# COMMISSIONER OF INCOME-TAX, EXCESS PROFITS TAX, HYDERABAD, ANDHRA PRADESH v. V. JAGAN MOHAN RAO & ORS

- **Citation:** [1970] 1 S.C.R. 726
- **Court:** Supreme Court of India
- **Decided:** 1969-07-31
- **Bench:** J.C. Shah, Acting C.J, V. Ramaswami, A.. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-excess-profits-tax-hyderabad-andhra-pradesh-v-v-4687
- **Pages:** 10

## Headnote

Indian Income-tax Act, 1922, s. 34 and s. 10(2) (xv )-Decision of
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).
The assessee purchased a spinning mill in 1941 from a vendor claiming
to be its sole proprietor. In a suit filed by the venddr's sons the trial court
had held that the suit property including the aforesaid spinning mill was
the vendor's self-acquired property. When the assessee purchased the mill
an appeal against the trial court's judgment was pending in the High Court.
The High Court decided that the property was not the self-acquired property of the vendor but was coparcenary property in which the sons had
two thirds interest. The vendor filed an appeal before the Privy Council.
During its pendency the assessee entered into a compromise with
the
venddr's sons whereby they agreed to release their two thirds interest in the
mill and its profits for a sum of Rs. 1,15,000.
The compromise was
certified by the High Court. In 1947 the Privy Council decided that the
property including the spinuing mill was the self-acquired property of the
vendor. On receipt of this decision which finally determined the rights
of the parties and assessee's ownership of the mill, the Income-tax Officer
issued a notice under s. 34 of the Indian Income-tax Act, 1922 for the
assessment year 1944-45 and assessed the income fl;pm the mill for that
year and for the two subsequent assessment years in the hands of the
assessee.
The assessee's objection that the decision of the Privy Council
was not 'definite information' within the meaning of s. 34 was rejected as
also the assessee's claim that the sum of Rs. 1,15,000 paid to the vendor's
sons in pursuance of the compromise should be set off as an expense
against the income from the mill for the year in question. The Appellate
Assistant Commissioner and the Tribunal upheld the Income-tax Officer's
order. The High Court in reference held that the notice under s. 34 was
valid but that the payment of Rs. 1,15,000 was made partly
towards
acquisition of a capital asset and partly towards the discharge of the claim
for profits and the part apportionable towards the profits was allowable as
revenue expenditure.
The assessee as well as the Revenue appealed to
this Court.
HELD : (i) In Maharaia Kumar Kamal Singh's case this Court held
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. It was further held that even in a case where a
return had been submitted, if the Income-tax Officer had erroneously failed
to tax a part of the assessable income, it was a case when that part of
the income had escaped assessment. The decision of the Privy Council was
therefore held to be information within the meaning of s. 34(1) (b). The
principle laid down in Maharaja Kumar Kcmal Singh's case governed the
present case and it must be held that the proceedings initiated under s. 34
for the assessment year 194445 were legally valid. [732 G-733 BJ
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C.I.T. v. JAGAN MOHAN (Ramaswamz", J.)
727
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Maharaja Kuniar Kania! Singh v. Co1nn1issioner
of
Incon1e-tax, 35
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l.T.R. !, followed and applied.
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Kcmakhya Narain Singh's case, 14 I.T.R. 6, referred to.
The contention that only two thirds of the income could be said to
have escaped assessment because the one-third share of the vendor could
have been validly assessed the Income-tax Officer on the basis of
the
High Court's judgment, could not be accepted.
When once valid proceedings are started under s. 34(1) (b) read with s. 22(2) the previous
under-assessment is set aside and the whole assessment p1:roccedings start
afresh. The Income-tax Officer then has not only

## Text

726
COMMISSIONER OF INCOME-TAX,
EXCESS PROFITS
TAX, HYDERABAD, ANDHRA PRADESH
v.
V. JAGAN MOHAN RAO & ORS.
July 31, 1969
[J.C. SHAH, ACTING C.J., V. RAMASWAMI AND A.. N. GROVER, JJ.]
Indian Income-tax Act, 1922, s. 34 and s. 10(2) (xv )-Decision of
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).
The assessee purchased a spinning mill in 1941 from a vendor claiming
to be its sole proprietor. In a suit filed by the venddr's sons the trial court
had held that the suit property including the aforesaid spinning mill was
the vendor's self-acquired property. When the assessee purchased the mill
an appeal against the trial court's judgment was pending in the High Court.
The High Court decided that the property was not the self-acquired property of the vendor but was coparcenary property in which the sons had
two thirds interest. The vendor filed an appeal before the Privy Council.
During its pendency the assessee entered into a compromise with
the
venddr's sons whereby they agreed to release their two thirds interest in the
mill and its profits for a sum of Rs. 1,15,000.
The compromise was
certified by the High Court. In 1947 the Privy Council decided that the
property including the spinuing mill was the self-acquired property of the
vendor. On receipt of this decision which finally determined the rights
of the parties and assessee's ownership of the mill, the Income-tax Officer
issued a notice under s. 34 of the Indian Income-tax Act, 1922 for the
assessment year 1944-45 and assessed the income fl;pm the mill for that
year and for the two subsequent assessment years in the hands of the
assessee.
The assessee's objection that the decision of the Privy Council
was not 'definite information' within the meaning of s. 34 was rejected as
also the assessee's claim that the sum of Rs. 1,15,000 paid to the vendor's
sons in pursuance of the compromise should be set off as an expense
against the income from the mill for the year in question. The Appellate
Assistant Commissioner and the Tribunal upheld the Income-tax Officer's
order. The High Court in reference held that the notice under s. 34 was
valid but that the payment of Rs. 1,15,000 was made partly
towards
acquisition of a capital asset and partly towards the discharge of the claim
for profits and the part apportionable towards the profits was allowable as
revenue expenditure.
The assessee as well as the Revenue appealed to
this Court.
HELD : (i) In Maharaia Kumar Kamal Singh's case this Court held
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. It was further held that even in a case where a
return had been submitted, if the Income-tax Officer had erroneously failed
to tax a part of the assessable income, it was a case when that part of
the income had escaped assessment. The decision of the Privy Council was
therefore held to be information within the meaning of s. 34(1) (b). The
principle laid down in Maharaja Kumar Kcmal Singh's case governed the
present case and it must be held that the proceedings initiated under s. 34
for the assessment year 194445 were legally valid. [732 G-733 BJ
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C.I.T. v. JAGAN MOHAN (Ramaswamz", J.)
727
A
Maharaja Kuniar Kania! Singh v. Co1nn1issioner
of
Incon1e-tax, 35
,
l.T.R. !, followed and applied.
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Kcmakhya Narain Singh's case, 14 I.T.R. 6, referred to.
The contention that only two thirds of the income could be said to
have escaped assessment because the one-third share of the vendor could
have been validly assessed the Income-tax Officer on the basis of
the
High Court's judgment, could not be accepted.
When once valid proceedings are started under s. 34(1) (b) read with s. 22(2) the previous
under-assessment is set aside and the whole assessment p1:roccedings start
afresh. The Income-tax Officer then has not only the jurisdiction but the
duty to levy tax on the entire income that has escaped assessment in that
year. [733 C-E]
(ii) It is well-established that where money is paid to perfect a title
or as consideration 'for getting rid of a defect in title or a threat of litigation the payment would be a capital payment and not a revenue payment.
11oney paid in consi<leration of the acquisition of a source of profit or
income is capital expenditure both on principle and authority. [733 F-G]
Atherton v. British Insulated and Helsby Cables Ltd. [1926] A.C. 205,
213 and Commissioner of Taxes v. Nchanga Consolidated Copper Mines
Ltd. [1964] A.C. 948, referred to.
It was rrue that in the present case the High Court took into consideration the 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
\Vas a fair offer. But that did not mean that the sons of the vendor were·
given as a result of the compromise a share in the profits of the assessee.
It was clear from the circumstances of the ca1e that the payment was
made by the asse·ssee in order to perfect his title to a capital ·asset, and
no portion of it could therefore could be set off against the profit. [735 CJ
11r ·
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 893 to
' )
892 and 1381 to 1386 of 1966.
Appeals from the judgment and order dated December 7, 1962
of the Andhra Pradesh High Court in Case Referred No. 24 of
F
1956.
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D. Narsaraju, P. Ramrao, K. R. Chaudhuri and K. Rajendra
Chaudhuri, for the appellants (in C.As. Nos. 893 to 898 of 1966)
and the respondents (in C.As. Nos. 1281 to 1386 of 1966).
Jagdish Swarup, Solic;itor-General, S. K. Aiyar and R. N. Sachthey, for the respondent (in C.As. Nos. 893 to 898 of 1966) and
the appellant (in C.As. Nos. 1381 to 1386 of 1966).
The Judgment of the Court was delivered by
Ramaswami, J,
The assessee who
1s the
Kartha of a
Hindu Undivided Family was assessed in that status for the relevant
assessment years, 1944-45, 1945-46, 1946-47 not only to incometax but also to excess profits tax. On February l, 1941 he pnrchased from Randhi Appalaswamy (hereinafter referred to as the
vendor) a spinning mill known as Sri Satyanarayana Spinning
728
SUPRBIE COURT REPORTS
( 1970] I S.CR.
Mills, Rajahmundry for a sum of Rs. 54, 7 31. The purchase w~s
made at a period when there was litigation between the wns of
the vendor and the vendor in respect of the spinning mill and
other properties.
The sons had filed a suit against the father,
the vendor, claiming the schedule properties including the mill as
joint family properties and for partition of the same. The vendor
claimed that the properties were his self-acquired properties. The
District Judge, Rajahmundry held that the properties were the
self-acquired properties of the vendor and dismissed the suit cf
the plaintiffs.
Against the judgment of the District Judge an
appeal was filed in tl1e M<idras High Court, being A. S. No. J 75
of 1938. While the appeal was pending, on February 1, 194 1 the
assessee purchased the mill from the vendor who purported tc ·.-:!!
the same as the sole owner. In A. S. No. 175 of 1938 the Madr'"
High Court held that the properties of the vendor were not hi;
self-acquired properties but were joint family properties in which
the plaintiffs had a two thirds share. Against this judgment the
vendor preferred an appeal to the Privy Council. While that appeal
was pending the assessee had submitted returns for the relevant
assessment years.
However, before the assessments were taken
up the asscssee entered into a compromise with the plaintiffs on
September 7, 1945 by virtue of which he got a release of the
interest of the vendor's sons on payment of Rs. 1, 15,000. While
the appeal was pending before the Privy Council the plaintiffs had
applied to the High Coun for recovery of their share of the profits.
The High Court appointed the assessee as the Receiver directing
him to deposit the profits in the High Court. The assessec deposited a sum of Rs. 1,09,613 for the year 1944-45, Rs. 31,087
for the year 1945-46 and Rs. 4,775 for the year 1946-47. Under
the compromise the assessec was entitled to withdraw these amount~
on payment of Rs. 1, 15,000.
The Privy Council decided the
appeal on July 2, 1947 reversing the order of the High Court and
restoring that of the District Judge holding that Appalaswamy was
the absolute owner of the mill and the sons had no right, title
or interest therein.
On receipt of the Privy Council's decision
which finally determined the rights of the panics and the ownership of the assessee in the mill, the Income-tax Officer issued on
March 2, 1948 a notice under s. 34 pf the Income-ta~ Act in
respect of Rs. 1,09,613 received by the assessee as lease income
of the mill.
It was contended for the assessec (I) tha· the proceedings initiated under s. 34 of the Act for the ye2. 1944-45
assessment were invalid in law as there was no new information
leading to the discovery that income had escaped assessment, (2)
that in any event the assessce was entitled to set c.J the sum of
Rs. 1,15,000 paid to the sons of Appalaswamy under the compromise: approv~ by. the High Cou~ .for releasing their rights.
1f any, m the mill agamst the assessee s mcome from the mill. Th~
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C.l.T. v. JAOAN MOHAN (Ramaswami, J.)
729
Im:ome-tax Officer rejected these contentions and
treated
the
whole amount of Rs. 1,15,000 as paid toward capital expenditure
in acquiring an asset.
The Appellate Assistant Commissioner
rejected the appeal of the assessee.
The Tribunal affirmed the
order of the Appellate Assistant Commissioner.
It held in the
first place that the assessee had not disclosed the impugned source
of income from the mill in his original assessment, that the matter
as to fae assessee's ownership of the mill was sub-judice and that
the decision of the Privy Council constituted information not only
o,f law but also as to the factum of the ownershio of the Mill and
the income therefrom. The Tribunal expressed the view thnt the
sum of Rs. 1,15,000 could not be allowed to be set off against the
assessee's income from the mill as it was an ex gra:ia payment to
the sons of Appalaswamy who had no right, title or interest in
the mill and it was paid in order to perfect a supposed defective
title and as such was of capital nature. Thereafter the Income-tax
Appellate Tribunal stated a case to the High Court under s. 66(2)
of the In,dian Income-tax Act, 1922 on the following questions
of law:
"R. A. No. 779 which relates to the assessment year
1944-45:
( 1) Whether on the facts and in the circumstances
of the case, in respect of the assessment year 1944-45,
the, assessment made on the assessee in the status of a
Hindu undivided family in respect of income received by
him as Receiver could be justified notwithstanding the
provisions of section 41 of the Act ?
( 2) Whether, on the facts and in the circumstances
of the case, the assessment of the entire income of
Rs. 1,09,613 in the hands of the assessee is valid in the
face of the compromise memo, dated 7-9-1945 approved
by the Court ?
( 3) Whether, on the facts and in the circumstances
of the case, the assessee is not entitled to
set oJf
Rs. l, 15 ,000 being the aniount paid to the minors for
releasing their rights in the prnperty from out of the
amount received from the mill ?
R. A. No. 780 w!)ich relates to assessment year 1945 46:
( n Whether on the facts and in the circumstances
of the case, the assessment made under section 34 of the
Act is valid in law ?
(2) Whether on the facts and in the circumstances
of the case, in respect of the assessment year 1945-46,
730
St:PREME COlJRT REPORTS
[1970] l S.C.ll..
the assessment on the assessee in the status of a Hindu
undivided family in respect of the income received by
him as Receiver could be justiticd notwithslanding the
provisions of Section 41 of the A ct ?
(3) Whether, on the facts a .tl in the circumstance'
of the case, the assessment of the entire
income
of
Rs. 31,087 in the hands of the asses"cc i> valid in the
face of the compromise memo, dated 7-9-1945 approved
by the Court ?
( 4) Whether, on the facts and in the circumstances
of the case, the assessee is not
entitled
to
set
oil
Rs. 1, 15,000 being the amount paid to !he minors for
releasing their rights in the property from out of the
amoun• rec~ived from the mill ~
R.A. No. 781 which rebtcs to a-sc"mcnt year 1946-47 :
( 1) Whether, on the facts and in the .:ircumstances
of the case, in respect of the assessment year I 946-47
the assessment on the assessee in the status of a Hindu
undivided family in respect of income recci·1cd by him
as Receiver could be justified, notwithstanding the provisions of section 41 of the Act ?
(2) Whether, on the facts and in the circumstances
of the case. the assessment of the entire income
of
Rs. 4,775 in the hands of the as;c"ec is valid in the
face of the compromise memo, dated 7-9-1945 approved
by the Court ?
(3) Whether on the facts and in the circums•;mces
of the case, the assessee is not entitled
to
set
oR'
Rs. 1,15,000 being the amount paid to the minors for
releasing their right in the rrorerty from out or the
amount received from the Mill?"
The Appellate Tribunal poinlcd out in tho statement of 1hc
case that question No. I in R.A. No. 780 for the assessment year
1945-46 pertained to the earlier a>sc«mcnt year 1944-45 in R.A.
No. 779 and al><> that question No. 2 in R.A. Ne:" 780 and R.A.
No. 779 for the assessment year l 94~-46 ::nd the corresponding
excess profits tax assessment did not arise in that year but pertained to the earlier assessment vear I 944-45 in RA. No. 779
and the corresponding excess r'rofits tax assessment in R. :\.
1\o. 782.
The High Court answered question Js:os. l and 2 in R. A.
No. 779 and qucs1ion No. l in R. A. No. no in the affirm~tive.
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C.I.T. v. JAGAN MOHAN (Ramarwami, !.)
731
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The High Court held that re-"assessment proceedings have been
validly initiated under s. 34 of the Act. The High Court tound
that the assessment on the assessee in the status of Hind11 Undivided Fautily in respect of income received by him as Receiver
was proper. The High Court thought that the basis of the comprontise in the Madras High Court enter~d into between
t~c
assessee and the minor sons of the veudor Appalaswamy wherem
the assessee paid Rs. 1,15,000 to the minor sons cannot be ignored.
The High Court negatived the contention
of the Income-tax
Department that the sum of Rs. 1,15,000 was pai\I to cure a supposed defect in the title and that it_ was a capital payment. Upon .
the interpretation of the terms of1he compromise the High Court
took the view th,at the· amount of·Rs. 1,15,000 was paid partly
towards acquisition of capital asset and partly towards the discharge of the claim towards profits and hence it should he apportioned towards capital and income in the proportion of 90/85.
C.As. Nos. 1381 to 1386 of 1966 ~re brought by certificate from
the judgment of the High Court on behalf of the Comntissioner of
Income-tax and C.A. Nos. 893 to '898 of 1966 were brought by
special lea\>e from the same judgment to this Court on behalf of
the assessce.
After the Amen<)ing Act· of 1939 and before the Amending
Act of 1948 Section 34 stood as follows :
" ( 1) If in consequence of definite information
which has come into his possession
the Income-tax
Officer, discovers that income, profits or gains chargeable to income-tax have escaped assessment in any year,
or have been under-assessecj, or have been assessed at too
low a rate, or have been the subject of excessive relief
under this Act the Income-tax Officer may in any case
in which he has reason (()1believe that the assessee has
concealed the particnlars o'f his income or deliberately
furnished inaccurate particulars thereof at anv time within eight years, and· in ·any ·oiher case at any· time within
f~ur years of the end lilf- t~at year, serve on th~ person
hable to pay tax on such mcome profits or gams or in
the case of a company on' .the principal officer thereof a
notice containing all or any of the requirements which '
may be included in a nc\tice under sub-section (2) of
section 22, and may proceed to llssess or re-assess such
income, profit or _gains, ~nd the provisions of this Act,
shall, so far as may be, apply accordingly as if the notice
were a notice issued under that sub-section.
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(2) No order of assessment under section 23 or of
assessment or re-assessment under sub-section (.1) of this
732
SUPREME COURT R&PORTS
( 1970] I S.C.R.
section shall be made after the expiry, in any case to --
A
which clause ( c) of sub-section ( 1) of section 28
applies. of eight years, and in any_ othe.r .case, of four
y~ars from the end of the year, m wh1c11 the income,
profits or gains were first' assessable.
The first question ads.in~ in this case is whether the proceediI?g
under s. 34 is legally vahd. It was contended by Mr. Narasara1u
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~Illcome-tax Officer was fully aware of the circumstances of the 'case and the assessee had placed all the relevant facts
before .him namely thr t under the High· Court'~ judgment the
vendor was only enti!ld to one-third share of the income pending the decision of the appeal before the Privy Council.
Jn our
opinion there is no justification for this 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 h~ 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. J4
of the Income-tax Act.
This view is borne out by the deeis!Ori
of this Court in Maharaja Kumar Kamal s;,1gh v. Commissio11er
of bico111e·-1ax.(') Jn that case tl)c Income-tax Officer had, following the decision of the High Court i~~ Kamakhya Narain Singh's
case(') omitted to bring to assessment for the year 1945-46 the
sum of Rs. ,93,G04 reQ!_esenting interest on ai·mars of rent due io
the assessce in respect of agricultural land on the ground that
. the amount was agricultural income. Subsequently the Privy Cou!l-
. -ciI, on appeal from that decision held that interest on arrears of
rent prryablc in respect of agricultural land was not agricultural
income. As a result of this· decision the Income-tax Officer initiated
re-a>sessment proceedings under s. 34(l)(d) of the Income-tax
Act and brought the amount of Rs. 93,604 to tax.
In these
circumstances it was held by this Court firstlv that the word infornlation ins. 34(1) (b) included information as to the true rrn.i"
correct state of the law, and so would cover information a>' to
relevant judicial decisions, secondly that 'escape' in s. 34 (1) was
not confinec! to cases where no return had been submitted bv the
assessee or where income had not been assessed owin~ io in-
..ctvertence or oversight or other' laclina attributable to th~ asse:;sing authorities.
But even in a ,case where a return had been
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C.I.T. v. JAOAN MOHAN (Ramaswami, !.)
733
submitted, if the Income-tax Officer had erroneously failed· to tax
a part of the assessable income, it was a case ~~ere that part. of
the income had escaped assessment.
The dec1s10n of the Privy
Council therefore, was held to be information within the meaning
of s. 34,(l) (b) and the proceedings for re-assessment were validly
initiated.
In our opinion. the principle of this deci~ion .g?~erns
the present case and it must be held that the proceedmgs m1Uated
under s. 34 for the assessment year 1944-45 were legally valid ..
It was stated on behalf· of the appellant that in 9ny case the
Income-tax Office!" 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 isstting a notice under sub-s. (2) of s. 22 the
previous under-assessment is set aside and the whole 9ssessment
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 wa~ li!lble 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 1;t1e 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'l:iringing into existence a right or asset
of an enduring nat\)re. 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 n source of profit or in.come 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.
7 3~
SUPREME COURT REPORTS
[1970) I SCR.
asset or an advantage for the enduring benefit of a trade,
J think that there is very good reason (in the absence of
sp.:cial circumstances leading to an opprisitc conclusion)
for treating such an expenditure as properly attrib1i:ablc
not to revenue but to capital."
In Commissioner of Taxes v.
Nclzanga
Conso!idtlled Copper
Mines Ltd.(1) Lord Radcliffr observed at p. 960:
"Courts have stressed. the importance of observing a
demarcation between the cost of creating, acquiring or
enlarging the permanent (which dCles not mean perpetual) structure of which the income is to be the produce
or fruit and the cost of earning that inco1ne itself or performing the incomc·e:irning operations.
Probably thi,
is as illuminating a line of di .. tinction as the law by itself
is likely to achieve.''
It is, howel'cr, contended on behalf of the asscssce that the
amount of Rs. I, 15,000 was paid partly for the acquisiuon of
capital asset and partly to discharge the claim towards profits and
hence there should be an apportionment of the amount, It i,; not
possible to accept this contention.
It appears from the order of
the High Court that the value of the mi!! was fixed at Rs. 1,15,000
after taking into consideration the fact that the mil; 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.
Jn 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. I, 1.5,000 for the release of the claim of the plaintiffs in the mill was held to be fair.
The High Court, thererore,
certified the compromise to be for the benefit of the minor plain·
tiffs.
In the cour;e 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 mill was the se!Facquired property of the fath~r. 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 e.ntitled 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
(I) [I %1) A.C. 94~.
A
B
D
E
F
G
H
A
B
c
D
E
F
C.I.T. v. JAGAN MOHAN (Ramaswami, 1.)
735
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 clrum, 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 plaintift."
It is true that the :High Court took into consideration the income
from the mill in testi!)g 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 tlie 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. b~ 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 accor~ingly 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.
LISSup CI/69-3
I. 1 ._,