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PETITIONER: THE COMMISSIONER OF INCOME-TAX,MADHYA PRADESH AND BHOPAL

       Vs.

RESPONDENT: MESSRS.  VYAS & DOTIWALA

DATE OF JUDGMENT: 03/10/1958

BENCH: SARKAR, A.K. BENCH: SARKAR, A.K. AIYYAR, T.L. VENKATARAMA GAJENDRAGADKAR, P.B.

CITATION:  1959 AIR   90            1959 SCR  Supl. (1)  39  CITATOR INFO :  R          1961 SC1261  (7)

ACT:        Income-tax-Assessees  financing cloth  distribution  scheme-        Profits, if accrue to assessees-Agreement to utilise Profits        for   charitable  Purposes-Such  Profits,  if  exempt   from        taxation-lndian  Income-tax Act, 1922 (XI Of 1922), s.  4(3)        (i-a).

HEADNOTE: 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 6-1/4%  of  the  ex-mill price.   The Deputy Commissioner paid 4-1/2% of the  ex-mill price  to the asses-sees 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  they 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.

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Held further, that the profits were not exempt from taxation under  s.  4(3) (i-a), as the business was  not  carried  on behalf of any religious or charitable institution.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 222 of 1956. 40 Appeal  by special leave from the judgment and decree  dated December  8, 1953, of the former Nagpur High Court in  Misc. Civil Case No. 55 of 1950. C.   K.   Daphtary,  Solicitor-General  of  India,   K.   K. Rajagopala  Sastri,  R.  H. Dhebar and  D.  Gupta,  for  the appellant. 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 &  Dotiwala. 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  came up before the Appellate Tribunal they were consolidated 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 standard 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 41 of the cloth were to be financed.  The orders for the  cloth were  to be placed by the Government with the mills  and  on the arrival of a consignment of cloth, the assessees were to pay  to the Deputy Commissioner, Amraoti, the value  of  the consignment  together  with 6-1/4 per cent. of  the  ex-mill price.   The consignment was thereupon to be opened and  its contents  checked  by the assessees and  the  officials  and delivered  to the assessees on their granting a receipt  for the same.  The Deputy Commissioner would pay 4-1/2 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 percent. 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  control  of  the

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Deputy  Commissioner  who made himself  responsible  to  the assessees   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 1946-47 as profits earned in working the  scheme.  The Income-tax Officer assessed the  assessees to tax on the profits so earned. 6 42 The  assessment orders made by this officer would appear  to show  that the only point urged by the assessees before  him against  the assessment was that the income was exempt  from taxation  under s. 4(3)(i-a) of the Indian  Income-tax  Act, 1922.  The officer rejected this contention.  The  assessees went  up in appeal to the Appellate Assistant  Commissioner, before  whom  the  same -contention  appears  to  have  been 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 Dot 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  earlier referred to. The Appellate Tribunal agreed with the  conten- tion 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 Deputy 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.  In 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  standard cloth; and, if  so  whether  such income was assessable in their hands. 43 On  that  reference  the  High Court  held  that  under  the charging section in the Indian Income-tax Act, 1922, namely, s. 4, it was necessary for the revenue authorities to  prove that  the  assessees received or should be  deemed  to  have received  income  or  profit  from  the  scheme  during  the relevant period.  It held that the asseess had not  actually received  any such income and further that the expression  "

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deemed to be received " in that section only meant deemed by the  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 Solicitor-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 assesses.   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 assessees 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 indicate 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 by   the  assessees.   Again  the  claim,  may  be  in   the alternative, by the assessees for exemption under s. 4(3)(i- a)  would not arise unless the assessees were carrying on  a business.   Lastly,  para. 14 of the scheme which  we,  have earlier set out, clearly contemplates profits resulting from the scheme.  The provision that the profits would be devoted to  charity to be decided by the Deputy Commissioner,  would indicate  that  without  it  the  profits  would  have  been utilisable  by the assessees.  The profits belonged  to  the assessees and hence the necessity for this agreement so that the  assessees might be made to spend them on charity.   If, as the Tribunal 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 the working of the  scheme produced  profits  and  apart from  para.  14  such  profits undoubtedly  belonged  to the assessees.  If they  chose  to agree by para. 14 to devote the profits to charity, that was their  business; the profits made 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 assessees had undertaken not  to  make  any profits on the distribution work under the scheme; they  had only  agreed  to finance the scheme  without  receiving  any interest  or  profit.   Furthermore,  since  the   assessees actually  made  the  profits, they are  liable  to  pay  tax thereon whether they agreed not to make any profits or  not. We wish also to point out that it is not the assessees’ 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 are liable to pay  tax on them.

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With  regard to the assessees’ claim for exemption under  s. 4(3)(i-a), they are clearly not entitled to any.  That claim of the assessees 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 45 is applied solely to the purpose of the institution and  the business is carried on in the manner provided.  It is enough to  say that the scheme, considered as a business,  was  not carried  on  on  behalf  of  any  religious  or   charitable institution.   Once it is held that the assessees  made  the profit, how they use it would not matter. In  the result, we would answer both parts of  the  question framed,  in-the affirmative.  We hold that the profits  were the income which accrued to the assessees 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.