# THE COMMISSIONER OF INCOME-TAX, MADHYA PRADESH AND BHOPAL v. MESSRS. VYAS & DOTIW ALA

- **Citation:** [1959] Supp. 1 S.C.R. 39
- **Court:** Supreme Court of India
- **Decided:** 1959
- **Case number:** Civil Appeal No. 222 of 1956
- **Bench:** Venkatarama Aiyar, Gajendragadkar, A. K. Sarkar
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/the-commissioner-of-income-tax-madhya-pradesh-and-bhopal-v-messrs-vyas-dotiw-ala-1544
- **Pages:** 7

## Headnote

I ncome-tax-Assessees financing. cloth distribution scheme-Profits, if accrue to assessees-Agreement to utilise profits for charitable
purposes-Such profits, if exempt from taxation-Indian Income-tax
Act, r922 (XI of r922), s. 4(3) (i-a).
The Deputy Commissioner of Amraoti, evolved a scheme for
the distribution of standard cloth. The assessees agreed to
finance the scheme without charging any interest and were appointed financiers and distributors. The orders for the cloth were
placed by the Government with the mills and the cloth was delivered to the assessees upon their paying the value of the cloth
together with 6!% of the ex-mill price. The Deputy Commissioner paid 4t% of the ex-mill price to the assessees for contingent expenses of working the scheme. The assessees distributed
the cloth at prices fixed by the Deputy Commissioner through
the Tehsildars and the Deputy Commissioner was responsible to
the assessees for the sale proceeds receivable from the Tehsildars. Out of the sale proceeds the Deputy Commissioner paid
to the assessees whatever thev had advanced on the cloth. The
profits from the scheme were agreed to be utilised for such
charitable purposes as might be decided by the Deputy Commissioner. The assessees contended that the income was not their
income and that it was exempt from taxation under s. 4(3) (i-a)
of the Income-tax Act.
·
Held, that the profits were income which accrued to the
; .
assessees. The assessees worked the scheme and such working
produced the profits. The fact of the control of the Deputy Commissioner could not prevent the working of the scheme by the
assessees from being a business carried on by them. The provisions in the agreement that the Deputy Commissioner guaranteed the payment by the Tehsildars of the price due from them,
and that the profits would be devoted to charity decided by the
Deputy Commissioner and the claim for exemption under s. 4(3)
(i-a) all indicated that the assessees were the owners of the
business.
Held further, that the profits were not exempt from taxa-
•
tion under s. 4(3) (i-a), as the business was not carried on behalf
of any religious or charitable institution.

## Text

(1) S.C.R. SUPREME COURT REPORTS
39
THE COMMISSIONER OF INCOME-TAX,
MADHYA PRADESH AND BHOPAL
v.
MESSRS. VYAS & DOTIW ALA
(VENKATARAMA AIYAR, GAJENDRAGADKAR
and A. K. SARKAR JJ.)
I ncome-tax-Assessees financing. cloth distribution scheme-Profits, if accrue to assessees-Agreement to utilise profits for charitable
purposes-Such profits, if exempt from taxation-Indian Income-tax
Act, r922 (XI of r922), s. 4(3) (i-a).
The Deputy Commissioner of Amraoti, evolved a scheme for
the distribution of standard cloth. The assessees agreed to
finance the scheme without charging any interest and were appointed financiers and distributors. The orders for the cloth were
placed by the Government with the mills and the cloth was delivered to the assessees upon their paying the value of the cloth
together with 6!% of the ex-mill price. The Deputy Commissioner paid 4t% of the ex-mill price to the assessees for contingent expenses of working the scheme. The assessees distributed
the cloth at prices fixed by the Deputy Commissioner through
the Tehsildars and the Deputy Commissioner was responsible to
the assessees for the sale proceeds receivable from the Tehsildars. Out of the sale proceeds the Deputy Commissioner paid
to the assessees whatever thev had advanced on the cloth. The
profits from the scheme were agreed to be utilised for such
charitable purposes as might be decided by the Deputy Commissioner. The assessees contended that the income was not their
income and that it was exempt from taxation under s. 4(3) (i-a)
of the Income-tax Act.
·
Held, that the profits were income which accrued to the
; .
assessees. The assessees worked the scheme and such working
produced the profits. The fact of the control of the Deputy Commissioner could not prevent the working of the scheme by the
assessees from being a business carried on by them. The provisions in the agreement that the Deputy Commissioner guaranteed the payment by the Tehsildars of the price due from them,
and that the profits would be devoted to charity decided by the
Deputy Commissioner and the claim for exemption under s. 4(3)
(i-a) all indicated that the assessees were the owners of the
business.
Held further, that the profits were not exempt from taxa-
•
tion under s. 4(3) (i-a), as the business was not carried on behalf
of any religious or charitable institution.
CIVIL APPELLATE JURISDICTION:
Civil Appeal No.
222 of 1956.
October 3.
40
SUPREME COURT REPORTS . (1959] Supp.
1958
Appeal by special leave from the judgment and
Th c
. .
decree dated December 8, 1953, of the former Nagpur
.; 1:,;::;'.;;;~· High Court in Misc. Civil Case No. 55 of 1950.
Madhya Pradesh 0G K Da 1ta
S l" "t
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rT K
Bh P 1
•
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p1• ry,
oici orene1a
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, ... ia, "·
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; •
Rajagopala Sastri, R.H. Dhebar and.D. Gupta, for the
Mmrs. Vyas o;. appellant..
Dotiwala
Sarkar ].
The respondent did not appear.
1958. October 3. The Judgment
delivered by
of the Court was
SARKAR J.-This is an appeal brought by special
leave against the judgment of the High Court at
Nagpur, delivered on a reference under s. 66(1) of the
Income-tax Act, The appeal is by the Commissioner
of Income-tax, Madhya Pradesh and Bhopal. The
respondents are the assessees Vyas & Dotiwa.la. The
respondents have not appeared in this appeal. We
shall presently set out the facts but before we do that,
we wish to state that the assessment years concerned
were 1945-46 and 1946-47. Though there were two
separate assessment orders in respect of these years,
ultimately when they ca.me up before the Appellate
Tribunal they were conaolidated into one appeal. The
appeal before us likewise concerns both these assessment years.
It appears that in or about July 1943 when considerable difficulty was being felt about cloth, the Deputy
Commissioner, Amraoti, evolved a scheme to solve
that difficulty. Under that scheme Kisanlal Vyas
and a firm called Edulji Framji Dotiwala who have in
these proceedings been referred to as Dotiwala, undertook to finance the scheme without charging any
interest or profit and were appointed as financiers
and also distributors of a variety of cloth called
stardard cloth for the town and camp of Amraoti and
certain areas in the interior. It is not necessary to
set out the various details of the scheme and it will be
sufficient to state that Vyas and Dotiwala, who as an
association of persons are the assessees concerned,
agreed to open an account in the Imperial Bank of
India to be operated by them out of which the purchases
. '
j.
'
(1) S.C.R.
SUPREME COURT REPORTS
41
of the cloth were to be financed. The orders for the
1958
cloth were to be placed by the Government with the Th c -. .
,
,
.
l
e
om1nissioner
mills and on the arrival of a consignment of cloth, t ie
of Income-tax
assessees were to pay to the Deputy Commissioner, Madhya Prade;h
Amra.oti, the value of the consignment together with
and Bhopal
6l per cent. of the ex-mill price. The consignment was
v.
thereupon to be opened and its contents checked by Messrs. Vyas &
the assessees and the officials and delivered to the
Dotiwala
assessees on their granting a receipt for the same.
Sarkar 1.
The Deputy Commissioner would pay 4i per cent. of
the ex-mill price to the assessees out of the amount
paid by the latter as aforesaid for contingent expenses
of working the scheme. The scheme provided that
the contingent expenses were not to exceed 3 per cent.
of the ex-mill price. The cloth coming to the hands
of the assessees was to be distributed in Amraoti town
and camp through a shop to be opened by the assessees
and in the interiors of the area; concerned through
Tehsildars with Patils under them. The substance of
the arrangement of distribution appears to have been
that it would be entirely under the co.ntrol of the
Deputy Commissioner who made himself responsible
to the a.ssessees for the sale proceeds receivable from
the Tehsildars. The Deputy Commissioner was to
decide the price for which the cloth was to be sold to
the consumers and also the persons entitled to buy the
cloth. Out of the sale proceeds the Deputy Commissioner was to pay to the assessees whatever they had
advanced on account of the cloth. The most important
provision in this scheme is para. 14 which is set out
below.
Profits resulting from the scheme shall be utilised
for such charitable purposes as may be decided on by
the Deputy Commissioner in consultation with the
advisory
committee appointed
to supervise the
scheme.
It appears that the books of the ·assessees showed
Rs. 34,737/- for the assessment year 1945-46 and
Rs. 17 ,682/- for the assessment year 1946-4 7 as profits
earned in working the scheme. The Income-tax Officer
assessed the assessees to tax on the profits so earned.
6
42
SUPREME COURT REPORTS [1959] Supp.
•958
The assessment orders made by this officer would
T •- c -. .
appear to show .that the only point urged by the
-
omm1mon.,
b fi
h'
·
h
h
of Income-ta
assessees e ore 1m agamst t e assessment was t at
Madhya PrO:.sh the income was exempt from taxation under s. 4(3)(i-a)
a•d Bhopal
of the Indian Income-tax Act, 1922.
The officer
v.
rejected this contention. The assessees went up in
Mess•s. Vy"' .s. appeal to the Appellate Assistant Commissioner,
Dotiwala
b £
h
e ore w om the same contention appears to have been
Sarhar 1 .
repeated. The Appellate Commissioner confirmed the
order of the Income-tax Officer. The assessees then
appealed to the Appellate Tribunal. The Tribunal
held that the assessees had objected to the assessment
before the Income-tax Officer on two grounds, namely,
that the income was not the income of the assessees
and that the income was exempt from taxation under
s. 4(3)(i-a), as appeared from their letter dated January
22, 1947. One of these alone had been dealt with by
that officer, as appears from his order ear1ier referred
to. The Appellate Tribunal agreed with the contention of the assessees that they were not liable to be
taxed on the profits because these did not form their
income.
The Tribunal was of the view that the
scheme was the scheme of the Deputy Commissioner
and completely under his control ; that the assessees
were merely the financiers and also managers under
the peputy Commissioner to carry out the scheme
and that the assessees only helped to work the scheme.
The Tribunal held that the profits that may have
resulted from such working were not therefore theirs
nor represented their income and the assessees could
not be assessed to income-tax thereon. Ill this view
of the matter the Tribunal set aside the orders of
assessment.
Thereafter, on the application of the revenue authorities the Tribunal referred the following question to
the High Court under s. 66(1) of the Act:
Whether on the facts of this case any income
accrued to Messrs. Vyas and Dotiwala as the result of
their associating themselves as financiers in the
scheme for the distribution of stands.rd cloth ; and, if
so whether such income was assessable in their
hands.
'
- \..-
(1) S.C.R. SUPREME COURT REPORTS
43
On that reference the High Court held that under the
z958
charging section in the Indian Income-tax Act, 1922, .
- ..
1
4 .
s:
h
h
1 lie Commissioner
name y, s. , it was necessary 1or t e revenue aut o11
n 1
rities to prove that the assessees received or should be ,:.,d,.;:• ;;a::~.,.
deemed to have received income or profit from the
and Bllopal
scheme during the relevant period. It held that the
v.
assessees had not actually received any such income Messrs. Vyas <!>-
and further that the expression " deemed· to be
DoliUllilla
received" in that section only meant deemed by the
Sarkar ;.
provision of the Act to be· received, and no such
provisions of the Act had been relied upon on behalf
of the revenue authorities. In this view of the matter
the High Court answered the question framed, in the
negative.
The learned :::lolicitor-General contends that the
High Court failed to appreciate the real question.
He
says that the question was not whether income was
received or deemed to be received but whether income
had accrued and the point for decision was, as appeared
from the judgment of the Tribunal, whether the profits
formed the income of the assessees. We agree with
this criticism of the judgment of the High Court.
On the point that arises from the question framed,
we think that the Tribunal went wrong. It is not
disputed that the assessees worked the scheme and
such working produced the profits as found in the
assessment orders. The Tribunal thought that since
the scheme was completely under the control of the
Deputy Commissioner, the a.ssessees could not be said
to have carried on business by working the scheme.
We are unable to see that the fact of the control of
the Deputy Commissioner can prevent the working of
the scheme by the assessees from being a business
carried on by them. In our view, it only comes to
this that the assessees had agreed to do business in a.
certain manner. The fact that the Deputy Commissioner guaranteed the payment by the Tehsildars of
the price due from them, to the assessees would 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
SUPREME G'OURT REPORTS [1959) Supp.
1958
by the a.ssessees.
Again the claim, may be in the
. .
alternative, by the. a.ssessees for exemption under
Th',C1omm•monu s. 4(3)(i-a.) would not a.rise unless the a.ssessees were
01
ncome-tax,
.
b ·
L
J
1
f h
h
Madhya Prad"h carry mg on a usmess.
a.st y, pa.re..
4 o t e sc eme
and Bhopal
which we have earlier set out, clearly contemplates
v.
profits resulting from the scheme. The provision that
M""'·. Vyas .s- the profits would be devoted to charity to be decided
Dotiwala
by the Deputy Commissioner, would indicate that
Sarkar J.
without it the profits would have been utilise.hie by
the a.ssessees.
The profits belonged to the a.ssessees
and hence the necessity for this agreement so that ·the
a.ssessees might be made to spend them on charity.
If, as the Tribune.I thought, the profits were of the
Government, there was no necessity for the Government providing for the profits being expended on
charity, for the Government if minded to do so, could .
have done it without such a provision. The fact
remains that t.he working of the scheme produced
profits and apart from para. 14 such profits undoubtedly
belonged to the a.ssessees. If they chose to agree by
pa.re.. 14 to devote the profits to charity, that was their
business; the profits ma.de by them would not change
their character and cease to be the assessees' income
because they agreed to devote their income to charity.
We might also say that there is nothing in the scheme
which shows that the a.ssessees had undertaken not to
make any profits on the distribution work under the
scheme ; they had only a.greed to finance the scheme
without receiving any interest or profit. Furthermore,
since the assessees actually made the profits, they a.re
liable to pay tax thereon whether they a.greed not to
make any profits or not. We wish also to point out
that it is not the a.ssessees' case that they have been
made to pay out the profits for any charity. For these
reasons we think that the profits were the profits of
the assessees and they a.re liable to pay tax on them.
With regard to the a.ssessees' claim for exemption
under s. 4(3)(i-a.), they a.re clearly not entitled to any.
That claim of the asse88ees has not been accepted by
any of the Courts below.
Section 4(3)(i-a) applies to
income derived from business carried on on behalf of a.
religious and charitable institution when the income
(1) S.C.R.
SUPREME COURT REPORTS
45
is applied solely to the purpose of the institution and
x95B
the business is carried on in the manner provided. It The Commissioner
is enough to say that the scheme, considered as a
of Income-tax.
business, was not carried on on behalf of any religious Madhya Pradesh
or charitable institution. Once it is held that the
and Bhopal
assessees made the profit, bow they use it would not
v.
matter.
Messrs. Vyas c;.
In the result, we would answer both parts of the
Doliwula
question framed, in the affirmative. We bold that the
Sarkar J.
profits were the income which accrued to the a.ssessees
and such income is assessable to income-tax and is
not exempt from taxation under s. 4(3)(i-a).
The
appeal is allowed with costs here and below.
Appeal allowed.
SMT. INDERMANI JATIA
v.
COMMISSIONER OF INCOME-TAX,
U.P., LUCKNOW
(VENKATARAMA AIYAR, P. B. GAJENDRAGADKAR
and A. K. SARKAR, J J)
Income-tax-Mercantile system of accounts-Accounts in India
showing credit entry of receipt of interest from Indian State-If such
amount liable to tax-New point-Indian Income-tax Act. z9:z:z (XI
of z9:z:z), s. 4 (I)(a).
The assessee, who was ordinarily resident in British India,
carried on ·business at Khurja and Aligarh in India and at Chistian
in the Indian State of Bahawalpur. He kept a central set of
accounts of the business at Khurja, which were maintained on
the mercantile system. Under the said system credit entries are
made in respect of amounts due immediately they become legally
due and even before they are actually received. In his account
books the income received by the assessee froll\ all sources was
~
shown, and the interest · account showed credit entries of
amounts received as interest on capital invested in the shop at
Chistian. The assessee conceded that as creditor he had the
right to enforce the payment of interest in British India and
that liability of the Chistian shop had been extinguished to the
October 3.