm claimed that this was a capital income and not revenue receipt. The income-tax officer levied a tax on Rs. 2 lakh holding it a revenue receipt. The appellate tribunal also found that the termination of the managing agency was a device to evade tax, and in fact no termination was made as the partners of the firm were still enjoying the benefit of the managing agency of the company. The tribunal thus held the amount as revenue receipt and consequently taxable. The High Court affirmed this view. The Supreme Court while affirming the decision of the High Court agreed with the findings of the Appellate Tribunal regarding the method adopted by the appellant firm to evade tax.16

IV. INCOME DEEMFD TO ACCRUE OR ARISE

]n CJ.T. v. Union Tile Exporters,17 the contracts for the sale of goods were made in one place and the sales were effected in another town outside India. The question arose as to the determination of the place where the income accrued. The Court emphatically pointed out that the place where the contracts were actually made was as important as the place of sale and hence income accrued and arose at both the place.

16. The Supreme Court observed in this connection thus : On the facts found in this case, it is manifest that the managing agency business carried on by the assessee firm was not distroyed or lost to the four individual partners who constituted the assessee firm. What happened was that the individuals who constituted the assessee firm became the directors of the newly formed company namely, J. K. Commercial Corporation, and in this new capacity they imde took the conduct of the managing agency business and as shareholders continued to benefit from the profits of that business flowing to them in the shape of dividend instead of as a share of profits from the assessee firm. In other word, the managing agency ..sset was enjoyed by the four individual partners in a different capacity with the same object of piofit making. There was, therefore, no distinction of the apparatus of the making asset i.e. the managing contract. Id. at 712. 17. (1969) 71 I T R 453


*8 ANNUAL SURVEY OF INDIAN LAW 1969

V. BUSINESS INCOME

The treatment meted out to business income in the Income-tax Act, is naturaly different from that given to income from other heads and it is a vexed question whether an income is from business or not. In New Savan Sugar and Gur Refining Co. Ltd. v. C./.r.,ls the assessee company was carrying on the business of making sugar and refining gur. It let out its mill to a third party on payment of royalty on the manufacture of sugar and gur. The lessee was given the right to manage his affairs without any interference. The assessee claimed that the income from lotting out business assets was business income and hence he should be allowed depreciation allowance and development rebate as provided by the Income-tax Act. The income-tax officer on the other hand, maintained that the income was not business income but income from "other sources". The appellate tribunal agreed with the income-tax officer, and the High Court concurred in with this opinion. The Supreme Court while affirming the decision of the High Court pointed out that from the facts it was clear that the intention of the assessee was to part with the entire machinery of the factory and premises with the obvious object of earning rental income. It was not the intention of the assessee to treat the factory, machinery etc. as a commercial concern during the subsistance of the lease. Section 10 of the Indian Income-tax Act, 1922 dealing with income from business applied only to those cases where the tax was payable by an assessee "in respect of a business carried on by him/' (Emphasis added). And here, as is apparent the assessee had ceased to carry on the business and hence the income he received in the shape of royalty payments was not income from business, but income from other sources. Consequently depreciation and development rebate also could not be allowed. The Court distinguished this case from the case of Commissioner of Excess Profits Tax v. Shri Laxmi Silk Mills Ltd.19 wherein it was held that the lcttine out of its assets by the company were for a temporary period and the assets did not cease to be commercial assets because of this, and hence the income from letting out of business premises was income from business. However, the Supreme Court in this case had also pointed out that no general principle could be laid down which would be applicable to all cases, and each case would have to be decided according to its own circumstances.

18. (1969) 74 I.T.R. 7.

19. (1951) 20 I.T.R. 541.



In Rajputana Trading Co. v. C./.T.-0 an interesting point was decided by the Court. The assessee company was carrying on speculative and non speculative business. In one year it sustained loss in the speculative business and became liable to pay the loss to a person. This loss was allowed to be deducted from its profits. After some years the creditor waived his right to claim the amount and consequently it became the profit of the assessee in that year. The question now arose whether this income should be deemed to be the profit under the head of "business or profession", or speculative business. The assessee contended that if by fiction envisaged in section 10 (2A), 1922 Act, such waived amount was deemed to be the profit of that year when the sum was payable, then the fiction should be carried further to place this profit in that category in which the loss was suffered, namely, speculative business. His contention was rejected by the appellate tribunal and the High Court. The Supreme Court reversed the decision of the High Court and observed:

When the loss or the liability for which deduction has previously been allowed to the assessee arose out of speculative transactions the origin of such loss or liability is known and ascertainable. If such loss or liability is to be feated as profit.. .it would be most illogical and irrational to treat the so called profits as having a neutral source and not springing out of the same category of speculative business which led to the assessee incurring that loss on liability.21

The Court was of the view that once a loss is categorised as a speculative loss, and if it is deemed to be income on profit from business, profession or vocation by virtue of section 10 (2A) of the 1922 Act, then it followed by necessary implication that such profit can only be income or profit arising from speculative business. The Court, in our opinion decided the point correctly; it would indeed have been unjust to divorce the income or profit from the source it originated from, and put it in a category where it was unjustified.

VI. HINDU UNDIVIDED FAMILY

The taxation of a Hindu undivided family has always been bristled with problems. One of the point often litigated is, under what circumstances will the income of the karta of a Hindu undivided family be deemed to be the income of the family? The Supreme Court in 1968 had tackled this question in V. D. Dhanwatey v. CJ.T.2'- and S.R.M. CT.PL. Palanippa Chettiar v.

20. (1969) 72 I .T .R. 286. 21. Id. at 288. 22. (1969) 68 I T.R. 365.



CLTr* In 1969 the Court was again called upon to decide this question in at least three cases, in C.I.T. v. Gurunath v. Dhakappa** the karta of a Hindu undivideed family was a partner in a registered firm representing his family. He was appointed manager of the firm on a salary of Rs. 500 p.m. For the assessment year 1960-61, a sum of Rs. 14,737 was allocated to him as his share of the profits of the firm. The amount included a sum of Rs. 6,000, which was the salary payable to him as the manager. The income-tax officer sought to include this amount of Rs. 6,000 in the income of the Hindu undivided family. The assessee's contention that this amount be treated as his personal income, was rejected by the appellate assistant commissioner and the tribunal. The High Court of Mysore to which a reference was made decided in favour of the assessee, and this decision was confirmed by the Supreme Court. The Court held that this case was governed by its earlier decision in V. D. Dhanwaty v. C./.7V5 wherein it was held that unless there was real and sufficient connection between the joint family funds and the remuneration paid by the partnership to the manager of the joint Hindu family, who was a partner the remuneration could not be taxed as the income of the family. In the Dhakappa case, there was no finding that the income which was received by G. V. Dhakappa was directly related to any assets of the family, utilised in the partnership and hence the income could not be treated as the income of the Hindu undivided family.

In the case of P. N. Krishna Iyer v. C.LT.-* two points were involved. One was regarding the determination of karta*s income and the income of the Hindu undivided family and the second one was the jurisdiction of the commissioner under section 33B, of the 1922 Act27 to revise the order of the income-tax officer in view of the decision of the appellate assistant commissioner. The facts of the case in brief were that the assessee set up a transport business on his own initiative, but this business was later on declared to be the business of Hindu undivided family, of which the assessee was a partner. The transport business was taken over by a private limited company and the credit entry was made in the name of the Hindu undivided family. The assessee purchased some shares of

23. (1968) 68 I .T .R. 221. 24. (1969) 72 I .T.R. 192. 25. Supra note 22. 26. (1969) 73 I .T.R. 539. 27. This section corresponds to § 263 (1) of the 1961 Act.



the company and was appointed the governing director. He was given a handsome salary, and commission on the net profit of the company in consideration for his past services and his ability. The question arose whether the remuneration and commission etc. earned by the assessee was his separate income or formed part of the income of the hindu undivided family. The income-tax officer treated the salary and commission as the assessee's saperate income and this was endorsed by the appellate assistant commissioner. The commissioner, however, under section 33B, revised the order passed by the income-tax officer and directed that the salary and commission be included in the income of the Hindu undivided family. The tribunal reversed the order of the commissioner. On reference to the High Court, the order of the tribunal was set aside and the salary and commission was included in the income of the Hindu undivided family. On appeal to the Supreme Court the decision of the High Court of Kerala was affirmed. The Court referred here also to the decision it gave in V. D. Dhanwatey v. C.I.T.28 and other similar cases, wherein it had decided a similar point. Regarding this case, after taking into consideration all the factors the court came to the conclusion that the income earned by the assessee must be included in the joint family income. It based its decision on the following arguments :

The shares which qualified the assessee to become a member of the company purchased with the aid of joint family funds. The shaies which were alloted to the assessee in lieu of his services were also treated as shares belonging to the joint family. The entire capital assets of the company originally belonged to the joint family and were made available to the company in consideration of A mere promise to pay the amount for which the assets were valued. The income was primarily earned by utilising the joint family assets or funds and the mere fact that in the process of gaming the advantage an element of personal service or skill or labour was involved did not alter the character of the income. In cases of this class the character of the receipt must be determined by reference to its source, its relation to the assets of the family of which the recipient was the member, and the primary object with which the benefit received disbursed.2*

Regarding the revisional powers of the commissioner under section 33B, of the Indian Income-tax Act, 1922 the Court pointed out that though the assessee had urged that the commission had no power to revise an order of the income-tax officer after it had been carried in appeal to the appellate assistant commissioner who had

28. Supra note 22. 29. Supra note 26 at 546.



given directions for it to be changed, the Court did not think that the commissioner had attempted to revise the order of the appellate assistant commissioner. In the instant case, since the rectified assessment of the Hindu undivided family was never challenged in appeal to the appellate assistant commissioner, the commissioner had power to revise the order passed by the income-tax officer which had not been appealed from.

A regular tussle seems to be going on between the assessee, who happens to be a member of a Hindu undivided family, and the assessee which may be linked to joint family funds. The assessee tries to have this income assessed as his separate income while the income-tax officer endeavours to include in it the joint family income. The Supreme Court has laid down certain principles which should be taken into consideration while deciding such cases; but so long as there is a difference in the rates and progressiveness of taxation on individuals and Hindu undivided families, this battle will continue to be waged between the assessee and the income-tax officer, though on a smaller scale.

VII. EXPENDITURE WHOLLY AND EXCLUSIVELY FOR BUSINESS

Section 10 (2) (XV) of the 1922 Act corresponding to section 37, 1961 Act, allows that expenditure to be deducted which has been laid out or expended 'wholly and exclusively for business.' Here too, the assessee and the Income-tax authorities do not see eye to eye, resulting in a tremendous amount of litigation. Whether such an expenditure should be allowed or not would depend upon the circumstances of each case. The Supreme Court has, however, taken a very realistic view of this matter in / . K. Wollen Manufacturers v. C.I.T.,M) Here the assessee was carrying on the business of manufacture and sale of blankets. It paid to its general manager salary of Rs. 1,000 p.m. plus twelve and half percent to twenty-five per cent commission on net sales, and claimed deduction for this. The high rate of remuneration was being given because of his special knowledge and interest in the business. The income-tax officer reduced the amount of commission on the ground that it was excessive. This view was upheld even by the High Court. The Supreme Court revrsed the decision and following its previous decision in C.l.T. v. Walchand & Co.,31 held that the whole expenditure was allowable. It observed :

30. (1969) 72 I.T.R. 612. 31. (1967) 65 T.T.R. 381.



In applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be adjudged from the point of view of the business man and not of income tax department.^2

The Supreme Court in this case reiterated the view it had taken in Walchand case, which in our opinion is very sound. It is the assessee who should be the person to decide the question of expenditure he has to incur having regard to the nature of his business, and not the income-tax authorities, who have however, to judge whether the expenditure has been laid out 'wholly and exclusively' for business purposes.

VIII. DEPRECIATION ALLOWANCE—BALANCING CHARGE

In C.l.T. v. B. N. Kharwar;iA the Supreme Court, besides deciding about balancing charge, stressed the point that in a transaction the legal character prevailed over the substance of the matter. The assessee-firm which carried on the business of manufacturing, purchasing and selling cloth closed its manufacturing side and trans-iered its machinery to a private limited company in the share capital of which the partners of the firm had the same interest as they had in the assets and profits of the partnership. The income-tax officer brought to tax Rs. 40,743 being the excess realised over written down value of the machinery. But the tribunal held that the firm Transferred the machinery only with a view to carry on the business as a company rather than as a firm, and by such a transfer no profit could be deemed to have resulted to the firm. The High Court of Gujarat also decided in favour of the assessee. In the Supreme Court, the counsel for the commissioner contended that the assessee could not avoid the liability to be taxed in respect of the excess realised over the written down value of the machinery sold by the firm on the plea that the "substance of the transaction which resulted in the transfer of the rights of the firm was of a nature of a step to re-adjust the business relations of the partners inter-se." The Court while agreeing with this expressed its disapproval of the decisions of the Bombay,84 Calcutta,35 Keralasn and Madras37 High Courts, wherein it was held that in all transactions

32. Supra note 30 at 616. 33. (1969) 72 I .T.R. 603. 34. Rogers and Company v. C.l.T., (1958) 34 I .T.R. 336. 35. C.l.T. v. Mttgneerana Ban»ur & Company, (1963) 47 I.T.R. 565. 36. C.I.T. v. Morning Star Bus Service, (1963) 49 I.T.R. 927. 37. M. C Cherian v. C.I.T., (1964) 51 I .T.R. 631.



vvhich come up for consideration in a taxing statute one has to look at the real nature of the transaction and not at the legal form. The Supreme Court was of the view that the taxing authorities cannot ignore the legal character of the transaction which is the source of receipt and proceed on what they regard as "the substance of the matter". The Court further observed :

1 he taxing authority is entitled and is indeed bound to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the device and to determine the t'ue charcter of the relationship But the legal effect of the transaction cannot be displaced by probing into the "substance of the tiansaction.^

In the present case there was a transfer of machinery by a firm to a company, and the legal effect of the transaction was to convey for consideration the rights of the firm in the machinery to the company. The company was a separate legal entity as distinct from the firm. The transaction resulted in a profit to the firm, the tax on which could not be avoided despite the fact that the interest of the partners in the machinery was substituted by an interest in the shares of the company which owned the machinery. However, as the tribunal had not recorded any finding as to whether the transfer was in the nature of sale, and under the law excess over written down value could only be brought to charge if there was a sale, the Supreme Court remanded the case to the tribunal to decide in the light of observations made by it. In l.R. v. Fisher's Executors,^ Lord Shaw had remarked :

Tt is incorrect. in principle to attempt to get behind that transaction, legal and competent and regular in from and to endeavour to construct a canon of liability to Income Tax out of conjecture as to the motive or scheme for the defeat of the Revenue which unde lay its various stages

The opinion of the Supreme Court was also in consonance with this. The Court drew a distinction between those transactions where the legal relation was clear and those where some .device had been used to cloud the legal relations. In the former case the income-tax authorities have no power to go behind the transaction and find out the substance of the matter, while in the latter they can try to rip open the device to find out the true legal relations, but once having found that out, they cannot again go into the "substance of the transaction/' However, in a subsequent case, the Supreme Court

38 Supra note 33 607. 39 (1924) 10 T C 302, 306, (H.L.)


LA W OF INCOME TAX 65

went a step further, and held that though the legal relationship in a transaction was clear, yet if a device was used to evade the taxes, the income tax authorities were entitled to pierce the veil and look at the "substance of the transaction" to find out the true nature of the transaction.40

IX. ASSESSMENT OF INCOME FROM TRUVST PROPERTY

In C. R. Nagappa v. C.l.T.,n the assessee created trusts after transferring certain properties to his minor children, by seven separate deeds. He, his wife and his daughter were the trustees. A portion of the income from the trust properties was to be utilised lor the benefit of the minor children and the rest was to be accumulated. The income-tax officer included that income from the tiust property, which was utilised for the benefit of the minor children, in the income of the settlor i.e. the father. The commissioner ordered that the entire income from the trust property be included in the income of the father and taxed in his hands. The tribunal and the High Court of Mysore concurred in with this view. Before the Supreme Court, the counsel for the assessee contended that the income-tax officer was bound to assess the income under each deed of trust separately in the hands of the trustees as "representative assessee", as it was not permissible to assess the income in the hands of Nagappa or of the beneficiaries.42 The Court held that it was implicit in sub-section (1) of section 161 that the income-tax officer may assess a representative assessee as regards income in respect of which he is the representative assessee, but he is not bound to do so. He may assess either the representative assessee or the person represented by him. Hence the income from the trust properties could be included in the income of Nagappa. But if the income from the trust property has been included under section 64 (V) in the income of Nagappa, it cannot be brought for the purpose of assessment to tax in the total income of the minor children or of the trustees to whom it is transferred.

X. CARRY FORWARD AND SET OFF The conditions laid down in the provision in the Income-tax

Act for the carry forward and set off of losses sustained in business are capable of different interpretations and this has consequently

40. Juggilaf Kunudapat v. C.l.T., supra note 15. 41. (1969) 73 I.T.R. 626. 42. See & 161 of the Income-tax Act, 1961.



led to a lot of litigation. Only two cases decided by the Supreme Court in 1969 are given as illustrations of the fact that it is high time the relevant provisions were made more clear by the legislature.

In Hoogly Tiust (Pvt.) Ltd. v. C.l.T.4i the assessee was carrying on several businesses, among which were the business of cloth and a general section. The assessee sustained loss in J 953-54 and 1954-55 in the cloth business, which he wanted to carry forward and set off during the following years against the profits of the general section. The income-tax officer refused to allow this on the ground that the losses in those years arose out of cloth business which was different from the business carried on by the assessee in the later years and the cloth business was not carried on during the accounting year relevant to the assessment years 1955-56 and 1957. On appeal the appellate assistant commissioner affirmed the order of the income-tax officer. He found that the assessee acted as the distributing agent of the government for the distribution of cloth and cement and the mode of carrying on that business was altogether different from his ordinary business; besides, there was a separate staff for the work and a separate overdraft with the bank, for the cloth business. The tribunal however, found that these businesses did not constitute separate businesses and that there was sufficient evidence of dovetailing. The High Court relied mostly on the facts found by the appellate assistant commissioner and relying on the test laid down by the Bombay High Court in Manilal Dehyabhai v. C.I.T.44 decided that the two businesses were distinct and hence no set off could be allowed. On appeal the Supreme Court reversed the judgement of the High Court. It followed its previous decision in C.l.T. v. Prithvi Insurance Co. Ltd.47' wherein the lest laid down by Rowlatt J. in Scales v. George Thompson and Co. Ltd.,4(i was approved; that test being, whether there was any interconnection, any inter lacing, any inter-dependence, any unity at all embracing those two businesses. The Court found that there was sufficient inter-connection between the two businesses of the assessee to term it the "same business" and hence the set off should be allowed. The Supreme Court emphasized that the High Court was in error in not accepting the finding of facts by the tribunal and "it was not open to the

43. (1969) 73 I .T .R. 685. 44. (1969) 37 I .T.R. 398. 45. (1967) 63 I .T .R. 632. 46. (1927) 13 T .C . 83.


LA'W OF INCOME-TAX 61

High Court to accept the findings of the appellate assistant commissioner in preference to those given by the tribunal or to come to any independent conclusion itself on facts."

Section 24 (2) (ii) of 1922 Act, corresponding to section 72 (1) (i), 1961 Act, has laid down that in order to get the benefit of carry forward of loss of the business of one year in the following year, it is essential that the same business must be carried on in the following year. The Supreme Court in C.l.T. \. A. D. Reddy,47 held that same business does not mean that it should be carried on by the same concern; it is enough if the 'same business' is carried on by another concern in which the person who has sustained the loss is a partner. In this case the assessee was carrying on business in 'bidi' leaves through two registered firms of which he was a partner. He sustained a loss in one firm which was dissolved. The assessee sought to set off the loss sustained in one firm out of the profits of the other firm. The income-tax officer rejected this claim on the ground that the "same business" was not continued in the following year as the firm in which the loss was sustained had been dissolved. The tribunal and the High Court held that if the same person who suffered the loss is carrying on the same business in partnership with others, it is the "same business" within the meaning of section 24 (2) (ii) of 1922 Act. The Supreme Court concurred in with this view.

XL PROVISIONAL ASSESSMENT

The question whether an enquiry can be made, carrying forward and set off of loss disallowed and advance tax demanded on the basis of a provisional assesment was tackled by the Supreme Court in laipur Udyog L%td. v. C.l.T >* A company submitted returns and claimed a loss of earlier years. The income-tax officer made a provisional assessment and disallowed the losses claimed by the company. A demand note for additional payment and penalty was sent to the company, and an advance tax based on the provisional assessment, was also sought to be levied. The High Court confirmed this, while the Supreme Court reversed the judgement. It held that is was not open to the income-tax officer in a provisional assessment to reject or ignore the claim of the company for carrying forward and set off of losses and therefore the provisional assess-

47. (1969) 73 l .T .R 751.

48. (1969) 71 l .T.R. 799.



ment was invalid. Because of this invalidity, the advance tax sought to be levied was also invalid. The Court observed :

The scheme of Section 141 (1961 Act) is to call upon the assessee to pay tax provisionally at the appropriate rate on what he admits is his taxable income... .The section does not permit an enquiry to be made whether the total income returned by he assessee exceeds the amount admitted by him, nor whether the allowances or deductions claimed by him are admissible. If there be a discrepancy between the return made and the accounts and documents accompanying the return, the Income-tax Officer may ask the assessee to explain the discrepancy, but he must make a provisional assessment on the basis of the return initially made or clarified and the accounts and documents field. He cannot make a provisional assessment by holding that ce tain claims made by the assessee are in law unjustified. If it transpires that the assessee has without reasonable cause concealed particulars of his income or furnished inaccurate particulars of his income, it may be open to the Income-tax Officer to impose penalty upon him after the regular assessment is completed. But it is not open to him to dete mine whether there has been any concealment of particulars of income or to decide whether claims which have been made are unwarranted.4**

XII. TAXING OF UNEXPLAINED CASH-CREDITS

When there is an unexplained cash-credit, it is open to the income-tax officer to hold that it is the income of the assessee and no further burden lies on the income-tax officer to show that the income is from any particular source. It is for the assessee to prove that even if the cash credit represents income, it is income from a source which has already been taxed. To Supreme Court expressed this view in C.l.T. v. Devi Vishwanaih Prasad?"

XIII. REASSESSMENT—INCOME ESCAPING ASSESSMENT

In BaJchand v. Income-tax Officer,™ after the appellant had been assessed to tax under section 23 (3), 1922 Act, for the assessment year 1945-46 and 1946-47, the income-tax officer issued a notice under section 34 of the Act, on June 24, 1959, and in its preamble he mentioned that he had reason to believe that assessed income for the assessment years 1946-47 and 1945-46 had escaped assessment and therefore he proposed to assess this income. In the notice, however, it was clearly mentioned that the assessee had to file a return for his total income assessable for the year ending March 31, 1946. The assessee consequently filed a

49. Id. at 805. 50. (1969) 72 l .T.R. 194. 51. H969) 72 l .T.R. 197.



return for the assessment year 1946-47. He was informed that he was required to file a return for 1945-46 and he did so on March 22, 1960, admitting that he had "misunderstood" the notice under section 148, 1961 Act, in respect of assessment year 1946-47. Thereupon the assessee moved the High Court for an order quashing the notices issued in June, 1959 and March, 1963 claiming that (1) the initation of reassessment proceedings pursuant to the notice dated June 24, 1959 for the year 1945-46 was incompetent, and (ii) so long as the return submitted by the assessee in August, 1959 for 1946-47 was not considered and disposed of, the income-tax officer was not competent to issue a notice for that year either under section 34, 1922 Act, or section 148, 1961 Act. The High Court rejectd the petition. On appeal to the Supreme Court, the Court while affirming the decision of the High Court, held that the negligence in drafting the preamble to the notice dated June 24, 1959 did not affect the validity of the notice, as the assessee had clearly been informed that he had to file a return of income assessable for the year ending on March 31, 1946. The Court was of the view that the assessee could not file a voluntary return after the original assessment under section 23 (1922 Act) was completed, and that the return filed on August 17, 1959 did not deprive incqme-tax officer of his jurisdiction to initiate reassessment proceedings in respect of the assessment year 1946-47. The Income-tax Act does not provide for any machinery for dealing with voluntary returns filed by an assessee after assessment of the income for the year of assessment is complete. The principle laid down by the Supreme Court in C.l.T. v. Ranchoddas Karsondas5" and C.l.T. v. S. Raman Chettiar,™ which said that the income-tax officer should not ignore a voluntary return filed by an assessee and issue a notice of reassessment, cannot be applied to this case, because of the different facts involved here.

The case of J. P. lani, I.T.O. v. Induprasad Devishanker Bhatt,rA

decided the point that the income-tax officer cannot issue a notice under section 148, 1961, in order to reopen the assessment of an assessee in a case where the right to reopen the assessment was barred under the 1922 Act at the date when the new Act came into force. The relevant section in the new Act cannot be construed to revive a right which has been barred under the old Act. Tt is a well-known principle of the interpretation of statutes that unless

52. (1959) 36 I.T.R7~569. 53. (1965) 55 l .T.R. 630. 54. (1969) 72 l .T.R. 595.



there is necessary implication retrospective operation should not be given to the statute, so as to affect, alter or destroy any right already acquired or revive any remedy already lost by efflux of time.

XIV. LIABILITY OF AGENT OF A NON-RESIDENT

When a resident is appointed as an agent of a non-resident under the Income-tax Act, the agent's liability is only for the year for which he is so appointed. The income-tax officer will have to give notice for each assessment year to the person concerned if he intends to treat him an agent. This was the Supreme Court's view in H. L. Sud, I.T.O. v. Tata Engineering and Locomotive Co. Ltd.™

XV. LIABILITY OF PARTNER

In the two cases mentioned below the Supreme Court decided the extent of liability of a partner in a registered firm and an unregistered firm.

A partnership firm an important entity for doing business, The Income tax Act devotes special attention to the taxation of a partnership firm. Firms can either be registered or unregistered and the mode of taxing them is different.

In Kalva Suryanarayana v. Income Tax Officer,^ a partnership was formed to carry out a contract in 1949-50; after completion of the contract the partnership came to an end. For the assessment year 1951-52 the partners of the dissolved firm applied for registration of partnership under section 26 A, 1922 Act, which was granted. The liability of the four partners was notified and increased by the commissioner under his revisional powers. Two partners paid the tax while the other two did not pay. The income-tax officer sought under section 44, to recover the unpaid tax from the two partners who had already paid their share. The High Court affirmed this. The Supreme Court on appeal, reversed this decision and held that once the liability to pay tax has been distributed, as in the case of a registered firm, the pertners cannot be made liable for those who have not paid. Under the scheme of the Income-tax Act, in the case of a registered firm, tax is assessed individually against each partner and no tax is payable by the partnership and therefore, the principle of joint and several liability has no application. This rule is also applicable to a case where after the discon-

55. (1969) 71 I T R. 457. 56 (1969) 71 I T.R. 422.



tinuance of the business of a firm and its dissolution, the firm is granted registration and the total income of the firm is apportioned and assessed in the hands of the partners.

In Sahu Rajeshwar Nath v. Income-Tax Officer^ the sole question for determination was that when a firm not registered under the Income-tax Act was assessed and a notice of demand was issued against that firm, whether a separate notice of demand was necessary against a partner of the firm if the tax assessed against the firm was sought to be recovered from that partner. The Court held that a separate notice was not necessary in such a case and the tax could be recovered from the partner; moreso as the partner admitted being a partner of the firm for the relevant accounting year.

XVI. RECOVERY OF TAX

An important point of law was decided by the Supreme Court in Kapur Chand Shrimal v. Tax Recovery Officer?* A Hindu undivided family committed default in making payment of the tax due. The income-tax officer issued a certificate for the recovery of the tax to the tax recovery officer. This officer had the karta of the hindu undivided family arrested and detained in a civil prison, treating him as the assessee. The karta filed a writ petition against this detention, but the High Court of Andhra Pradesh rejected it. The appeal to the Supreme Court was allowed and the Court held that the karta of a Hindu undivided family cannot be arrested for default of the family in payment of the tax. It was pointed out that though the karta or manger represents the family, he cannot be treated to be an assessee in default and be arrested or his personal property attached. The Court observed :

Under the Income-tax Act, 196l, a Hindu undivided family is a distinct taxable entity, apart from the individual members who constitute that family.. . . It is true that if properties of the family... are to be attached, proceedings may be started against the Hindu undivided family and the manager represents the family in proceedings before the Tax Recovery Officer. But by the clearest implication of the statute the assessee alone may be deemed to be in default for non-payment of tax, the liability to arrest and dentention on failure to pay the tax due is also incurred by the assessee alone. The manager, by virtue of his status, is competent to represent the Hindu undivided family but on that account he cannot for the purposes of section 222 of the Act of 1961, be deemed to be the

51. (1969) 72 l .T .R. 617.

58. (1969) 72 l .T .R. 623.


:2 ANNUAL SURVEY OF INDIAN LAW 1969

assessee when the assessment is made against the Hindu undivided family and the certificate for recovery is issued against the family.59

This judgement of the Supreme Court makes is impossible for the income-tax authorities to take action against a delinquent Hindu undivided family which fails to pay the tax and also does not have property or assets to be attached in lieu of the tax due. Since the Hindu undivided family has a separate legal entity for income tax purposes, apart from its members, the members cannot thus be arrested or detained for non-payment of tax by the Hindu undivided family. The income-tax authorities are thus reduced to the position of spectators in such a case. This is a serious lacuna in the law, especially when section 179 of the 1961 Act specifically renders the directors of a private company in liquidation, jointly and severally liable for the payment of tax which cannot be recovered from the assets of the private company in liquidation. After all, the Hindu undivided family is composed of its members, who should be made liable for the tax due from the Hindu undivided family. The Court has taken, a correct view of the laws it stands today, it is now left to the law-makers to take note of this decision and plug in the loophole at the earliest opportunity.

XVII. POWERS OF APPELLATE TRIBUNAL

The powers exercised by the appellate tribunal in appeal have been the subject of review by the Supreme Court in a number of cases. In two such cases decided by the Court in 1969, it further clarified the position with regard to two aspects of this matter.

The assessee, in Income-lax Officer v. M. K. Mohammed Kunkhi,™ was held liable and penalties were imposed on him under section 271 (1) (c) read with section 272 (2) of the 1961 Act for concealment of particulars of income and furnishing inaccurate particulars. The assessee preferred appeals to the appellate tribunal and made an interim prayer for stay of collection of penalties imposed. The tribunal declined to order any stay holding tbat it had no power to grant such a prayer. The High Court on being moved under article 226 of the Constitution held that the tribunal had this power since it was incidental and ancillary to its appellate jurisdiction. The Supreme Court on appeal agreed with this view. The Income-tax Act in sub-section (6) of section 220 provides that an income-tax officer in his discretion may treat the assessee

59. Id. at 627-628. 60. (1969) 71 l .T .R. S15.


LAW OF INCOME TAX 73

as not being in default, when the assessee has preferred an appeal to appellate assistant commissioner under section 246. The appellate tribunal has not been given specific powers in this respect under the Act. However Mr. Justice Grover who delivered the judgment observed :

Section 255 (5) of the Act does empower the Appellate Tribunal to regulate its own procedure, but it is very doubtful if the power of stay can be spelt out from that provision. In our opinion the Appellate Tribunal must be held to have the power to grant stay as incidental or ancillary to its appellate jurisdiction. This is particularly so when section 220 (6) deals expressly with a situation when an appeal is pending before the Appellate Assistant Commissioner, but the Act is silent in that behalf when an appeal is pending before the Appellate Tribunal. It could well be said that when section 254 confers appellate jurisdiction, it impliedly grants the power of doing all such acts, or employing such means, as are essentially necessary to its execution and that the statutory power carries with it the duty in proper cases to make such orders for staying proceedings as will prerent the appeal if successful from being rendered nugatory.61

The Court referred to some authoritative works on construction and interpretation of statutes,**2 to support its stand. It sought to dispel the apprehension which would arise in the minds of the Income tax authorities, on account of this judgment in that if the appellate tribunal has the power to stay recovery of taxts and penalties as a matter of course, the revenue would be put to a loss by the in-ordinate delay in the disposal of appeals by the appellate tribunal. The Court also pointed out that this power Would be exercised only in "most deserving and appropriate cases" and not in & routine manner. The Court's judgment has taken into account the practical difficulty which would arise in such cfcses, especially when the appeal is decided in favour of the assessee and in the meantime the recovery proceedings &re continuing. However, it is submitted that the process by which the conclusion was reached was against the norms and conditions in interpretating a taxing statute. It has been repeatedly held that in a taxing statute one has to look only at the language which is used. Mr. Justice Rowlatt in Cape Brandy Syndicate v. I.R., had observed ;

In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in.

61. Id. at 822. 62. Sutherland, 3. G. Statues and Statutory Construction 18-23 (3rd ed.

1943) and Maxwell on Interpretation of Statutes 350 (11th ed. 1962).



nothing is to be implied. On can only look fairly at the language used.63

again, Lord Simonds had said in Wolfson v. LR. It is not the function of the court of law to give, to words a sLained and unnatural meaning because only thus will a taxing section apply to a transaction which had the legislature thought of it, would, have been covered by appropriate words.64

Justice Bhagwati had also pointed out in / . Fernandez v. State of Kerala:

If . . . , the case is not covered within the four corners of the provisions of the taxing statute, no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the legislature and by considering what was the substance of the matter.65

The Supreme Court in the present case has tried to *'probe into the intentions of the legislature" when it said : "It is difficult to conceive that the legislature should have left the entire matter to the administrative authorities to make such orders as they choose to pass in exercise of unfettered discretion." The Income-tax Act gave no such powers to the appellate tribunal which the Court has assumed that the tribunal was deemed to possess by implication. The process of implication if carried further, will lead to confusion in interpreting a taxing statute. The Court must be guided in a matter by the wordings of the section, and not by the consequences which will follow.06 Here the Court has taken into consideration the consequences which will result from its decision. Though the Judgment is beneficial to the tax-prayers, it is not to be judged by that yardstick.

The seconrj case of C.l.T. v. Manick Sons,67 involved the power of the appellate tribunal (in appeal) to adopt any method of assessment it liked,, in appeal. The Supreme Court held that the tribunal had wide judicial powers, which must be exercised in respect of matters that arise in appeal and according to law. It cannot assume powers which are inconsistent with the express provisions of the Act or its scheme. The method of assessment adopted by the tribunal in this case was not proper and it had exercised powers which it did not possess.

63. (192U 12 T.C. 358, 366 as referred to and approved by the House of Lords in Canadian Eagle Oil Co. Ltd. v. The King, (1945) 27 T.C. 205, 248.

64. (1949) 31 T.C. 141, 169 (H .L . ) . 65. A I R . 1957 S C. 657, 661. Emphasis added. 66. See statement of Lord Poiter in, Indian Iron and Steel Co. Ltd. v.

C.LT., 1943 l .T .R . 328, 329 (P .C . ) . 67. (19690 74 l .T .R. 1.



XVIII. POWERS OP THE HIGH COURT

The issue concerning the powers of the High Court on reference, especially its right to make alterations and additions in the ca^e as stated by the appellate tribunal, has been a vexed question. The Supreme Court on a number of occasions63 had to demarcate the limits of the power the High Court prossessed under section 66 of the 1922 Act, corresponding to section 256 1961 Act. Two important decisions were given by the Supreme Court in this area, in 1969.

in C.l.T. v. Imperial Chemical Industries,™ the Supreme Court reiterated its earlier view that the High Court was not a court of appeal in a reference under section 66 (1) and thus it was not open to it to embark upan a reappraisal of the evidence and to arrive at findings of fact contrary to those of the appellate tribunal. Its function was to answer the question of law in the context of the facts found by the appellate tribunal. In Lakshmi Ratan Cotton Mills Co. Ltd. v. C.l.T.70 the power of the High Court under section 66 (1) was further delineated. The tribunal had referred a case to the High Court of Allahabad under section 66 (1). The assessee was, however, not satisfied with this statement and it applied to the High Court to call for additional statements on questions, not referred to in the application. The High Court called for such additional statements under its purported jurisdiction under section 66 (4).71 After the tribunal submitted the second statement and then the High Court came to the conclusion that it did not have the powers it had exercised. On appeal to the Supreme Court, the High Court's view was upheld. It was pointed out that the High Court could act under section 66 (4), only when it was not satisfied with the statement of the case referred to it under sub-section (i) and (2) of section 66 and the lacts were not sufficient to enable determination of the question raised thereby. In such case the Court could under section 66 (4) refer the case back to the appellate tribunal to make such additions or alternations as the Court desired. However, as Mr. Justice Shah observed :

6S. Two such cases, Pctlad Turkey Red Dye Works v. C.l.T. (1963) 1 S.C.J. 248 and Guru Estate v. C.l.T., (1963) 1 S.C.J. 372 were reviewed by the author in "Annual. Survey—Income tax," 6 J.I.L.L 522 (1963-64).

69. (1969) 74 l .T .R. 17. 70. (1969) 73 l .T .R. 634. 71. Corresponding to § 258 of the 1961 Act.



Section 66 (4) does not enable the High Court to raise a new question of law which does not arise out of the Tribunal's order and direct the Tribunal to investigate new and further facts necessary to detcjmine this new question which had not been referred to it under Section 66 (1) or 66 (2) and direct the Tribunal to submit a supplementary statement of case. This power and ju isdic-tion which is rested in the High Court is to be exercised within the four corners of Section 66.72

XIX. PROSECUTION FOR FALSE STATEMENT

In T. S. Baliah v. T. S. Rangachari, Income-tax Officer,73 the Supreme Court decided an interesting point which involved three statutes, namely, the Income-tax Act, 1922, the Income-tax Act, 1961 and the Indian Penal Code, 1860. The assessee was a cinema actor, who made a false statement in the return filed by him. The income-tax officer at the instance of the appellate assistant commissioner proceeded against him under section 52 of the Income-tax Act, 1922,74 as well as section 177 of the Indian Penal Code, I860, both of which provide for the punishment of a person who knowingly makes a false statement. The assessee raised two preliminary objections to the prosecution proceedings : (1) Prosecution proceedings cannot be started under two sections for the same offence and the two sections cannot stand together; (2) By repeal of the 1922 Act, the right to prosecute under that Act is also lost, and this prosecution is not expressly saved by section 297 (2) of the 1961 Act. The Madras High Court rejected both the objections and the Supreme Court took the same view. Regarding the first objection it took the view that two seperate provisions for the prosecution of a person for the same offence may stand together, unless one provision is inconsistent with the other. Though a trial may be made of the offender for the same offence simultaneously under both the provisions, but punishment cannot be awarded twice for the same offence by virtue of section 26 of the General Clauses Act. The provisions enacted in section 52 of the 1922 Act did not alter the nature and quality of the offence enacted in section 177 of the Indian Penal Code, 1860 but it merely provided a new course of procedure for what was already an offence. "In a case of this description the new statute is not regarded as superseding nor repealing by implication the previous law, but as cumulative." On the second objection of the assessee, the Court held that when an enactment is repealed and a new Act takes its place, unless the

72. Supra note 70 at 646. 73. (1969) 72 l .T.R. 787. 74. Corresponding to § 277 of 1961 Act.



new Act expressly or impliedly so states, the rights and liabilities which have accrued under the repealed Act, are saved by virtue of section 6 (e)75 of the General Clauses Act, 1897. Thus the proceeding for the prosecution of a person can be started under the 1922 Act, and even though that Act is repealed, the proceeding will continue, since there is nothing to the contrary in the 1961 Act, and section 6 (e) of the General Clauses Act, 1897 which will apply to such a case. The Court again took into consideration the "intention of the Parliament" and observed :

Having examined the provisions of clause (2) of Section 297 of the 1961 Act we are of the opinion that it is not the intention of the parliament to take away the right of instituting prosecution in respect of proceedings which are pending at the commencement of the Act. It is true that there is no express sub-clause in section 297 (2) of the 1961 Act which provides for the continuation of such proceedings but our concluded opinion is that Parliament did not intend section 297 (2) of the 1961 Act to be completely exhaustive and in regard to such matters as are not expressly saved by section 297 (2) of the 1961 Act the provisions of section 6 (e) of the General clauses Act will apply.76

Since the Parliament did not make an exhustive list of savings in section 297 (2) the Court presumed that the Parliament did not intend to take away the right to launch prosecutions in those proceedings which were pending before the commencement of the 1961 Act. As has already been pointed out in earlier case, the tendency of the Supreme Court to presume and read in the Income-tax Act, something which is not there, simply on the basis of the "intention of the Parliament" does not seem to be correct. In this case since there is no express saving of the relevant provisions of the 1922 Act dealing with institution of proceedings for false statement it just cannot be presumed that the legislature had 'intended' it to be saved. It is submitted the Court has erred, in reading in the 1961 Act a provision which the legislature would have put in

75. § 6 (e) of the General Clauses Act, 1897, is as follows: Where this Act or any Central Act or Regulation made after the commencement of this Act repeals any enactment hitherto made or hitherto to be made, then unless a different intention appears, the repeal shall not affect any investigation, legal proceeding or remedy in respect of any such right privilege obligation, liability, penalty, forfeiture or punishment as aforsaid; and any such investigation, legal proceeding or remedy may be instituted, continued or enforced and any such penalty forfeiture or punishment may be imposed as if the repealing act or regulation has not been passed. 76. Supra note 73 at 793.



if it had so desired. All the same in view of the provisions of section 6 (e) of the General Clauses Act, 1897 the decision given is correct.

The foregoing analysis not only shows the apathy of the government towards having a stable income tax law, but it also indicates that the Supreme Court is continuing to adopt the right approach in deciding the Income tax cases, which are on the increase each year.


Law of Income-Tax14.139.60.114:8080/jspui/bitstream/123456789/3240/1/037... · 2016. 8. 25. · ing of income-tax rates on the slabs of income from Rs. 10,000 to Rs. 20,000, (2) the

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