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Petitioner: CHHATRASINHJI KESARISINHJI THAKORE VS Respondent: COMMISSIONER OF INCOME TAXHonorable Justice CHAGLAN. A. Palkhivala, Hathi and Pandya,G. N. Joshi and R. J. Joshi
1963 P T D 989
1963 P T D 989
[Bombay, India]
Before S. T. Desai and V. S. Desai, JJ
CHHATRASINHJI KESARISINHJI THAKORE
versus
COMMISSIONER OF INCOME TAX
Income tax Reference No. 85 of 1957, decided on 14th April 1960.
Income---
-- Mining lease Amounts paid by lessee to lessor towards "local fund cess" Whole amount not payable as cess Whether amount collected is income of lessor.
A mining lease granted by the assessee's ancestors provided that the lessee shall pay the rents and royalty reserved by the lease at the time and in the manner provided and shall also pay and discharge all taxes, rates, assessments and impositions whatsoever being in the nature of public demands which shall from time to time be charged, assessed or imposed upon or in respect of the mines or works of the lessee by authority of the Government of India or the Government of Bombay or otherwise except demands for land revenue. The lessee paid two sums of Rs. 16,309 and Rs. 39,515 calculated at 3 per cent. of the royalties describing the payments as payments in respect of "local fund cess". It was found by the Tribunal that the local fund cess leviable under the Bombay Local Boards Act in respect of the villages leased was only Rs. 270 per year. The question being whether the sums of Rs. 16,309 and Rs. 39,515 received by the assessee from the lessee were "income" of the assessee :
Held, that the amounts received by the assessee were liable to be taxed as income of the assessee except to the extent of the local and cess that was in fact payable by the assessee in respect of the villages leased.
Legal position with regard to such payments was that if there is a legal liability imposed upon the assessee to pay to the Local Board in respect of local cess these two amounts, then these two amounts cannot and do not represent income. If, however, the liability of the assessee is in respect of only part of this amount, then to the extent of the surplus, even though the lessee might have paid it for payments of tax or cess, the excess would be income in the hands of the assessee. The question whether the Local Board collected the amounts or the assessee paid the amounts to the Board was irrelevant.
Rajkumar Mills Ltd. v. Commissioner of Income tax (1955) 28 I T R 184 (S C) ref.
STATEMENT OF CASE
By these two applications, which are consolidated for the sake of convenience, Shri Chhatrasinhji Kesarisinhji Thakore, the assessee, requires the Appellate Tribunal to refer to the High Court some questions of law, which are said to arise out of the Tribunal's order under section 33 (4) in I. T. A. Nos. 4842 and 4843 of 1955 56. Inasmuch as, in our opinion, a question of law does arise out of the aforesaid orders, we hereby draw up a statement of the case and refer it to the High Court of Judicature at Bombay under section 66 (1) of the Indian Income-tax Act, 1922. Both the parties agree that all the material facts have been correctly stated. Mr. B. A. Palkhivala wanted questions Nos. 3 and 4 as set out in the application to be referred also. We cannot grant this request as it is based upon certain assumptions.
2. This reference arises out of two assessments made upon Shri Chhatrasinhji Kesarisinhji Thakore Saheb of Shivrajpur for the assessment years 1952 53 and 1953 54, the previous years for which ended on July 31, 1951, and July 31, 1952, respectively. The dispute before the Tribunal related to the inclusion in the total income of the said two years of two sums of Rs. 16,309 and Rs. 39,515 received in the circumstances to be described presently, by the assessee from Shivrajpur Syndicate Ltd.
3. At the material time, the assessee was a Talukdar and owned large tracts of land. Nearly 50 years ago, some of these lands were given by his ancestors on lease to Shivrajpur Syndicate Ltd. (hereinafter referred to as "the Syndicate") for the purpose of its mining operations. These leases were renewed from time to time. The lease agreement with which the Tribunal was immediately concerned was the one made on December 11, 1947, between the assessee and the said Syndicate. A copy of the said lease agreement is marked Annexure "A" and forms part of the case. According to the said agreement, the lease is for a period of 12 years commencing from December 1, 1945. The operative portion of the said lease agreement states that "in consideration of the rents and royalties, covenants and agreements by and in these presents", the lessor, i.e., the assessee, "grants and demises unto the lessee", i.e., the Syndicate, "all those mines, beds, veins and seams of manganese ore" in the lands situate in Broach and Panch Mahals district. The land under lease was about 751 acres as set out in Part I of the Schedule. Parts II, III and IV of the Schedule deal with liberties, etc. restrictions and conditions etc., powers and privileges reserved to the lessor respectively. Part V deals with rents and royalties reserved by the lessee. According to clause (1), the lessee Syndicate is to pay "a certain annual rent" of Rs. 2,629- 8-8 by two equal half yearly instalments. According to clause, (2), the Syndicate is to pay "royalty at the rate of eight per cent. of the sale value" of the manganese ore. Part VII contains "the covenants of the lessee", that being a consideration for this agreement as already stated above. Clause (1) of the said Part VII stands as follows :
"(1) The lessee shall pay the rents and royalty reserved by this lease at the time and in the manner provided in Parts V and VI and shall also pay and discharge all taxes, rates, assessments and impositions whatsoever being in the nature of public demands which shall from time to time be charged, assessed or imposed upon or in respect of the mines or works of the lessee or any part thereof by authority of the Government of India or the Government of Bombay or otherwise except demands for land revenue . . . . ."
It is in accordance with this clause that the Syndicate paid, and the assessee received, the two sums of Rs. 16,309 and Rs. 39,515, the assessability of which was being disputed before the Tribunal. It is found that the said Syndicate calculated this amount at the rate of 3 annas on the amount of rent and royalties payable by it to the assessee in accordance with Part V of the lease agreement and that the Syndicate itself has described the said two sums as "local fund cess".
4. Before the Income tax Officer, the assessee claimed the said two sums to be exempt from tax on the sole ground that the two sums represented "agricultural income". The Income tax Officer rejected that contention. In appeal to the Appellate Assistant Commissioner, the assessee disputed liability to tax of the said two sums on three different grounds, viz.
(i) that the two sums under consideration were exempt under section 4 (3) (viii) ;
(ii) that the said two sums were collected by the assessee from the Syndicate for someone else's benefit as local fund cess levied under the Bombay Local Boards Act, 1923, by the State Government and as such did not form part of his income ; and
(iii) that, assuming that the two receipts were his income receipts, they were exempt under section 4 (3) (vii) as they were "of a casual and non recurring nature".
The Appellate Assistant Commissioner rejected the first of these three contentions and accepted the last two. He, therefore, directed that the said sums should be excluded from the total income of the assessee. A copy of the order passed by the Appellate Assistant Commissioner for the first of the two assessment years is marked Annexure "B" and forms part of the Case.
5. The Department came in appeal to the Tribunal against the said orders of the Appellate Assistant Commissioner and raised the following contention in the grounds of appeal relating to the assessment year 1952-53 :
"The Appellate Assistant Commissioner erred in deleting from the assessment the local cess of Rs. 16,309 (not Rs. 16,039 as stated by the Appellate Assistant Commissioner) received by the assessee from Shivrajpur Syndicate Ltd.
The appellant, therefore, prays that the order of the Appellate Assistant Commissioner in so far as it pertains to this point should be set aside and that of the Income tax Officer restored."
The contention in the appeal relating to the assessment year 1953 54, was in identical terms except that the appropriate amount was Rs. 39,515. When the appeals came up for hearing before the Tribunal, it called upon Mr. Palkhivala, counsel for the assessee respondent, to sustain the Appellate Assistant Commissioner's order as it did not think it necessary to hear the appellant first. Out of the three contentions raised before the Appellate Assistant Commissioner and set out in paragraph 4 above, he expressly gave up the first and relied upon the second ,and the third. In support of the second of these two contentions, he urged that what the assessee collected from the syndicate as local fund cess as a statutory agent of some one else, could not be his income even though he retained it ; for such illegal or unauthorised retention would not make a receipt his income, if initially that receipt was not his income. In support of this, he relied upon several sections of the Bombay Local Boards Act, 1923. Mr. Palkhivala's claim for exemption under section 4 (3) (vii), if stated in his own words, was as follows :
"If it is my retention year after year, that has made this receipt my income, then the retention being in its nature casual and non-recurring, the original receipt must be regarded as of a casual and non recurring nature."
The Tribunal rejected both these contentions and held as follows :
(i) that the assessee did not receive these two sums from the Syndicate for and on behalf of either the Government or of the Broach and Panch Mahal District Local Board, vide paragraph 8 of the Tribunal's order, a copy of which order is marked annexure "C" and forms part of the case ;
(ii) that what the Syndicate pays to the assessse is not "cess" as described in section 93 of the Bombay Local Boards Act, 1923, and recoverable under that Act but is merely a sum that is calculated with reference to the said cess and is payable to the assessee by the Syndicate under clause (1) of Part VII of the lease agreement, vide paragraph 9 of the Tribunal's order, marked Annexure "C" ; and
(iii) that while dealing with the claim for exemption under ,section 4 (3) (vii), the manner in which a receipt was treated or applied by the recipient could not change its initial character for the purpose of taxation.
6. In view of certain controversy raised, it is necessary to add the following facts
As already stated, the Tribunal called upon the respondent to sustain the Appellate Assistant Commissioner's order, even though this appeal was filed by the Department. After hearing Mr. Palkhivala for the respondent, the Tribunal also heard the Departmental Representative. In reply to Mr. Palkhivala, the latter urged that the two amounts in dispute were not "cess" levied under the Bombay Local Boards Act, 1923, but only amounts received in that guise. He said that in the grounds of appeal, the two sums were described as "the local cess" as that phrase was found a convenient label to describe them. This is borne out by what the Tribunal said in paragraph 9 of the order, vide Annexure "C". It was Mr. N. A. Palkhivala's contention that these two sums were "local cess" as held by the Appellate Assistant Commissioner vide paragraphs 5, 6 and 7 of the Tribunal's order, Annexure "C".
7. On these facts, the following questions of law arise
"(i) Whether the sum of Rs. 16,309/ Rs. 39,515 received by the assessee
from the Syndicate is `income' for the purposes of the Indian Income tax Act, 1922 ?
(ii) If the answer to the above question is in the affirmative, whether the income receipt is exempt under section 4 (3) (vii) of the Act by reason of its being of a casual and non recurring nature?"
[The case originally came before Chagla, C. J. and S. T. Desai, J., Chagla, C. J., delivered the judgment of the Court on September 22, 1958.]
N. A. Palkhivala, Hathi and Pandya for the Assessee.
G. N. Joshi and R. J. Joshi for the Commissioner.
JUDGMENT
CHAGLA, C. J. This is rather an unusual reference, in that the assessee is contending that he is liable to pay a larger amount and the taxing department equally emphatically insists that the liability of the applicant is a smaller liability. Of course, such a position would be inconceivable if the dispute was restricted to the payment of tax. No assessee ever contends that he is liable to pay more income tax and no taxing department ever says that the assessee is liable to pay less tax. But this controversy arises because the liability is different in nature. The liability which the assessee wants to take up upon himself is the liability to pay to the State Government and the liability which the Department wishes to impose upon the assessee is a liability to the Central Government in respect of income tax.
Now, the question arises this way. The assessee is the Thakore Saheb of Shivrajpur and the assessment years are 1952-53 and 1953-54. The Thakore Saheb had leased out certain of his lands to the Shivrajpur Syndicate Ltd. Under the lease, the syndicate was liable to pay rent and royalty and it was also liable to pay and discharge all taxes, rates, assessments and impositions whatsoever being in the nature of public demands which shall from time to time be charged, assessed or imposed upon or in respect of the mines or works of the lessee or any part thereof by authority of the Government of India, or the Government of Bombay or otherwise. Therefore, the lessee was liable to pay rents, taxes and rates as the lessor was in law liable to discharge. It is clear, in our opinion, that before the lessee can be made liable to pay any amount under this clause of the lease, the condition precedent is the liability of the lessor to pay any tax or rate. To put it in a different language, under this clause the lessor became entitled to collect from the lessee the amount of taxes or rates which he in law was liable to pay.
Now, the lessee company paid to the assessee two sums of Rs. 16,309 and Rs. 39,515 in these two assessment years respectively in respect of local cess, and the taxing department sought to bring these amounts to tax. The contention of the assessee was that these amounts represented local cess which he was liable to pay to the State Government and therefore these sums did not constitute his income. It is important to note that he admitted his liability in respect of these amounts. It is true that there is a finding of fact by the Tribunal that no demand was made by the District Local Board in respect of these amounts, nor is there any evidence to show that in fact the assessee has discharged any liability in respect of local cess amounting to these two sums. But whether the District Local Board made a demand or not, whether the assessee paid any amount for local cess or not, we have a clear admission on the part of the assessee on the record that in law he is liable to pay these amounts in respect of local cess to the District Local Board. It seems to us clear that, if there is a legal liability imposed upon the assessee to pay to the District Local Board in respect of local cess these two amounts, then these two amounts cannot and do not represent income. If, however, the liability of the assessee is in respect of only part of this amount, then to the extent of the surplus, even though the lessee might have paid it for payment of tax or cess, the excess would be income in the hands of the assessee. We are not concerned with the relationship between the lessor and the lessee, nor are we interested to know how and why the lessee came to pay these amounts. If in respect of the whole of these two amounts there is a liability upon the assessee to pay to the District Local Board the local cess, then clearly the assessee is merely the collecting agency for the payment of tax and the tax collected by him for being paid in law to the District Local Board cannot constitute his income. If, on the other hand, what the assessee has received is not wholly or in part tax collected to be paid to the District Local Board, then to that extent what he has received is income, Here again, we are not concerned with the action of the District Local Board in collecting or not collecting the tax and in demanding or not demanding the tax What we have to find is :
What is the nature of the sums received by the assessee? Do they represent amounts in respect of which there is a legal liability to pay as tax or cess, or do they represent something which is received by the assessee without any such legal liability? Now, with respect to the Tribunal we do not agree with the view taken by it that the liability of the assessee on a true construction of the lease was to pay an amount equivalent to the cess. The language used by the contracting parties in the lease is clear and unequivocal. The liability of the lessee is to pay and discharge all taxes, rates, assessments and impositions whatsoever in the nature of public demands which shall from time to time be charged, assessed or imposed upon or in respect of the mines or works of the lessee. Therefore, as we pointed out, there must be a charge or an assessment upon the lessor in respect of his lands or mines and some demand being made by a public authority before the lessee can become liable to pay anything to the lessor under this clause.
Now, the question that really the Tribunal should have considered and which it has failed to consider is what is the liability of the assessee in law with regard to the payment of the cess and turning to the relevant provisions of the law, which is the Bombay Local Boards Act, 1923, we have first section 75 which constitutes the local fund of the District Local Board, and the item with which we are concerned is clause (c) the net proceeds (after deducting the expenses of assessment and collection) of the cesses in the district authorised by sections 93 and 95. When we turn to section 93, it imposes an obligation upon the State Government to levy a cess at the rate of 3 annas on every rupee of every sum payable to the State Government as ordinary land revenue. We are not concerned with the other part of this subsection. Therefore, the scheme of this section is that the Government in order to finance the District Local Board, charges over and above the land revenue a further sum of 3 annas on every rupee from every person liable to pay land revenue and that additional sung is paid to the District Local Board. Now, we have cases where there is alienation of land revenue : where the Government does not recover the whole of the land revenue, but has alienated either the whole or part of it. That case is dealt with in clause (b) every sum which would have been assessable on any land as land revenue had there been no alienation of land revenue. So far the purpose of the cess the alienation has to be ignored and Government has a right to levy cess on the original land revenue payable ignoring the alienation. Then we have clause (c) every sum which would have been assessable on any land as land revenue had the land not been Talukdari land. This deals with Talukdari land and again the intention is to charge the cess on the basis of assessment again ignoring the fact of any connection given to the Talukdar in respect of his Talukdari land. Then section 94 lays down rules for assessment and it dealt with the case of alienated villages. We are told that the Tribunal will have to find as a fact that the lands are alienated villages and in the cases of alienated lands, we are concerned with villages under clause (a) if the village has been surveyed and assessed in the manner laid down in the said Code and the rules made there under, the cess shall be fixed on the total amount of assessment of the village as fixed under the said Code or the rules made thereunder. The villages here are admittedly surveyed villages and the question is what is the total amount of assessment which these villages have to pay.
Mr. Joshi's contention is and he is supported by what appears on the record, that the assessee pays a certain amount to the Government which is known as Jama and he pays the cess only on the basis of that Jama. In other words, he treats the Jama as the assessment of the villages fixed under section 94 (1) (a), Again, this is something which the Tribunal will have to ascertain whether the amount of the assessment of the village is the same as the Jama paid by the assessee, or whether the amount of the assessment is different from the Jama paid by the assessee. In the latter case, whatever may be the Jama that the assessee may pay, his liability to pay the cess would be on the basis of the actual assessment of the village. If, on the other hand, the assessment and the Jama is the same, then the cess would be on the basis of the Jama. Section 96 provides that the cess described in section 94 shall be levied, so far as may be, in the same manner, and under the same provisions of law, as the land revenue. In this case the land revenue is collected by the assessee and part of it or may be the whole of it as Jama is paid to the Government. Therefore, with regard to the cess it would also be for the assessee to collect the cess and pay it to the Government. Then we have section 104 which dealt with collection of taxes and the error into which the Tribunal seem to have fallen is to confuse the question of collection with the question of levy and assessment. Even though the assessee may be assessed to tax and even though the Government may have levied the tax, the District Local Board may not have proceeded to collect the tax under Chapter VIII of the Act. But the failure on the part of the District Local Board to collect the tax will in no way affect either the fact of the assessee having been assessed to tax or his liability to pay the tax.
Now, we are inclined to dispose of this reference by answering the question submitted to us as follows : The amounts in question or part of them are income to the extent that they exceed the amount in respect of which the assessee is liable to pay cess under the law. But Mr. Palkhivala has drawn our attention to a decision of the Supreme Court in Rajkumar Mills Ltd. v. Commissioner of Income tax ((1955) 28 I T R 184 (S C)), and he has pointed out that it would be a safe and better course for us to call for an additional statement of the case and on the basis of that statement to finally dispose of the question ourselves. Mr. Palkhivala says that if we send down the matter answering the question in this way, giving the Tribunal the directions that we have given, it would really be that the Tribunal would be ultimately deciding the question and not ourselves.
In view of this, we direct the Tribunal to submit to us a supplemental statement of the case in the light of this Judgment.
Question No. 2 will stand over till the supplemental case has been received.
SUPPLEMENTARY STATEMENT OF CASE
The High Court has directed by its order in I. T. Reference No. 85 of 1957, dated 22nd September 1958, to submit a supplementary statement of the case on the following points
"(1) Whether the lands we are concerned with are alienated villages ?"
(2) What is the total amount of assessment which these villages have to pay ?
(3) Whether the amount of the assessment of the village is the same as the Jama paid by the assessee, or whether the amount of the assessment is different from the Jama paid by the assessee ?
(4) What is the liability of the assessee in law with regard to the payment of the cess ?"
2. The material facts bearing upon each of these questions are set out hereunder
Q. 1 The assessee says that though the lands were originally alienated villages, they were not so in the relevant years of account, which are the years ending July 31, 1951, and July 31, 1952, respectively; the said lands ceased to be alienated villages as from August 15, 1910, as a result of the promulgation of the Bombay Taluqdari Tenure Abolition Act, 1949 (LXII of 1949). This Act came into force on August 15, 1950 ; therefore the concerned lands were only alienated villages from the 1st of August 1950 to the 15th of August 1950, and thereafter they ceased to be alienated villages under the aforesaid Act. In our opinion, though the village has ceased to be an alienated village under the Act, the incident of the said tenure of the Act, having regard to section 5 (2) of the Taluqdari Abolition Act, remains and the Taluqdar has not to pay land revenue under section 5 (1) but has to pay Jama under section 5 (2) till the expiry of the settlement in 1962.
Qs. 2 & 3. The required information is contained in the letter dated July 1.1, 1959, written by the…
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