COMMISSIONER OF INCOME-TAX, EXCESS PROFITS TAX, HYDERABAD, vs V.…

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PETITIONER:

COMMISSIONER

SUPREME COURT OF INDIA

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,

and

10(2)(xv)--Decision

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).

..............................

(2) No order of assessment under section

23 or of assessment or re-assessment under

sub-section (1) of this

section shall be made after the expiry, in any

case to which clause (c) of sub-section (1)

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

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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SUPREME COURT OF INDIA

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.

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.

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. Page 7 of 9 http://JUDIS.NIC.IN SUPREME COURT OF INDIA 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. 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 Page 8 of 9 http://JUDIS.NIC.IN SUPREME COURT OF INDIA 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 Page 9 of 9

COMMISSIONER OF INCOME-TAX, EXCESS PROFITS TAX, HYDERABAD, vs V. JAGAN MOHAN RAO & ORS. on 31 July, 1969