The Commissioner of Income-tax, Madhya Pradesh and Bhopal v. Messrs. Vyas & Dotiwala

(1) S.C.R. SUPREME COURT REPORTS 39 THE COMMISSIONER OF INCOME-TAX, MADHYA PRADESH AND BHOPAL _October_ _3._ _v._ MESSRS. VYAS & DOTIW ALA (VENKATARAMA AIYAR, GAJENDRAGADKAR and A. K. SARKAR JJ.) _I ncome-tax-Assessees financing. cloth distribution scheme-Pro-_ _fits,_ _if accrue_ _to_ _assessees-Agreement to_ _utilise profits for charitable_ _purposes-Such profits, if exempt from taxation-Indian_ _Income-tax_ _Act,_ _r922_ (XI _of r922),_ s. _4(3)_ (i-a). The Deputy Commissioner of Amraoti, evolved a scheme for the distribution of standard cloth. The assessees agreed to finance the scheme without charging any interest and were appointed financiers and distributors. The orders for the cloth were placed by the Government with the mills and the cloth was delivered to the assessees upon their paying the value of the cloth together with 6!% of the ex-mill price. The Deputy Commissioner paid 4t% of the ex-mill price to the assessees for contingent expenses of working the scheme. The assessees distributed the cloth at prices fixed by the Deputy Commissioner through the Tehsildars and the Deputy Commissioner was responsible to the assessees for the sale proceeds receivable from the Tehsildars. Out of the sale proceeds the Deputy Commissioner paid to the assessees whatever thev had advanced on the cloth. The profits from the scheme were agreed to be utilised for such charitable purposes as might be decided by the Deputy Commissioner. The assessees contended that the income was not their income and that it was exempt from taxation under s. 4(3) (i-a) of the Income-tax Act. _Held,_ that the profits were income which accrued to the ; . assessees. The assessees worked the scheme and such working produced the profits. The fact of the control of the Deputy Commissioner could not prevent the working of the scheme by the assessees from being a business carried on by them. The provisions in the agreement that the Deputy Commissioner guaranteed the payment by the Tehsildars of the price due from them, and that the profits would be devoted to charity decided by the Deputy Commissioner and the claim for exemption under s. 4(3) (i-a) all indicated that the assessees were the owners of the business. _Held_ further, that the profits were not exempt from taxa - tion under s. 4(3) (i-a), as the business was not carried on behalf of any religious or charitable institution. CIVIL APPELLATE JURISDICTION: Civil Appeal No. 222 of 1956. 40 SUPREME COURT REPORTS . (1959] Supp. _1958_ Appeal by special leave from the judgment and _Th_ _c_ . . decree dated December 8, 1953, of the former Nagpur .; 1:,;::;'.;;;~· High Court in Misc. Civil Case No. 55 of 1950. ##### Madhya Pradesh Bh P 1 0- G K • • Da p1• 1ta ry, S oici l" "t or- G ene1a . l <! f [--', ... ia, · "· rT K • ; • _Rajagopala Sastri,_ _R.H. Dhebar_ and.D. _Gupta,_ for the _Mmrs._ _Vyas_ o;. appellant.. _**Dotiwala**_ The respondent did not appear. 1958. October 3. The Judgment of the Court was delivered by ###### SARKAR J.-This is an appeal brought by special leave against the judgment of the High Court at Nagpur, delivered on a reference under s. 66(1) of the Income-tax Act, The appeal is by the Commissioner of Income-tax, Madhya Pradesh and Bhopal. The respondents are the assessees Vyas & Dotiwa.la. The respondents have not appeared in this appeal. We shall presently set out the facts but before we do that, we wish to state that the assessment years concerned were 1945-46 and 1946-47. Though there were two separate assessment orders in respect of these years, ultimately when they ca.me up before the Appellate Tribunal they were conaolidated into one appeal. The appeal before us likewise concerns both these assessment years. ###### It appears that in or about July 1943 when considerable difficulty was being felt about cloth, the Deputy Commissioner, Amraoti, evolved a scheme to solve that difficulty. Under that scheme Kisanlal Vyas and a firm called Edulji Framji Dotiwala who have in these proceedings been referred to as Dotiwala, undertook to finance the scheme without charging any interest or profit and were appointed as financiers and also distributors of a variety of cloth called stardard cloth for the town and camp of Amraoti and ###### certain areas in the interior. It is not necessary to set out the various details of the scheme and it will be sufficient to state that Vyas and Dotiwala, who as an association of persons are the assessees concerned, agreed to open an account in the Imperial Bank of India to be operated by them out of which the purchases _**Sarkar**_ _]._ . ' _j._ # ' (1) S.C.R. SUPREME COURT REPORTS 41 of the cloth were to be financed. The orders for the _1_ _958_ ### cloth were to be placed by the Government with the Th c -. . ,, . l _e_ _**om1nissioner**_ mills and on the arrival of a consignment of cloth, t ie _of_ _Income-tax_ assessees were to pay to the Deputy Commissioner, _Madhya Prade;h_ Amra.oti, the value of the consignment together with _and Bhopal_ ###### 6l per cent. of the ex-mill price. The consignment was v. thereupon to be opened and its contents checked by _Messrs._ _Vyas_ & the assessees and the officials and delivered to the _Dotiwala_ assessees on their granting a receipt for the same. _Sarkar_ _1._ ###### The Deputy Commissioner would pay 4i per cent. of the ex-mill price to the assessees out of the amount paid by the latter as aforesaid for contingent expenses of working the scheme. The scheme provided that the contingent expenses were not to exceed 3 per cent. of the ex-mill price. The cloth coming to the hands of the assessees was to be distributed in Amraoti town and camp through a shop to be opened by the assessees and in the interiors of the area; concerned through Tehsildars with Patils under them. The substance of the arrangement of distribution appears to have been that it would be entirely under the co.ntrol of the Deputy Commissioner who made himself responsible to the a.ssessees for the sale proceeds receivable from the Tehsildars. The Deputy Commissioner was to decide the price for which the cloth was to be sold to the consumers and also the persons entitled to buy the cloth. Out of the sale proceeds the Deputy Commissioner was to pay to the assessees whatever they had advanced on account of the cloth. The most important provision in this scheme is para. 14 which is set out below. Profits resulting from the scheme shall be utilised for such charitable purposes as may be decided on by the Deputy Commissioner in consultation with the advisory committee appointed to supervise the scheme. ###### It appears that the books of the ·assessees showed Rs. 34,737/- for the assessment year 1945-46 and Rs. 17,682/- for the assessment year 1946-4 7 as profits earned in working the scheme. The Income-tax Officer assessed the assessees to tax on the profits so earned. 6 42 SUPREME COURT REPORTS [1959] Supp. _•958_ The assessment orders made by this officer would - \..- ' appear to show .that the only point urged by the ## T [•-] [ c ] [-. ][. ] - _omm1mon.,_ b fi h' - h h _of Income-ta_ assessees e ore 1m agamst t e assessment was t at _Madhya PrO:.sh_ the income was exempt from taxation under s. 4(3)(i-a) _a•d_ _Bhopal_ of the Indian Income-tax Act, 1922. The officer v. rejected this contention. The assessees went up in _Mess•s._ _Vy"'_ .s. appeal to the Appellate Assistant Commissioner, _**Dotiwala**_ b £ h e ore w om the same contention appears to have been _Sarhar 1 ._ repeated. The Appellate Commissioner confirmed the order of the Income-tax Officer. The assessees then appealed to the Appellate Tribunal. The Tribunal held that the assessees had objected to the assessment before the Income-tax Officer on two grounds, namely, that the income was not the income of the assessees and that the income was exempt from taxation under s. 4(3)(i-a), as appeared from their letter dated January 22, 1947. One of these alone had been dealt with by that officer, as appears from his order ear1ier referred to. The Appellate Tribunal agreed with the contention of the assessees that they were not liable to be taxed on the profits because these did not form their income. The Tribunal was of the view that the scheme was the scheme of the Deputy Commissioner and completely under his control ; that the assessees were merely the financiers and also managers under the peputy Commissioner to carry out the scheme and that the assessees only helped to work the scheme. The Tribunal held that the profits that may have resulted from such working were not therefore theirs nor represented their income and the assessees could not be assessed to income-tax thereon. Ill this view of the matter the Tribunal set aside the orders of assessment. Thereafter, on the application of the revenue authorities the Tribunal referred the following question to the High Court under s. 66(1) of the Act: Whether on the facts of this case any income accrued to Messrs. Vyas and Dotiwala as the result of their associating themselves as financiers in the ###### scheme for the distribution of stands.rd cloth ; and, if so whether such income was assessable in their hands. **(1)** S.C.R. SUPREME COURT REPORTS 43 On that reference the High Court held that under the _z958_ charging section in the Indian Income-tax Act, 1922, . - .. _s:_ h h _1 lie_ _Commissioner_ name y, 1 s. 4, it [. ] was necessary 1or t e revenue aut o- _11_ _n_ 1 ##### rities to prove that the assessees received or should be,:.,d,.;:• ;;a::~.,. deemed to have received income or profit from the _and_ _Bllopal_ ###### scheme during the relevant period. It held that the v. assessees had not actually received any such income _Messrs. Vyas_ <!>and further that the expression " deemed· to be _DoliUllilla_ received" in that section only meant deemed by the _Sarkar_ ;. provision of the Act to be· received, and no such provisions of the Act had been relied upon on behalf of the revenue authorities. In this view of the matter the High Court answered the question framed, in the negative. The learned :::lolicitor-General contends that the High Court failed to appreciate the real question. He says that the question was not whether income was received or deemed to be received but whether income had accrued and the point for decision was, as appeared from the judgment of the Tribunal, whether the profits formed the income of the assessees. We agree with this criticism of the judgment of the High Court. On the point that arises from the question framed, we think that the Tribunal went wrong. It is not disputed that the assessees worked the scheme and such working produced the profits as found in the assessment orders. The Tribunal thought that since the scheme was completely under the control of the Deputy Commissioner, the a.ssessees could not be said to have carried on business by working the scheme. We are unable to see that the fact of the control of the Deputy Commissioner can prevent the working of the scheme by the assessees from being a business carried on by them. In our view, it only comes to this that the assessees had agreed to do business in a. certain manner. The fact that the Deputy Commissioner guaranteed the payment by the Tehsildars of the price due from them, to the assessees would indi cate that the assessees were treated as the owners of ###### the business. It would indicate that if there had been no such guarantee, the loss due to the failure of the Tehsildars to pay their dues would have to be **borne** 44 SUPREME G'OURT REPORTS [1959) Supp. _1958_ by the a.ssessees. Again the claim, may be in the . . alternative, by the. a.ssessees for exemption under _Th',Comm•monu_ s. 4(3)(i-a.) would not a.rise unless the a.ssessees were _01_ _1_ _01_ _1ncome-tax,_ . b · L J 1 f h h _Madhya_ _Prad"h_ carry mg on a usmess. a.st y, pa.re.. 4 o t e sc eme _and Bhopal_ which we have earlier set out, clearly contemplates v. profits resulting from the scheme. The provision that _M""'·. Vyas_ .s- the profits would be devoted to charity to be decided _Dotiwala_ by the Deputy Commissioner, would indicate that _Sarkar_ _J._ without it the profits would have been utilise.hie by the a.ssessees. The profits belonged to the a.ssessees and hence the necessity for this agreement so that ·the a.ssessees might be made to spend them on charity. If, as the Tribune.I thought, the profits were of the Government, there was no necessity for the Government providing for the profits being expended on charity, for the Government if minded to do so, could . have done it without such a provision. The fact remains that t.he working of the scheme produced profits and apart from para. 14 such profits undoubtedly ##### belonged to the a.ssessees. If they chose to agree by pa.re.. 14 to devote the profits to charity, that was their business; the profits ma.de by them would not change their character and cease to be the assessees' income because they agreed to devote their income to charity. We might also say that there is nothing in the scheme which shows that the a.ssessees had undertaken not to make any profits on the distribution work under the scheme ; they had only a.greed to finance the scheme without receiving any interest or profit. Furthermore, since the assessees actually made the profits, they a.re liable to pay tax thereon whether they a.greed not to make any profits or not. We wish also to point out that it is not the a.ssessees' case that they have been made to pay out the profits for any charity. For these reasons we think that the profits were the profits of the assessees and they a.re liable to pay tax on them. With regard to the a.ssessees' claim for exemption under s. 4(3)(i-a.), they a.re clearly not entitled to any. That claim of the asse88ees has not been accepted by any of the Courts below. Section 4(3)(i-a) applies to income derived from business carried on on behalf of a. religious and charitable institution when the income (1) S.C.R. SUPREME COURT REPORTS 45 is applied solely to the purpose of the institution and _x95B_ the business is carried on in the manner provided. It _The Commissioner_ is enough to say that the scheme, considered as a _of Income-tax._ business, was not carried on on behalf of any religious _Madhya Pradesh_ or charitable institution. Once it is held that the _and Bhopal_ assessees made the profit, bow they use it would not v. matter. _Messrs. Vyas_ c;. _Doliwula_ In the result, we would answer both parts of the _Doliwula_ question framed, in the affirmative. We bold that the _Sarkar_ _J._ profits were the income which accrued to the a.ssessees and such income is assessable to income-tax and is not exempt from taxation under s. 4(3)(i-a). The appeal is allowed with costs here and below. _Appeal allowed._ SMT. INDERMANI JATIA _v._ COMMISSIONER OF INCOME-TAX, U.P., LUCKNOW (VENKATARAMA AIYAR, P. B. GAJENDRAGADKAR and _A._ K. SARKAR, J J) _Income-tax-Mercantile system of accounts-Accounts in_ _India_ _showing credit entry_ _of receipt of interest from Indian_ _State-If such_ _amount liable_ _to_ _tax-New point-Indian Income-tax Act._ _z9:z:z_ _(XI_ _of_ _z9:z:z),_ _s._ _4_ (I)(a). The assessee, who was ordinarily resident in British India, carried on ·business at Khurja and Aligarh in India and at Chistian in the Indian State of Bahawalpur. He kept a central set of accounts of the business at Khurja, which were maintained on the mercantile system. Under the said system credit entries are made in respect of amounts due immediately they become legally due and even before they are actually received. In his account books the income received by the assessee froll\ all sources was ~ shown, and the interest · account showed credit entries of amounts received as interest on capital invested in the shop at Chistian. The assessee conceded that as creditor he had the right to enforce the payment of interest in British India and that liability of the Chistian shop had been extinguished to the _October_ _3._