Full Judgment Text & Judicial Ruling

1968 P T D 457

1968 P T D 457

[Supreme Court India]

Present: S. K. Das, J. L. Kapur, A. K. Sarkar, M. Hidayatullah and Roghubar Dayal, JJ

P. S. SUBRAMANYAN, INCOME‑TAX OFFICER, COMPANIES CIRCLE I (I), BOMBAY AND ANOTHER

Versus

SIMPLEX MILLS LTD.

Civil Appeal No. 165 of 1962, decided on 15th November 1962.

Reassessment‑Income under‑assessed or subjected to excessive relief‑Advance tax‑Refund--Interest on advance tax‑Amend ment of law with retrospective effect‑Interest allowed becoming excessive owing to amendment‑Recovery of excess of interest by way of reassessment‑Whether permissible‑Indian Income‑tax Act, 1922, Ss. 18‑A (5) & 34 (1) (b).

In the original assessment of the assessee for the assessment year 1952‑53, a part of the tax paid by it in advance for that year was found refundable. The Income‑tax Officer allowed interest under section 18‑A(5) of the Income‑tax Act, 1922, on the amount of the advance tax paid by it in accordance with the law as it then stood. After the amendment of section 18‑A (5) by the Income‑tax (Amendment) Act, 1953, with retrospective effect, the Income‑tax Officer found that the interest allowed was excessive. He sought to recover by reassessment proceedings under section 34(1)(b) the excess of the interest so allowed on the ground that income for that year had been under‑assessed and had been made the subject of excessive relief:

Held, that the original assessment could not be reopened under section 34 because it could not be said either that there was under‑assessment of the income or that excessive relief was granted.

M. Chockalingam v. Commissioner of Income‑tax (1963) 48 I T R SC 34 ref.

P. S. Subramanyan v. Simplex Mills Ltd. (1963) 48 I T R 983 affirmed.

N. D. Karkhanis and R. N. Sachthey for Appellants.

R. J. Kolah add J. B. Dadochanji, O. C. Mathur and Ravinder Narain of J. B. Dadachanji & Co. for Respondent.

JUDGMENT

SARKAR, J.‑This appeal is entirely without substance. It arises out of an application under Article 226 of the Constitution made by the respondent assessee for a writ quashing an order of assessment, made under section 34 of the Income‑tax tact, 1922.

The respondent made advance payment of tax under sec tion 18A(1) of the Income‑tax Act for the assessment year 1952‑53. On August 30, 1952, regular assessment for this year was made and a part of the tax paid in advance was thereupon found refund able to the respondent. Under the provisions of subsection (5) of section 18‑A, as it then stood, interest at a certain rate was payable on the amount paid in advance by an assessee under this section. Rupees 14,720‑14‑0 were found payable to the respondent under this provision and this sum was paid some time in September 1952. On May 24, 1953 subsection (5) of section 18‑A was amended with effect from April 1, 1952: It is not necessary to refer to this amendment in detail and it is enough to state that under it the Government was to have paid to the respondent Rs. 9,404‑5‑0 instead of Rs. 14,720‑14‑0.

On March 18, 1957, a notice was issued under section 34(1)(b) stating that as the Income‑tax Officer had reason to believe that the respondent's income for the assessment year ending March 31, 1953, had been under‑assessed and had been the subject of excessive relief, he proposed to reassess the said income. The respondent protested, but notwithstanding the protest, the assessment under section 34 was made on July 30, 1957. The order of reassessment stated: "As per the amended provisions of section 18‑A (5) the assessee was entitled to interest of a much smaller amount than what has been allowed to him during the original assessment. As excessive relief has been allowed to the assessee in the original assessment under section 23(3) and in order to enable me to recover the excess interest allowed action under section 34 was taken Hence I will proceed to recover the excess interest allowed to the assessee during the original assessment." On the application of the respondent under Article 226 of the Constitution this order was set aside by the High Court of Bombay. Hence this appeal.

Section 34 of the Act under which the impugned order was made so far as material for our purposes is in these terms:

34. (1) If‑...

(b) the Income‑tax Officer has . . . reason to believe that income, profits or gains chargeable to income‑tax have escaped assessment for any year, or have been under‑assessed or assessed at too low a rate, or have been made the subject of excessive relief under this Act or that excessive loss or depreciation allowance has been computed.

he may . . proceed to assess or reassess such income, profits or gains or recompute the loss or depreciation allowance."

The assessment, reassessment or recomputation under this section is to be made according to the provisions of the Act as if it was pursuant td a notice under section 22 of the Act.

Under this section, therefore. An assessment earlier made can be re‑opened if income, profits or gains have escaped assessment or have been under‑assessed or assessed at too low a rate, or have been made the subject of excessive relief, or excessive loss or depreciation has been computed. It does not seem to us that any of these conditions can be said to have been fulfilled in the, present case. The notice under section 34 stated all these grounds but only two of them have been mentioned in the notice which has been earlier set out by us because counsel for the appellants has not relied on any other ground. With the other grounds we are not, therefore, concerned in this case. The two that have been relied on are cases where income has been under‑assessed or has been made the subject of excessive relief. It may be noticed here that the order of July 30, 1957, was based only on the ground that excessive relief had been allowed. It did not hold that the income had been under‑assessed.

It does not seem to us that it is a case where the respondent's income was under assessed or where excessive relief was granted in computing that income. It is a case where tax had been paid in advance and upon subsequent regular assessment for the period for which the tax had been paid it was found that what had been paid was in excess of what was actually due. This is really a case of over‑assessment though only provisional and not of under‑assessment at all. The payment of interest was in no sense a relief granted in computing income; it was paid at the rate calculated according to the law then in force. No doubt in view of the subsequent amendment of the law and in view of this amended provision being given retrospective operation covering the date when the original assessment had been made, if the interest has to be computed according to the amended law then a smaller sum might have been payable as interest. But, when it was computed, the new law was not in fact there and, therefore, the computation had been according to the law then in force. That computation cannot be reopened under section 34 because it cannot be said that it is a case either of under‑assessment or of excessive relief having been granted. It is really a case where the statutory liability of the State to pay interest was reduced from a higher figure to a lower one. Therefore, quite clearly it was not a case within section 34.

We were referred to the form of the notice of demand for the tax. It was contended that the form showed that in com puting the tax interest under section 18‑A had to be taken into account. Therefore, it was said, interest was a part of the tax and when more interest had been paid to the assessee than was due, it had been given excessive relief. As was rightly pointed out by Mr. Kolah appearing for the respondent, this is a wrong reading of the form. The form specified the net amount of the tax payable and thereafter provided for deduction of certain interest to show the amount of the demand. Therefore, the interest which had to be deducted in accordance with it in arriving at the demand is not a part of the tax. At least it‑ is not so treated in the form. That is enough to dispose of this argument.

We were then referred to subsections (8) and (11) of section 18‑A. Subsection (8) provides for payment of certain interest by an assessee and subsection (11) says that any sum other than a penalty or interest paid by an assessee under the provisions of section 18‑A shall be treated as a payment of tax. It was contended that the provisions of these two subsections show that the interest with which we are concerned is a part of the tax, and, therefore, when more interest was allowed to an assessee than was due, he was given excessive relief. This is obviously fallacious. These subsections deal with interest payable by an assesseee and we are concerned in this case with interest payable by the Government.

Lastly, our attention was drawn to Civil Appeals Nos. 37‑40 of 1962 M. Chockalingam v. Commissioner of Income‑tax ((1963) 48 I T R 34 (S C)) in which referring to the proviso to section 35 of the Income‑tax Act this court observed:

"The learned counsel for the department raised the forlorn argument that the addition of penal interest is not enhance ment of assessment as stated in the proviso. We do not see what else it could be."

It was contended that this showed that the penal interest was part of the tax. We do not think so. In any event we are not concerned with a case of penal interest here. It cannot obviously be suggested that the interest payable by the Govern ment to the assessee for amounts paid by the assessee as tax in advance is a tax paid by the assessee.

At the hearing learned counsel for the State sought leave to contend that the order of July 30, 1957, could be supported under section 35 of the Income‑tax Act. This leave was refused for such a point was not raised in the court below and the action by the revenue authorities had expressly been taken under section 34 of the Act.

This appeal must, therefore, be dismissed with costs and we order accordingly.

Appeal dismissed.

1968 P T D 461

[Supreme Court India]

Present: S. K. Das, J. L. Kapur, A. K. Sarkar, M. Hidayatullah and Raghubar Dayal, JJ

MAHARAJA SHREE UMAID MILLS LTD.

Versus

UNION OF INDIA AND OTHERS

Civil Appeals Nos. 214 of 1956 and 399 of 1960, decided on 27th November 1962.

Income‑tax‑Excise duty‑Native State ‑ Jodhpur ‑ Conces sions under agreement with ruler--Accession of State to India‑ Formation of United State of Rajasthan‑-Rajasthan becoming a Part B State‑Local laws repealed and Indian Acts extended to Part B State‑Concessions under agreement whether enforceable against Union of India or State Government of Rajasthan‑Consti tution, of India, Arts. 19, 31, 295, 372-‑Income‑tax Act, 1922-- Central Excises and Salt Act, 1944‑Finance Act, 1950, Ss. 11,13-- Rajasthan Administration Ordinance, 1949, S. 3-‑Rajasthan Excise Duties Ordinance, 1949, S. 34.

Under a deed of agreement executed on April 17, 1941, between the Government of the Maharaja of the Native State of Jodhpur and the appellant company, certain concessions were granted to the company. Clause (6) of the agreement provided as follows : "The State will exempt or remit the following duties and royalties : (e) State or Federal excise duty on goods manufactured in the mill premises. If any such duty has to be paid by the company, the State will refund the sum wholly to the company. (f) State or Federal income‑tax or super‑tax or surcharge or any other tax on income. If any such tax has to be paid by the company the State will refund the same to the company " In consideration of the concessions the appellant company agreed to pay to the State of Jodhpur a royalty of 7 percent. of the net profits of the company in each of its financial years, payable within three months after the close of each financial year. After the coming into existence of the Dominion of India under the Indian Independence Act, 1947, the Maharaja of Jodhpur acceded to the Dominion. The ruler then joined the United State of Rajasthan and on April 7, 1949, made over the administration of his State to the Rajpramukh of the United State of Rajasthan. On the same day was promulgated the Rajasthan Administration Ordinance, 1949, section 3 whereof continued all the laws in force in any covenanting State until altered or repealed 'or amended by a competent Legislature or authority. There was a fresh instrument of accession on April 15; 1949, on behalf of the United State of Rajasthan, by which it accepted all matters enumerated in List I and List III of the Seventh Schedule to the Government of India Act, 1935, as matters in respect of which the Dominion Legislature might make laws for that State. On September 5, 1949, the Rajasthan Excise Duties Ordinance, 1949, was promulgated whereby all laws dealing with matters covered by the Ordinance in force at its commencement in any part of Rajasthan were repealed. On November 23, 1949, the United State of Rajasthan made a proclamation to the effect that the Constitution of India to be adopted by the Constituent Assembly of India shall be the Constitution of the Rajasthan State. On the coming into force of the Constitution of India on January 26, 1950, Rajasthan became a Part B State. By the Finance Act, 1950; passed by the Indian Parliament, the provisions of the Central Excises and Salt Act, 1944, and of the rules and orders made thereunder and the provisions of the Indian Income‑tax Act, 1922, were extended to the territory of Rajasthan as from April 1, 1950, and the local laws were repealed. The question was whether the appellant company was liable to pay excise duty and income‑tax under these Acts.

Held, (i) that the agreement of April 17, 1941, rested solely on the consent of the parties : it was entirely contractual in nature and was not a law;

(ii) that the Maharaja of Jodhpur could make a law within his own competence and jurisdiction and not one for some other sovereign. He had therefore no authority to give exemption from Federal excise duty or Federal income‑tax. Such an exemption was a dead letter and did not have the force of law. Assuming that clause (6) of the agreement was an assurance to influence the Federation, if and when it came into existence, so as to secure an exemption from Federal excise duty or Federal income‑tax, such an assurance could not be enforced even, as a contract;

(iii) that clause (6) of the agreement could not be treated as law in any case in respect of a tax or duty imposed by the Union Government which came into existence on January 26, 1950, when there was no mention of such a tax or duty in the agreement;

(iv) that Article 372 of the Constitution, which continued existing laws must be considered as embracing those orders only which had the force of law; namely, law as understood at the time;

(v) that in view of the clear words of, section 30 of the Rajasthan Excise Duties the 1949, and of the repealing provisions in the Finance Act, 1950, the earlier special law in matters of excise duties or, income‑tax or exemption therefrom did not continue in force;

(vi) that in the absence of any term ‑as to the exemption from excise duty or income-tax to be imposed by the Union Legislature the question of the Union Legislature accepting such a term and an obligation arising therefrom on January 26, 1950, under Article 295(1) (b) of the Constitution, could not arise;

(vii) that, on the facts, neither the United State of Rajasthan nor the Part B State of Rajasthan armed the agreement dated April 17, 1941;

(viii) that under Article 295(1) (b) there must be a right or liability on an Indian State corresponding to a State specified in Part B of the First Schedule which could become the right or liability of the Government of India. If the right itself did not exist before the commencement of the Constitution and could not be enforced against any Government, the question of its vesting in another Government under Article 295(1) (b) could not arise. There was nothing in Article 295 which expressly prohibited Parliament from enacting a law as to income‑tax or excise duties in territories which became Part B States and which were formerly Indian States, and such a prohibition could not be read into Article 295 by virtue of some contract that might have been made by the then ruler of a Native State with any person;

(ix) that under the agreement entered into between the President of India and the Rajpramukh of Rajasthan on February 25, 1950, it was open to the Union of India to limit in any way it thought fit any concessions as appeared to the Union Government to be extravagant and against the public interest. The appellant company could not therefore claim that it had a constitutional guarantee to exemption from excise duty or income‑tax:

(x) that as the appellant company bad no right either against the State Government of Rajasthan or the Union Government on January 26, 1950, it could not invoke to its aid either Article 19 or Article 31 of the Constitution of India.

Decisions of the Rajasthan High Court affirmed.

[Case‑law ref.]

G. S. Pathak, Senior Advocate (Rameshwar Nath, S. N. Andley and P. L. Vohra of Rajinder Narain and Co. with him) for appellants.

M. C. Setalvad, Attorney‑General for India, H. N. Sanyal, Additional Solicitor General for India, and K. N. Rajagopal Sastri, Senior Advocate (R. N. Sachthey with them) for the Respondents in C. A. No. 214 of 1956 and Respondents Nos. 1, 3 and 4 in C. A. No. 399 of 1960.

G. C. Kasliwal, Advocate‑General for the State of Rajasthan and M. M. Tiwari, Senior Advocate (S. K. Kapur, Khan Singh, S. Venkatakrishnan and K. K. Jain with them) for Respondent No. 2 in C. A. No. 399 of 1960.

JUDGMENT

S. K. DAS, J.‑These two appeals on certificates granted by the High Court of Rajasthan have been heard together, because they raise common questions of law and fact, and this judgment will govern them both.

Shortly put, the main question in C. A. No. 399 of 1960, is whether the appellant, the Maharaja Shree Umaid Mills Ltd., is liable to pay excise duty on the cloth and yarn manufactured and produced by it, in accordance with the provisions of the Central Excises and Salt Act, 1944, which provisions were extended to the territory 6f the State of Rajasthan on April 1, 1950. The main question in C. A. No. 214 of 1956 is whether the same appellant is liable to pay Income‑tax in accordance with the provisions of the Indian Income‑tax Act, 1922, from the date on which those provisions were extended to the territory of the State of Rajasthan. C. A. No. 399 of 1960 arises out of a suit which the appellant had filed in the court of the District Judge, Jodhpur. That suit was dismissed by the learned District Judge. Then there was an appeal to the High Court of Rajasthan. The High Court of Rajasthan dismissed the appeal. The High Court was then moved for a certificate under Articles 132(1) and 133(1) of the Constitution. Such certificate having been granted by the High. Court the appeal has been preferred to this court. C. A. No. 214 of 1956, arises out of a writ petition which the appellant had filed for the issue of a writ of mandamus or any other appropriate writ restraining the respondents from assessing or recovering Income‑tax from the appellant. This writ petition was dismissed by the High Court on the preliminary ground that the appellant had another remedy open to it under the provisions of the Income‑tax Act, 1922. The appellant moved the High Court and obtained a certificate, in pursuance of which it has filed C. A. No. 214 of 1956. As we are deciding both the appeals on merits, it is unnecessary to deal with the preliminary ground on which the High Court dismissed the writ petition.

We have already stated that in both the appeals the Maharaja Shri Umaid Mills Ltd., Pali, is the appellant. In C. A. No. 399 of 1960, the respondents are the Union of India, the State of Rajasthan, the Collector of Central Excise, New Delhi, and the Superintendent, Central Excise, Jodhpur. In C. A. No. 214 of 1956, the respondents are the Union of India, the State of Rajasthan, the Commissioner of Income‑tax, Delhi and the Income‑tax Officer, Jodhpur.

We may now state the facts which are relevant to these two appeals. The appellant was incorporated under the Marwar Companies Act, 1923, and, has its registered office at Pali in the present State of Rajasthan. It has been manufacturing cloth and yarn since 1941. The case of the appellant was that the then Ruler of the State of Jodhpur was earnestly desirous of having a cotton mill started at Pali and for that purpose agreed to give certain concessions by way of immunity from payment of taxes and duties then in force in the Jodhpur State or likely to come into force in view of the contemplated federation of the Indian States and Provinces under the Government of India Act, 1935. There were negotiations and correspondence about the concessions which were to be granted and finally a formal deed of agreement incorporating the concessions and immunities granted was executed between the Government of His Highness the Maharaja of Jodhpur on one side and the appellant on the other on April 17, 1941. Clause 6 of this agreement, in so far as it is relevant for our purpose, said:

"The State will exempt or remit the following duties and royalties :...

(e) State or Federal excise duty on goods manufactured in the mill premises. If any such duty has to be paid by the company the State will refund the same wholly to the company.

(f) State or Federal Income‑tax or super‑tax or surcharge or any other tax on income If any such tax has to be paid by the company the State will refund the same wholly, to the company..."

In consideration of the concessions given the appellant agreed to pay to the State of Jodhpur, a royalty of 7 , percent. on the net profits of the company in each of its financial years, such payments to be made within three months after the close of each financial year. This agreement, it was stated, was acted upon by the State of Jodhpur and the appellant enjoyed an immunity from excise duty and Income‑tax. The Indian Independence Act, 1947, brought into existence, as from. August 15, 1947, a Dominion of India. The Ruler of Jodhpur acceded 'to the Dominion of India by means of an Instrument of Acces sion in the form referred to in Appendix VII at pages 165 to 168 of the White Paper on Indian States. Jodhpur was one of the Rajputana States. The integration of these States was completed in three stages. Firstly, a Rajasthan Union was formed by a number of smaller Rajputana States situated in the south‑east of that region. Later, there was formed the United State of Rajasthan. The Ruler of Jodhpur joined the United State of Rajasthan and on April 7, 1949, made over the administration of his State to the Rajpramukh of the United State of Rajasthan. The Covenant by which this was done is Appendix XL at pages 274 to 282 of the White Paper. On the same day was promulgated the Rajasthan Administration Ordinance, 1949 (Ordinance No. 1 of 1949), section 3 whereof continued all the laws in force in any covenanting State until altered or repealed or amended by a competent Legislature or other competent authority, etc. There was a fresh Instrument of Accession on April 15, 1949, on behalf of the United State of Rajasthan by which the United State of Rajasthan accepted all matters enumerated in List I and List III of the Seventh Schedule to the Government of India Act, 1935, as matters in respect of which the Dominion Legislature might make laws for United State of Rajasthan ; there was a proviso, however, which said that noth ing in the said Lists shall be deemed to empower the Dominion Legislature to impose any tax or duty in the territories of the United State of Rajasthan or to prohibit the imposition of any duty or tax by the Legislature of the United State of Rajasthan in the said territories. On September 5, 1949, was promulgated the Rajasthan Excise Duties Ordinance, 1949 (Ordinance No. XXV of 1949). This Ordinance was published on September 19, 1949, and section 34 thereof said that all laws dealing with matters covered by the Ordinance in force at its commencement in any part of Rajasthan were repealed. One of the questions before us is whether this section had the effect of abrogating the agreement dated April 17, 1941, in case that agreement had the force of law in the State of Jodhpur. On November 23, 1949, the United State of Rajasthan made a proclamation to the effect that the Constitution of India shortly to be adopted by the Constituent Assembly of India shall be the Constitution for Rajasthan State. The Constitution of India came into force on January 26, 1950, and as from that date Rajasthan became a Part B State.

For the purpose of these two appeals, we have to notice the three stages of evolution in the constitutional position. First, we have the State of Jodhpur whose Ruler had…

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