CASE NO.: Appeal (civil) 2276(NT) of 1981 PETITIONER: COMMISSIONER OF INCOME TAX, GUJARAT RESPONDENT: ARTEX MANUFACTURING COMPANY DATE OF JUDGMENT: 08/07/1997 BENCH: S.C. AGRAWAL & G.B. PATTANAIK JUDGMENT:

JUDGMENT 1997 Supp (1) SCR 608 The Judgment of the Court was delivered by <NAME> J. This appeal by certificate granted by <ORG> under Section 261 of Income Tax Act, 1961 (hereinafter referred to as 'the 1961 Act') involves the question whether the surplus as a result of difference between the written down value and the sale consideration for the Plant, machinery and dead stock transferred by the assessee is under Section 41(2) of 1961 Act. The appeal relates to the assessment year 1967-68.

The assessee is a partnership firm which was carrying on the business of manufacturing artsilk cloth. A private Ltd. Company by the name of <ORG> (hereinafter referred to as 'the company') was formed with a a view to take over the business of the assessee as a running. On March 31, 1966 the assessee and the company entered into an agreement whereunder the assessee agreed to sell to the company the business hitherto carried on by the assessee as a whole going concern. The consideration for the said sale was Rs. 11,50,400 which was paid and satisfied by allotment of 11,504 fully paid up equity shares of Rs. 100 each according to original shares of partners of the assessee. In pursuance of the said agreement, the assessee ceased to carry on the business with effect from April 1, 1966 and the said business stood trans- ferred to the company. In respect of the assessment year 1967-68, the assessee filed its return showing 'nil' income. On January 9, 1970, a revised return was filed showing 'nil' income with a note that since the partnership firm was converted into a private limited company as a going concern there was no income chargeable to tax either under Section 41(2) or under Section 45 of the 1961 Act. During the course of the assessment proceed-ings before the Income Tax Officer, for the purpose of determination of purchase consideration, the assets were shown at Rs. 41,73,973, out of which the machinery and dead-stock, as revalued by M/s. Hargovandas Girdharlal, was Rs. 15,87,296. The liabilities were shown at Rs. 30,23,573 and the balance amount of Rs. 11,50,400 was shown as the purchase consideration. The Written Down Value of <ORG>, machinery and dead-stock as per assessee's books, was Rs. 4,36,896. The difference between Rs. 15,87,296, the value of <ORG>, machinery and dead-stock as revalued, and Rs. 4,36,896, the written down value of <ORG>, machinery and dead-stock as per assessee's books, came to Rs. 11,50,400. Relying upon the decision of this Court in <CITATION> ,  72 ITR 603, the Income Tax Officer held that tax was payable under Section 41(2) on the surplus amount, i.e., difference between the written down value of <ORG>, machinery and dead-stock as per assess's books and the value of the same as revalued by M/s. Hargovandas Girdharlal. The Income Tax officer held that the written down value of <ORG>, machinery and dead-stock as per Income Tax records was Rs. 3,32,276 and after deducting the same from the amount of Rs. 15,87,296 for which <ORG>, machinery and dead-stock were transferred to the company, the Income Tax Officer held that tax was payable under Section 41(2) on the income of Rs. 12,56,020. The Appellate Asstt. Commissioner, on appeal, has held that the surplus was assessable under the head 'Capital Gains' and not under the head 'Business'. As regards the status of the assessee it was held that the assessee must be taxed in the status of 'Association of Persons' and not in the status of a 'Registered Firm'. The assessee as well as the <ORG> filed appeals against the said decision of the Appellate Asstt. Commissioner before <ORG> (hereinafter referred to as 'the <ORG>'). The <ORG> framed the following questions for consideration :

(i) whether the surplus is taxable at all?

(ii) If the surplus is found to be taxable, whether it should be taxed under Section 41(2) or under the head 'Capital gains'?

(iii) Whether the surplus is assessable in the status of '<ORG> or 'Registered Firm'?

On the first question the contention urged on behalf of the assessee was that the principle of mutuality was applicable and consequently the surplus was not liable to tax. The said contention was rejected by the <ORG> on the basis of the decision of this Court in <CITATION> .,  75 ITR 790. On the second question regarding applicability of Section 41(2) , the <ORG> held that the language of Section 41(2) was wider than the language of Section 10(2)(vii) of the Indian Income Tax Act, 1922 (hereinafter referred to as 'the 1922 Act') and, therefore, the surplus was taxable under Section 41(2) of the 1961 Act. As regards the third question, the <ORG> held that the surplus was taxable as business profit under Section 41(2) and that the assessee was assessable in the status of a registered firm. At the instance of the assessee, the <ORG> referred the following questions for the opinion of <ORG> :

1. Whether, on the facts and in the circumstances of the case, the <ORG> was right in holding that the principle of mutuality will not apply and, therefore, the assessee was liable to be taxed?

2. Whether, on the facts and in the circumstances of the case, Section 41(2) was applicable?

3. Whether, on the facts and in the circumstances of the case, the <ORG> was right in holding that the surplus was not capital gains, but was business income?

4. Whether, on the facts and in the circumstances of the case, the <ORG> was right in holding that the status of the assessee was a registered firm and not that of an association of persons?

5. Whether the <ORG> was right in holding that the assessee was not entitled to any relief on the basis of the two circulars relied on by it?

6. Whether the Transfer of a going concern is liable to tax under Section 45 of the Income Tax Act, or under Section 41(2) , or is it realisation sale, which is not liable to tax?"

By the impugned judgment, <ORG> has answered Question No. 1 in favour of the <ORG> and against the assessee. Question Nos. 2, 3, 4 and 5 has been answered in favour of the assessee and against the <ORG>. The first part of question No. 6, relating to applicability of Section 45 has been answered in the affirmative and the second part relating to applicability of Section 41(2) in the negative and as regards the third part it" has been observed that in view of the answer to the first part and the second part of the question, the third part of the question does not arise. <ORG> has held that the decision of this Court in B.M. Kharwar (supra) is not applicable and that the present case is governed by the decision of this Court in <CITATION> ),  57 ITR 299. Feeling aggrieved by the said decision of <ORG>, the <ORG> has filed this appeal on the basis of the certificate of fitness granted by <ORG>.

Since question No. 1 was answered in favour of the <ORG> by <ORG> this appeal is confined to questions Nos. 2 to 6 which were answered against the revenue. The main question that falls for consideration is whether Section 41(2) can be held to be applicable in the present case.

Before we refer to the decisions of this <ORG> in <NAME> (supra) and <NAME> (supra), we may briefly refer to the legislative history of the provision contained in Section 41(2) of the 1961 Act. In the 1922 act provision relating to the 'balancing charge' was contained in clause

(vii) of sub-section (2) of Section 10 which originally read as follows :

" Section 10(2) - Such profits or gains shall be computed after making the following allowances, namely :-

(vii) : In respect of any machinery or plant which has been sold or discarded, the amount by which the written down value of the machinery or plant exceeds the amount for which the machinery or plaint is actually sold or its scrap value :

Provided that such amount is actually written of in the books of the assessee :

Provided further that where the amount for which any machinery or plant is sold exceeds the written down value, the excess shall be deemed to be profits of the previous year in which the sale took place."

Clause (vii) and the second proviso were amended by Act 9 of 1946 and Act 67 of 1949. After the amendment the said clause and the second proviso read as under :

"(vii) In respect of any such building, machinery or plant which has been sold or discarded or demolished or destroyed, the amount by which the written down value thereof exceeds the amount for which the building, machinery or plant, as the case may be, is actually sold or its scrap value :

Provided further that where the amount for which any such build-ing, machinery or plant is sold, whether during the continuance of the business or after the cessation thereof, exceeds the written down value, so much of the excess as does not exceed the dif-ference between the original cost and the written down value shall be deemed to be profits of the previous year in which the sale took place."

<CITATION> .,  41 ITR 290, this Court has thus explained the reason for introducing the fiction in the second proviso to Section 10(2)(vii) :

"The reason for introducing this fiction appears to be this. Where in the previous years, by the depreciation allowance, the taxable income is reduced for those years and ultimately the asset fetches on sale an amount exceeding the written down value, i.e., the original cost less depreciation allowance, the <ORG> is justified in taking back what it had. allowed in recoupment against wear and tear, because in fact the deprecia-tion did not result. But the reason of the rule does not alter the real character of the receipt. Again, it is the accumulated depreciation over a number of years which is regarded as in-come of the year in which the asset is sold. The difference between the written down value of an asset and the price realized by sale thereof though not profit earned in the conduct of the business of the assessee is notionally regarded as profit in the year in which the asset is sold, for the purpose of taking back what had been allowed in the earlier years."

[pp.295-296] Prior to the amendment introduced by Act 67 of 1949, for the purpose of applicability of Section 10(2)(vii) , the following three conditions were required to be satisfied :

(i) During the entire previous year or part thereof, the business should have been carried on by the assessee;

(ii) The building, machinery or plant should have been used in the business; and

(iii) The building, machinery or plant should have been sold when the business was being carried on and not for the purpose of closing it down or winding it up. After the insertion of the words "whether during the continuance of the business or after the cessation thereof in the second proviso by Act 67 of 1949, the third condition for the eligibility of the excess to tax was removed. If during the entire previous year or a part thereof, the business was carried on by the assessee and the building, machinery or plant was used in the business, the excess over the written down value was liable to tax by virtue of the second proviso to Section 10(2)(vii) even though the sale took place in the year of account after the closure of the business. (See : Commissioner of income <CITATION> .,(1965) 55 ITR 741.

At the relevant time Section 41(2) of the 1961 Act provided as under :

"41(2) Where any building, machinery or plant which is owned by the assessee and which was or has been used for the purposes of business or profession is sold, discarded, demolished, or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceed the written down value, so much of the excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to income tax as income of the business or profession of the previous year in which the moneys payable for the building, machinery, plant or furniture became due :

Provided that where the building sold, discarded, demolished, or destroyed is a building to which Explanation 5 to section 43 applies, and the moneys payable in respect of such building, together with the amount of scrap value, if any, exceed the actual cost as determined under that Explanation, so much of the excess as does not exceed the difference between the actual cost so determined and the written down value shall be chargeable to income tax as income of the business or profession of such previous year.

Explanation. - Where the moneys payable in respect of the building, machinery, plant or furniture referred to in this sub-section become due in a previous year in which the business or profession for the purpose of which the building, machinery, plant or furniture was being used is no longer in existence, the provisions of this sub-section shall apply as if the business or profession is in existence in that previous year."

While dealing with the question as to whether Section 41(2) would be attracted where there is slump sale in the sense that the entire business is transferred for a lump sum amount it would be useful to take note of the decision of <ORG> of <ORG> in <NAME> v. Commissioner of Taxes, (1927) AC 327 (PC). In that case, two partners carrying on business as general merchants and drapers sold the partnership business to a limited company in which they became the only shereholders. The sale was of the entire assets, including goodwill, the consideration being fully paid shares, and an agreement by the company to discharge all the liabilities. The nominal value of the shares being more than the sum to the credit of the capital account of the partnership in its last balance- sheet, a new balance-sheet was prepared showing a larger value for the stock-in-trade. The increase in value so shown was treated as profit on the sale of the stock-in-trade by the Commissioner of Taxes and the appellant was assessed upon it for income tax under the Land and Income Tax Act , 1916 of New Zealand, which imposed the tax on all profits or gains derived from any business. <ORG> decided the case in favour of the appellant. It was held that if the transaction is to be treated as a sale, there was no separate sale of the stock, and no valuation of the stock as an item forming part of the aggregate which was sold. It was observed that income tax being a tax upon income, it is well established that the sale of a whole concern which can be shown to be a sale at a profit as compared with the price given for the business, or at which it stands in the books does not given rise to a profit taxable to income tax, Lord <NAME>, speaking for <ORG>, said :

"Where, however, the business consists, as in the present case, entirely in buying and selling, it is more difficult to distinguish between an ordinary and a realization sale, the object in either case being to dispose of goods at a higher price than that given for them, and thus to make a profit out of the business. The fact that large blocks of stock are sold does not render the profit obtained anything different in kind from the profit obtained by a series of gradual and smaller sales. This might even be the case if the whole stock was sold out in one sale. Even in the case of a realization sale, if there were an item which could be traced as representing the stock sold, the profit obtained by that sale, though made in conjunction with a sale of the whole concern, might conceivably be treated as taxable income."

[emphasis supplied] <CITATION> .,  66 ITR 135, after referring to the decision in Doughty (supra), this Court has observed :

"This case shows that where a slump price is paid and no portion is attributable to the stock-in-trade, it may not be possible to hold that there is a profit other than what results from the appreciation of capital. The essence of the matter, however, is not that an extra amount has been gained by the selling out or the exchange but whether it can fairly be said that there was a trading from which alone profits can arise in business."

[p. 142] In Mugneeram Bangur (supra), after referring to the above quoted observations in Doughty (supra) and <CITATION> ., [supra), this Court has said :

"It follows from the above that once it is accepted that there was a slump transaction in this case, i.e., that the business was sold as a going concern, the only question that remains is whether any portion of the slump price is attributable to the stock-in-trade."

[p. 305] In Mugneeram Bangur (supra) the assessee, a firm, which carried on the business of buying land, developing it and then selling it, pursuant to an agreement sold the business as a going concern with its goodwill and all stock-in-trade, etc., to a company promoted by the partners of the firm, the company undertaking to discharge all debts and liabilities, development expenses, and liability in respect of deposits made by intending purchasers. The consideration was paid by the allotment of shares of the face value of the amount of consideration to the partners or their nominees. The sale consideration included a sum of Rs. 2,50,000 towards goodwill. <ORG> held that the firm had no goodwill and that the sum of Rs. 2,50,000, although shown as the value of the goodwill, was really the excess value of the land, which was its stock- in-trade, and that although the sale was that of a business as a going concern the value of its stock-in-trade could be traced. This Court held that the sale was the sale of a whole concerned and no part of the price was attributable to the cost of the land and no part of the price was taxable. It was also held that the fact that in the schedule to the agreement the price of the land was stated did not lead to the conclusion that part of the slump price was necessarily attributable to the land sold and that what was given in the schedule was the cost price of the land as it stood in the books of the vendor and even if the sum of Rs. 2,50,000 attributed to goodwill could be added to the cost of the land, there was nothing to show that this represented the market value of the land. In this context, <NAME> (as the learned Chief Justice then was) has said :

"It seems to us that in the case of a concern carrying on the business of buying land, developing it and then selling it, it is easy to distinguish a realisation sale from an ordinary sale, and it is very difficult to attribute part of the slump sale to the cost of land sold in the realisation sale. The mere fact that in the schedule the price of the land is stated does not lead to the conclusion that part of the slump price is necessarily attributable to the land sold. There is no evidence that any attempt was made to evaluate the land on the date of sale. As the vendors were transferring the concern to a company, constituted by the vendors themselves no effort would ordinarily have been made to evaluate the land as on the date of sale. What was put in the schedule was the cost price, as it stood in the books of the vendors. Even if the sum of Rs. 2,50,000 attributed to goodwill is added to the cost of the land, there is nobody's case that this represented the market value of the land." (emphasis supplied) [pp.305-306] In B.M. Kharwar (supra) the assessee was a firm carrying on the business of manufacturing, purchasing and selling cloth. It closed its manufacturing side of the business and transferred its machinery to a private limited company in the share capital of which the partners of the firm had the same interest as they had in the assets and profits of the partnership. The excess amount realised over the written down value of the machinery was brought to tax by the Income Tax Officer under Section 10(2)(vii) , proviso

(ii), of the 1922 Act, as amended by Act 8 of 1946 and Act 17 of 1949. On the basis of the decision of this Court in <CITATION> 's Executors, (1955) 28 ITR 928, and the decisions of <ORG> and Calcutta in <CITATION> , (1958) 34 ITR 336 and <CITATION> ., (1963) 47 ITR 565, respectively <ORG> as well as <ORG> held that no profit in a business sense could be deemed to have resulted to the firm by the said transfer and, therefore, second proviso to Section 10(2) (vii) of the 1922 Act was not applicable. The said view was reversed by this Court and it was held that "the taxing authority is entitled, and is indeed bound, to determine the true legal relation resulting from a transaction". It was observed :

"In the present case the machinery of the factory belonging to the firm was transferred to the private limited company. Assuming that thereby readjustment of the business relationship was intended the liability to be taxed in respect of the readjustment had to be determined according to the strict legal form of the transaction. The company was a legal entity distinct from the partnership under the general law. Transfer of the machinery was by the firm to the company; and the legal effect of the transaction was to convey for consideration the rights of the firm in the machinery to the company. The transaction resulted in excess realization over the written down value of the machinery to the firm, and the liability to tax, if any, arising under the Act could not be avoided merely because in consequence of the transfer the interest of the partners in the machinery was substituted by an interest in the shares of the company which owned the machinery." [pp. 608-609] After referring to the observations in <ORG> (supra) that where business is sold as a going concern and the sale of the assets is a realisation sale, the difference between the written down value and the price attributable to the assets which were admitted to depreciation is not taxable under Section 10(2)(vii) , proviso (ii), as it stood enacted before it was amended by Act 67 of 1949, <NAME>, (as the learned Chief Justice then was) said :

"In our judgment, by virtue of the amendment made in Section 10(2)(vii) , proviso (ii), of the Indian Income-tax Act , 1922, by section 11 of the Taxation Laws (Extension to Merged States and Amendment) Act , 67 of 1949, even under a 'realisation sale' excess over the written down value not exceeding the difference between the original cost and the written down value is liable to be brought to tax."

[p. 609] After taking note of the second proviso to Section 10(2) (vii) of the 1922 Act, as amended by Act 67 of 1949, the learned Judge, while rejecting the contention urged on behalf of the assessee that where a transfer of the assets is effected with a view to close down the business no taxable profits result because the transfer is not in the course of business of the assessee, has observed :

"If, since the amendment of the proviso, liability to pay tax on the excess over the written down value arises, whether the sale of building, machinery or plant is before or after the closure of the business, it would be illogical to say that the excess is not taxable if the sale is for the closing down or in the course of winding up of the business."

[p. 610] In B.M. Kharwar (supra) this Court has mentioned that the observations made by the revenue authorities suggested that only the manufacturing side of the business was closed and not the business of purchasing and selling the cloth and that the Tribunal had recorded no finding that the transfer was 'a realisation sale' or in the course of winding up of the business while the High Court had observed that it was not possible to say that the entire business carried on by the firm at Surat, namely, the manufacturing of art silk cloth and the sale thereof, was not taken over by the company. This Court has observed that it did not propose to express any opinion on the correctness of that view and has examined and rejected, on merits, the contention urged on behalf of the assessee that the sale was in the course of realisation of assets of the business and on that account the excess over the written down value was not taxable.

In this context, reference may also be made to the decisions of this <ORG> in <CITATION> ,  63 ITR 224, and <CITATION> , (1970) 75 ITR 790. In <ORG> (supra) the appellant company, which was originally registered as <ORG>, altered its name to <ORG> on March 21, 1952. On the same day another company was incorporated in the name of <ORG> and by a written agreement of the same date the appellant company agreed to transfer its assets and liabilities to the new company, viz., <ORG>, in consideration of the allotment of shares and some cash, the latter taking over the liabilities of the appellant-company. Under the terms of the agreement the appellant-company purported to transfer seven items of property described in the schedules annexed to the deed. No deed of conveyance was executed. The new company took possession of the property agreed to be sold on July 1, 1952. In the agreement the properties sold were allotted specific values and no attempt was made to prove that the values so allotted were not true. The consideration for a building transferred was in excess of its original cost and the question was whether the difference between the original cost of the building and its written down value would be deemed profits under the second proviso to Section 10(2)(vii) of the 1922 Act. This <ORG> held that since the appellant-company has sold the property for a stated consideration which was not shown to be notional and that consideration was in excess of the original cost of the building, the difference between its original cost and its written down value was profit within the meaning of the second proviso to Section 10(2)(vii) of the 1922 Act. On behalf of the appellant-company, it was submitted that the transfer was a slump sale of the assets and that there being no separate sale of the property described in the second schedule the difference between the written down value and the cost price was not liable to be included as income in the process of assessment and reliance was placed upon the decision of <ORG> in <NAME> (supra) and on the decision of this <ORG> in Mugneeram Bangur (supra). Rejecting the said contention it was observed :

"That principle has however no application here. In the present case it is true that the entire assets of the appellant-company were sold to Messrs. <NAME> & Co. Ltd. There was no separate sale of different items, but the consideration of each item of property sold was expressly mentioned in the agreement of sale." (p. 231) In <NAME> (supra) the assessee sold his business of two newspapers as a going concern along with its assets and liabilities to a company formed by him in consideration of the allotment of fully paid up shares. The sale deed, executed subsequent to the transfer of posses-sion, recited the value of the movables including machinery and plant of the business. The Income Tax authorities sought to treat the excess over the written down value up to the original cost of the plant and machinery as profit under the second proviso to Section 10(2)(vii) of the 1922 Act and it was contended on behalf of the assessee that the vendor and the purchaser being the same, the profits arising therefrom were not taxable. The said contention was rejected and it was held that the transaction which gave rise to the receipt sought to be brought to tax was of the nature of sale and that, therefore, the excess could be assessed under the second proviso to Section 10(2)(vii) of the 1922 Act and reliance was placed on the decision in B.M. Kharwar (supra).

In the impugned judgment <ORG> has distinguished the decision in B.M. Kharwar (supra) on the ground that in that case the entire assets and liabilities of the partnership were not transferred to a limited company inasmuch as the whole business of the firm was not transferred to the limited company but only the machinery on the manufacturing side of the business of the firm was transferred to the newly formed limited company and the consideration was received by the partners of the firm in the shape of the shares of the company and the shares were allotted to the partners on the same basis as their share in the profits of the partnership firm. According to <ORG>, in B.M. Kharwar, this <ORG> was not dealing with a case of transfer of a business as a whole by a firm to a limited company. According to <ORG> such type of a case is found in <NAME>. <ORG> has also placed reliance on its judgment in <CITATION> , (1980) 126 ITR 1. The distinction pointed out by <ORG> that in B.M. Kharwar (supra) this <ORG> was not dealing with a case of transfer of a business as a whole by a firm to a limited company, is, in our opinion, not of much significance because this <ORG>, in B.M. Kharwar (supra), has held that by virtue of the amendment made in Section 10(2)(vii) , proviso (ii) of the 1922 Act by Act 67 of 1949 even under a 'realisation sale' excess over the written drawn value not exceeding the difference between the original cost and the written drawn value is liable to be brought to tax. In <NAME> (supra) this <ORG> has indicated that where there is a slump transaction and the business is sold as a going concern what is to be seen is whether any portion of the slump price is attributable to the stock-in-trade and if on the basis of the facts it can be found that a particular price is at- tributable to a particular item then the excess amount would be chargeable to tax under Section 10(2)(vii) , proviso (ii) of 1922 Act ( Section 41(2) of the 1961 Act). In the farts of that case the <ORG> found that it was very difficult to attribute part of the slump price to the cost of the land sold in the realisation sale since there was no evidence that any attempt was made to evaluate the land on the date of the sale. In the present case, however, it was the admitted case of the assessee before the Income Tax Officer that the <ORG>, machinery and dead-stock had been revalued by M/s <NAME> at the time of the agreement for sale and the amount of Rs. 11,50,400 was fixed after taking into account the value of the <ORG>, machinery and dead-stock at Rs. 15,87,296 as per valuation by M/s <NAME>. This shows that at the time of execution of the agreement on March 31, 1967 the value of the <ORG>, machinery and dead- stock that were transferred was Rs. 15,87,296.

<NAME>, the learned counsel appearing for the assessee, has submitted that in the present case the value of the <ORG>, machinery and dead-stock is not mentioned in the agreement and the agreement does not indicate the value attributable to the said items. It is no doubt true that in the agreement there is no reference to the value of the <ORG>, machinery and dead-stock. But on the basis of the information that was furnished by the assessee before the Income Tax Officer it became evident that the amount of Rs. 11,50,400 had been arrived at by taking into consideration the value of the <ORG>, machinery and dead stock as assessed by the valuer at Rs. 15,87,296. This is not a case in which it can not be said that the price attributed to the items transferred is not indicated and hence Section 41(2) of the 1961 Act cannot be applied. We are, therefore, unable to agree with the view of <ORG> that Section 41(2) of the 1961 Act is not applicable. Question No. 2 referred to <ORG> is, therefore, answered in the affirmative, i.e., in favour of the <ORG> and against the assessee. Questions Nos. 2 and 3 are interconnected in the sense that the surplus amount resulting from the transfer of <ORG>, machinery and dead- stock is either taxable as income under Section 41(2) or as capital gain under Section 45 . The <ORG> was of the view that it was chargeable to income tax under Section 41(2) while <ORG> has held that it was chargeable to tax as capital gain. Since we are of the view that the income was chargeable to income tax under Section 41(2) the decision of <ORG> that it was chargeable to tax as capital gain cannot be upheld. But the liability under Section 41(2) is limited to the amount of surplus to the extent of difference between the written down value and the actual cost. If the amount of surplus exceeds the difference between the written down value and the actual cost then the surplus amount to the extent of such excess will have to be treated as capital gain for the purpose of taxation. The <ORG> has not considered the matter in this light and on the basis of the record it is not possible to answer question No. 3. We, therefore, discharge the answer recorded by <ORG> on question No.

3. It will be open to the <ORG> to rehear the parties and record clear findings in the light of the observations made in this judgment.

As regards Question No. 4, we are in agreement with the view of <ORG> that the assessee cannot be taxed as a 'registered firm' and has to be taxed in the status of a 'body of individuals' and the answer given by <ORG> to the said question is affirmed.

Question No. 5 relates to the two circulars of <ORG>. The <ORG> has stated that one of the circulars related to the tax liability of surplus in the case of Nationalised Banks and it has no application to the present case and that the second circular was based on the decision in <NAME> (supra) and since the said case dealt with the provisions of Section 10(2) (vii) proviso (ii) of the 1922 Act prior to amendment, the said circular has no application and that the matter is governed by the decision in <NAME> (supra). We are in agreement with the said view of the <ORG> and question No. 5 is, therefore, answered in the affirmative, i.e., in favour of the <ORG> and against the assessee.

In the light of the answers given to questions Nos. 2 and 3, first part of Question No. 6 is answered in the negative and the second part of the said question is answered in the affirmative.

In the result the appeal is partly allowed and the impugned judgment of <ORG> insofar as questions Nos. 2, 3, 5 and 6 are concerned is set aside and the said questions are answered as indicated above. The judgment of <ORG> regarding question No. 4 is affirmed. No order as to costs.


PETITIONER: COMMISSIONER OF INCOME-TAX, <NAME> Vs. RESPONDENT: ANDHRA CHAMBER OF COMMERCE DATE OF JUDGMENT: 01/10/1964 BENCH: <NAME>, J.C. BENCH: <NAME>, J.C. SUBBARAO, K. SIKRI, S.M. CITATION: 1965 AIR 1281 1965 SCR (1) 565 CITATOR INFO : R 1972 SC 273 (5) RF 1972 SC 763 (23) RF 1974 SC1527 (12) R 1975 SC 506 (3,4,5) D 1976 SC 10 (26,43) F 1976 SC 348 (4,8) R 1976 SC1836 (18) R 1980 SC 387 (5,6,40,83) RF 1981 SC1408 (6,7) R 1981 SC1462 (7) APL 1981 SC1765 (1) RF 1986 SC1054 (1,17) ACT: Indian Income Tax Act , 1922 , s. 4(3) (i)--Charitable purpose, meaning of--Company's object to promote trade, commerce and industry, whether charitable- Urging or opposing legislation affecting trade etc. Object whether political. HEADNOTE: The assessee company--<ORG>-had as its main object the promotion, protection, and development of trade, commerce and industry in India. It owned a building where it had its offices, and those parts of it not in the company's own use were let out to tenants. In income-tax proceedings the company claimed exemption in respect of the rental income under- s.4(3) (i) of the Indian Income-tax Act , 1922. The claim was negatived by the assessing and appellate authorities. <ORG>, however, held that the company was a charitable institution and its income from property was exempt under s. 4(3) (i). The <ORG> appealed to <ORG> by special leave. It was contended by the appellant that the property was not held by the company for a charitable purpose within the meaning of s. 4(3) (i), that the objects of the company were vague, that the benefit contemplated by the Memorandum of Association was not to the public generally but to the members of the company only, and that the objects of the company were political it being open to it to appropriate the entire income for political purposes. HELD: (i) The term charitable purpose as defined in the Act was inclusive and not exclusive. It included objects of general public utility. The object of the assessee company- promotion of trade and commerce in the country-was an object of general public utility, as not only the trading class but the whole country would benefit by it. It is not necessary that the benefit must include all mankind. It is sufficient if the intention be to benefit a section of the public as distinguished from specified individuals. [571 F-H]. Commissioners of Inland <ORG> v. <ORG>,  1 K.B. 611 and <ORG> v. Commissioners of Inland <ORG>, 16 T.C. 158, relied on. <CITATION> , 6 I.T.R. 427, disapproved. (ii) There was nothing vague about the company of general public utility such as promotion, protection, aiding and stimulation of trade, commerce need not to be valid, specify the modus or the steps by which the objects may be achieved or secured. [573 A-B]. <NAME> v. <NAME> L.R. 26 I.A. 71, Commissioners of Inland <ORG> v. <ORG>, 28 T.C. 311 and <NAME> and others (Trustees of <ORG>) v. Commissioners of Inland <ORG>, 35 T.C. 661, distinguished. (iii) The argument that it was only for the benefit of the trading classes ,in <NAME> that the funds of the company could be utilised did not stand scrutiny. [574 D-E]. 566 (iv) It cannot be said that a purpose would cease to be charitable even if public welfare is intended to be secured thereby if it includes the taking of steps to urge or oppose legislation affecting commerce, trade or manufacture. If the primary Purpose be advancement of objects of general public utility, it would remain charitable even if an incidental entry into the political domain for achieving that purpose e.g. promotion of or opposition to legislation concerning that purpose is contemplated. The object mentioned in the Memorandum of Association was that the assessee may take steps to urge or oppose legislative or other measures affecting trade, commerce, or manufacture. Such an object must be regarded as purely ancillary or subsidiary and not the primary object. [575 G-H; 580 B-C]. In re <ORG>, 7 I.T.R. 415 and <CITATION> , 12 I.T.R. 482, relied on. <NAME> v. Commissioner for special Purposes of Income Tax,  A.C. 531 and <NAME> v. <ORG>,  A.C. 406, referred to. <NAME> v. <ORG> (ex-parte <ORG> of preparatory schools) 10 T.C 73, The Commissioners of Inland <ORG> v.The temporance council of <ORG>, 10 T.C. 748, and <NAME> by Dr. <NAME> Charity commissioner, Bombay,  2 S.C.R. 625, JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 941. 946 of 1963.

Appeals from the judgment dated February 22, 1961 of <ORG> in Case Referred No. 121 of 1956. <NAME>, <NAME> and <NAME>, for the appellant (in all the appeals).

<NAME>, <NAME> and <NAME>, for the respondent (in all the appeals). The Judgment of the Court was delivered by - <NAME> <ORG>-hereinafter called the assessee's a Company incorporated under the Indian Companies Act 7 of 1913. The assessee was permitted under S. 26 of the Act to omit the word "Limited" from its name by order of <ORG>.

The following are the principal objects of the Memorandum of Association of the assessee :

(a) To promote and protect trade, commerce and industries of India, in the Province of Madras and in particular in the Andhra country.

(b) To aid, stimulate and promote the development of trade, commerce and industries in India, or any part thereof with capital principally provided by Indians or under the management of Indians.

(c) To watch over and protect the general commercial interests of India or any part thereof and the interests of the Andhras in particular engaged in trade, commerce or manufacture -in India and in particular the Andhra Desa. (y) To do all -such other things as may be conducive to the preservation and extension of trade, commerce, industries and manufactures or incidental to the attainment of the above objects or any of them.

Clauses (d) to (x) are incidental to the principal objects. By cl. 4 of the Memorandum of Association it was provided that the income and property of the assessee shall be applied solely towards the promotion of its objects as set forth therein and no portion thereof shall be paid or transferred, directly or indirectly, by way of dividends, bonuses or otherwise howsoever by way of profit to its members.

On December 2, 1944 the assessee purchased a building and made substantial alterations, additions and improvements therein. The assessee then moved its offices into that building on May 14, 1947 and let out to tenants the portion not required for its use. The income of the assessee is obtained from subscriptions and donations collected from its members and rent received from the building. The following table sets out in columns 3 & 4 the net annual value of the property less -the statutory deductions permissible under S. 9 of the Income-tax Act, 1922 and the net excess of expenditure over the income of the assessee (other than the rental income) incurred in connection with all its activities for the assessment years relating to which dispute arises in this group of appeals

Previous year Assessment Amount Net excess (calendar year) year Rs. Rs.

(1) (2) (3) (4)

1947 1948-49 3,400 7,431 1948 1949-50 6,154 7,139 1949 1950-51 6,928 5,266 1950 1951-52 5,740 10,173 1952 1953-54 8,072 13,672 1953 1954-55 8,072 17,397

----------------------------------------------------------- In proceedings for assessment before <ORG>, City Circle 1, Madras, it was contended that Sup./65-11 the annual value of the building was not assessable in its hands as the assessee was a charitable institution within the meaning of s. 4(3) (i) of the Income-tax Act , 1922. In the alternative, it was contended that the excess of expenditure over income should be set off against such income if the annual value is held assess,able. The Income- tax Officer rejected the contentions of the assessee and assessed its income from property on the basis of net annual value in the six assessment years without debiting the

-expenditure in excess of income (other than rent) against the net annual value.

The assessee appealed to <ORG> against all the orders of assessments. The Appellate Assistant Commissioner held that the assessee not being a charitable institution the income in question was not exempt under s. 4(3) (i). He also rejected the alternative contention, for in his view, there was no specific profit- making activity of the assessee the loss from which could be set off against its other income.

Appeals were then taken to <ORG>. The <ORG> held that the assessee was not exempt within the meaning of s. 4(3) (i) from liability to pay income-tax, because the activities of the assessee were intended for the benefit primarily of its members and "embraced only collective action on behalf of all its constituent members" which "could not be said to be the result of any trade or business or vocation carried on by it".

At the instance of the assessee the <ORG> referred the following questions to <ORG> :

"(1) Whether the aforesaid income from property owned by the assessee is exempt under S. 4 (3) (i) for the aforesaid six years of assessment ?

(2) If the answer to the above question is in the negative, whether the activities of the assessee amount to a trade or business, the profit or loss from which is assessable under S. 10 ?"

<ORG> answered the first question in the affirmative and did not record a formal answer on the second question. Against the order of <ORG>, these appeals are preferred by the -Commissioner of Income-tax, with certificate granted by <ORG> under S. 66A (2) of the Indian Income-tax Act .

We are concerned in this group of appeals with the assess- ment of income of the assessee in the years 1948-49 to 1954-

<NAME>

with the omission of the assessment year 1952-53. Between the years 1948-49 to 1952-53 there has been some change in s. 4(3) (i) which before it was amended by Act 25 of 1953 with effect from April 1, 1952 read as follows :

"Any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them :

(i) Any income derived from property held under trust or other legal obligation wholly for religious or charitable purposes, and in the case of property so held in part only for such purposes, the income applied, or finally set apart for application thereto."

By the last paragraph of sub S. (3) "charitable purpose" was defined as including relief of the poor, education, medical relief, and the advancement of any other object of general public utility, but nothing contained in cl. (i) or cl. (i) or cl.(i.a)or cl. (ii) shall operate to exempt from the provisions of the Act that part of the income of a private religious trust which does not enure for the benefit of the public. By the amendment made by S. 3 of the Indian Income- tax (Amendment) Act 25 of 1953, cls. (i) and (i-a) as they originally stood were amalgamated. It is common ground that by the amendment, no alteration which has a material bearing on the question to be decided in these appeals has been made.

Income from property qualifies for exemption under S. 4(3)

(i) if two conditions co-exist (i) the property is held under trust or other legal obligation; and (ii) it is so held wholly or in part for religious or charitable purposes-. The building which the assessee owns is by virtue of cl. 4 of the Memorandum of Association held under a legal obligation to apply its income to purposes specified in the Memorandum of Association. It is not the case of the assessee that the objects of incorporation are relief of the poor, education or medical relief, and the only question canvassed at the <ORG> is whether the purposes for which the assessee stands incorporated are objects of general public utility, within the meaning of the expression "charitable purpose" in S. 4(3) .

The principal objects of the assessee are to promote and protect trade, commerce and industries and to aid, stimulate and promote the development of trade, commerce and industries in India or any part thereof. By the achievement of these objects, it is not intended to serve merely the interests of the members of the assessee. Advancement or promotion of trade, commerce and industry leading to economic prosperity enures for the benefit of the entire community. That prosperity would be shared also by those who engage in trade, commerce and industry but on that account the purpose is not rendered any the less an object of general public utility. It may be remembered that promotion and protection of trade, commerce and industry cannot be equated with promotion and protection of activities and interests merely of persons engaged in trade, commerce and industry.

In Commissioners of Inland Revenue v. <ORG>) an association called <ORG> was formed with the object of holding annual meetings for the exhibition of farming stock, implements etc., and for the general promotion of agriculture. All prizes were open to competition in the United Kingdom, but certain privileges were attached to membership of the <ORG>. The income of the <ORG> was derived from entry fees and gate receipts, local subscriptions for prizes, interest on investments, and subscriptions of members. It was held by <ORG> that on the facts found by the Commissioners the <ORG> was established for a charitable purpose and that purpose continued notwithstanding the incidental benefits enjoyed by members of the <ORG>; and that those benefits did not prevent the. <ORG> from being established for a "charitable purpose only".

In Halsbury's Laws of England, 3rd Edn., Vol. 4 at p. 236, Art 517, it is stated "An association or institution may benefit its members in the course of carrying out its main charitable purpose and this alone will not prevent it from being a charity. It is a question of fact whether there is so much personal benefit, intellectual or professional, to the members of a society or body of persons as to be incapable of being disregarded."

In <ORG> v. <ORG> (2) it was held that <ORG> founded and incorporated by Royal Charter for the general advancement of mechanical science, and more particularly for promoting the acquisition of that species of knowledge which constitutes the profession of a civil engineer was a body of persons established for charitable purposes only. The Special Commissioners having regard in particular to the provisions of the supplemental charter of 1922, by which the corporate members (1) [1928] 1 K.B. 611.

(2) 16 T.C. 158.

of the <ORG> were authorised to use the title of member, or associate member, as the case might be, found that a substantial part of the objects of the <ORG> was to benefit the member-& and rejected the claim of the <ORG> for exemption. <ORG> disagreeing with the Special Commisssioners held that the benefit of members was purely incidental to the main purpose of the <ORG> which was established for charitable purposes only. <ORG> found that the only purpose for which the <ORG> was established was the promotion of science and that purpose had never been added to or varied by any of the supplemental charters : it followed therefore that the <ORG> was established for charitable purposes only, notwithstanding that it is of advantage to a civil engineer in his profession to be a member of the <ORG>, this result not being a purpose for which the <ORG> was established, but being incidental to and consequent upon the way in which the <ORG> carries out the charitable purpose for which alone it was established.

In the promotion of trade, commerce and industries of India the public is vitally interested and if by the activities of the assessee that object is achieved, it would be within the meaning of S. 4(3) (1) of the Act an advancement of an object of general public utility. In enacting the last paragraph of S. 4(3) the legislature has used language of great amplitude. "Charitable purpose" includes not only relief of the poor, education and medical relief alone, but advancement of other objects of general public utility as well. The clause is intended to serve as a special definition of the expression "charitable purpose" for the Act : it is again inclusive and not exhaustive or exclusive. Even if the object or purpose may not be regarded as charitable in its popular signification as not tending to give relief to the poor or .for advancement of education or medical relief, it would still be included in the expression "charitable purpose" if it advances an object of general public utility. The expression "object of general public utility" however is not restricted to objects beneficial to the whole mankind. An object beneficial to a section of the public is an object of general public utility. To serve a charitable purpose, it is not necessary that the object should be to benefit the whole of mankind or even all persons living in a particular country or Province. It is sufficient if the intention be to benefit a section of the public as distinguished from specified individuals. Observations to the contrary made by <NAME>, in Commissioner of Income-tax Bombay Presi-

dency, <CITATION> (1) that "an object of general public utility means an object of public utility which is available to the general public as distinct from any section of the public" and that objects of an association "to benefit works of public utility confined to a section of the public, i.e. those interested in commerce" are not objects of general public utility, do not correctly interpret the expression "objects of general public utility". The section of the community sought to be benefited must undoubtedly be suffi- ciently defined and identifiable by some common quality of a public or impersonal nature: where there is no common quality uniting the potential, beneficiaries into a class, it may not be regarded as valid.

It is true that in this case there is in fact no trust in respect of the income derived from the building owned by the assessee. But the property and the income therefrom is held under a legal obligation, for by the terms of the permission granted by the Government to the assessee to exclude from its name the use of the word "limited", and by the express term,% of cl. 4 of the Memorandum of Association the property and its income are not liable to be utilised only for the purposes set out in the Memorandum of Association. Counsel for the revenue submitted that the purposes of the assessee are vague and indefinite. He submitted that if a competent <ORG> were called upon, as it may be called upon to administer the obligation imposed by the Memorandum of Association, the <ORG> would on account of vagueness of the objects decline to do so, and therefore the purposes cannot be regarded as charitable. In the alternative, counsel contended that the benefit which is contemplated by the Memorandum of Association was not the benefit to the public generally, but the benefit to its members to carry on their business more profitably. In the further alternative, relying upon cl. 3(g) of the Memorandum of Association, counsel contended that the objects of the assessee were political, it being open to the assessee to appropriate the entire income for political purposes.

But the primary objects of the assessee are to promote and protect trade, commerce and industries and to aid, stimulate and promote the development of trade, commerce and industries and to watch over and protect the general commercial interests of India or any part thereof. These objects are not vague or inde-

(1) 6 I.T.R. 427.

finite as objects of general public utility. An object of general public utility, such as promotion, protection, aiding and stimulation of trade, commerce and industries need not, to be valid specify the modus or the steps by which the objects may be achieved or secured. It cannot be said that if called upon to administer an institution of which the objects are of the nature set out, the <ORG> would decline to do so merely on the ground that the method by which trade, commerce or industry is to be promoted or protected, aided or stimulated or the general commercial interests of India are to be watched over or protected are not specified. Analogy of cases like <NAME> v. <NAME>) in which <ORG> declared a devise under a will in favour of "dharam" void, is misleading. In that case the devise was declared void, because the expression "dharam" in the view of <ORG> being law, virtue, legal or moral duty was too general and too indefinite for the courts to enforce. Observations by Lord <NAME> in <ORG> v. <ORG>) that "One of the tests, and a crucial test, whether a trust is charitable lies in the competence of the <ORG> to control and reform it........... that it is the King as parens patriae who is the guardian of charity, and that it is the right and duty of his Attorney-General to intervenue and to inform "the <ORG> if the trustees of a charitable trust fall short of their duty. So too it is his duty to assist the <ORG>, if need be, in the formulation of a scheme for the execution of a charitable trust. But......... is it for a moment to be supposed that it is the function of the Attorney-General on behalf of the <ORG> to intervene and demand that a trust shall be established and administered by the <ORG>, the object of which is to alter the law in a manner highly prejudicial, as he and His Majesty's Government may think, to the welfare of -the <ORG> ?" do not assist the case of the revenue. In the view of Lord <NAME> the object of the trust was political and, therefore, void, and not because it was vague or indefinite.

In <NAME> and others (Trustees of <ORG>) v. <ORG>(") certain properties were conveyed to trustees by two conveyances, in one case on trust, inter alia, for the promotion of the religious, social and physical well-being of persons resident in the County Boroughs of West Ham and Leyton by the provision of facilities for religious (1) L.R. 26 I.A. 71. (2) 28 T.C. 311, 367.

(3) 35 T.C. 661.

services and instruction and for the social and physical training and recreation of such aforementioned persons who were members or likely to become members of <ORG> and of insufficient means otherwise to enjoy the advantages provided and by promoting and encouraging all forms of such activities, as were calculated to contribute to the health and well-being of such persons, and in the other case on similar trusts omitting reference to religious services and instruction and otherwise substituting "moral" for "religious". These trusts were, it was held, not for charitable purposes only. The case arose under the Stamp Act of 1891, and it was contended that the trusts being charitable stamp duty at a lower rate was chargeable. <ORG> held that the trust was not charitable. It was observed by Lord <NAME> that "the moral, social, and physical well-being of the community or any part of it is a laudable object of benevolence and philanthropy, but its ambit is far too wide to include purposes which the law regards as charitable".

These cases have, in our judgment, no bearing on the inter- pretation of the language used in the Memorandum of Associa- tion of the assessee.

The argument that it is only for the benefit of the members or the trading classes in Andhra Desa that the funds of the assessee could be utilised does not stand scrutiny. It is clear from the diverse clauses in paragraph 3 of the Memorandum of Association that the objects were not merely to benefit the members of the assessee or even the trading community of Andhra Desa. Reliance was placed upon the membership clause in the Articles of Association and it was submitted that only persons speaking Telugu language and residing in Andhra Desa [as defined in cl. 1 (s) of the Articles of Association] could be members. But that argument is wholly unfounded. By sub-cl. (iii) of cl. 5 a <ORG> of Commerce or Trade Association protecting and promoting Indian trade, commerce and industry is eligible for election as a member of the <ORG> and the representative of such a <ORG> of Commerce or Trade Asso- ciation need not necessarily be able to speak and write Telugu. Similarly by sub-cl. (iv) a Company or Corporation having its principal office or registered office in Andhra Desa or a branch in Andhra Desa is eligible to become a member in its conventional or corporate name and the representative of such a Company or Corporation need not necessarily be able to speak or write Telugu. Again under sub-cl. (v) a Partner of a Firm of a "Private Partnership Concern" or a Joint Family Business concern, or a Sole Proprietory concern having its principal office or registered office in Andhra Desa or a branch in Andhra Desa is eligible for membership of the <ORG> and the representative of such a member need not necessarily be able to speak or write Telugu. Finally, by sub-cl. (vi) an individual residing anywhere in India and connected in any manner with trade, industry and commerce is eligible for membership of the <ORG> provided his mother tongue is Telugu or he can both speak and write Telugu. There is no geographical limitation upon the membership qualification, nor is there limitation about the capacity to speak or write Telugu. We should not be taken as holding that if there were such restrictions, the character of the assessee as an institution for promotion of charitable objects would thereby be necessarily effected.

Clause 3(g) of the Memorandum of Association on which strong reliance was placed reads as follows :

"To urge or oppose legislative and other measures affecting trade, commerce or manufactures and to procure change of law and practice affecting trade, commerce and manufactures and in particular those affecting trade, commerce and industries in which Andhras are concerned and obtain by all acknowledged means the removal, as far as possible, of all grievances affecting merchants as a body and mercantile interests in general."

But cl. 3(g) is not the primary object of the assessee : it is merely incidental to the primary objects of promotion or protection of trade, commerce and industries, or to aid, stimulate and promote the development of trade, commerce and industries or to watch over and protect the general commercial interests.

The expression "object of general public utility" in s. 4(3) would prima facie include all objects which promote the welfare of the general public. It cannot be said that merely a purpose would cease to be charitable even if public welfare is intended to be served thereby if it includes the taking of steps to urge or oppose legislation affecting trade, commerce or manufacture. If the primary purpose be advancement of objects of general public utility, it would remain charitable even if an incidental entry into the political domain for achieving that purpose e.g. promotion of or opposition to legislation concerning that purpose, is contemplated. In In re The Trustees of the Tribune(1) the (1) 7 I.T.R. 415.

<ORG> was called upon to consider whether a trust created under a will to maintain a printing press and newspaper in an efficient condition, and to keep up the liberal policy of the newspaper, devoting the surplus income of the press and newspaper after defraying all current expenses in improving the newspaper and placing it on a footing of permanency and further providing that in case the paper ceased to function or for any other reason the surplus of the income could not be applied to the object mentioned above, the same should be applied for the maintenance of a college which had been established out of the funds of another trust created by the same testator, was a charitable purpose within the meaning of S. 4(3) . <ORG> expressed the view that the object of the settler was to supply the province with an organ of educated public opinion and this was prima facie an object of general public utility, and observed "These English decisions-are in point in so far only as they illustrate the manner in which political objects, in the wide sense which includes projects for legislation in the interests of particular causes, affect the question whether the <ORG> can regard a trust as being one of general public utility. In the original letter of reference it was not suggested by the Commissioner that the newspaper was intended by its founder to be a mere vehicle of political propaganda, and in the case of <NAME> it seems unrea- sonable to doubt that his object was to benefit the people of Upper India by providing them with an English newspaper-the dissemination of news and the ventilation of opinion upon all matters of public interest. While not perhaps impossible it is difficult for a newspaper to avoid having or acquiring a particular political complexion unless indeed it avoids all reference to the activities of Governments or legislatures or treats of them in an eclectic or inconsistent manner. The circumstances of Upper India in the last decade of the nineteenth century would doubtless make any paper published for Indian readers sympathetic to various movements for social and political reform. But their Lordships having before them material which shows the character of the newspaper as it was in fact conducted in the testator's lifetime, have arrived at the conclusion that questions of politics and legislation were discussed only as many other matters were in this paper discussed and that it is not made out that a political purpose was the dominant purpose of the trust."

In <ORG> v. Commissioner of <ORG>, Bombay(1) the assessee was formed as an unregistered association by a resolution of <ORG> village industry of hand-spinning and hand-weaving. The <ORG> was established as an integral part of <ORG>, but it had independent existence and powers unaffected and uncontrolled by politics. The objects of the <ORG>, amongst others, were to give financial assistance to khaddar organisations by way of loans, gifts or bounties, to help or establish schools or institutions where handspinning is taught, to help and open khaddar stores, to establish a khaddar service, to act as agency on behalf of the <ORG> to receive self-spun yarn as subscription to the <ORG> and to issue certificates and to do all the things that may be considered necessary for the furtherance of its objects, with power to make regulations for the conduct of affairs of the <ORG> of the Council and to make such amendments in the present constitution, as may be considered from time to time. The funds of the <ORG> consisted mostly of donations and subscriptions, and out of the funds charkas and handlooms were purchased and supplied to the inhabitants free of charge. Raw cotton was supplied to the poor people to be spun into yarn and the yam so spun along with the yam acquired by the <ORG> were supplied to other poor people for hand-weaving. The income of the <ORG> was treated by the Commissioner of <ORG> as not exempt under s. 4(3) (i) of the Indian Income-tax Act inasmuch as (i) the dominant purpose of the <ORG> was political, (ii) even assuming it was not political, the dominant purpose was not in any event a valid charitable purpose in law, and (iii) some of the objects were not clearly charitable objects. <ORG> held that the income of the <ORG> was derived from property held under trust or other legal obligation wholly for charitable purposes and the English decisions on the law of charities not based upon any definite and precise statutory provisions were not helpful in construing the provisions of S. 4(3) (i) of the Indian Income-tax Act . The words of S. 4(3) were largely influenced by Lord <NAME>'s definition of charity in <NAME> v. Commissioners for Special Purposes of Income-Tax (2) , but that definition had no statutory (1) 12 I.T.R. 482. (2)  A.C. 53 authority and was not precisely followed in the most material particulars; the words of the section being "for the advancement of any other object of general public utility" and not as Lord <NAME> said "other purposes beneficial to the community". <ORG> observed that the primary object of the <ORG> was relief of the poor and apart from that ground there was good ground for holding that the purposes of the <ORG> included advancement of other purposes of general public utility. <ORG> then held :

"These words, their Lordships think, would exclude the object of private gain, such as an undertaking for commercial profit though all the same it would sub-, serve general public utility. But private profit was eliminated in this case. Though the connexion in one sense of the <ORG> with <ORG> was relied on as not consistent with 'general public utility' because it might be for the advancement primarily of a particular party, it is sufficiently clear in this case that the <ORG>'s purposes were independent of and were not affected by the purposes or propaganda of <ORG>."

The Indian legislature has evolved a definition of the ex- pression "charitable purpose" which departs in its material clause from the definition judicially supplied in <NAME>'s case(1), and decisions of English Courts, which proceed upon interpretation of language different from the Indian statute have little value. We, therefore, do not propose to deal with the large number of English cases cited at the <ORG>, except to mention three, which declared trusts for political purposes invalid.

In <NAME> v. <ORG> (ex-parte <ORG>) and <NAME> v. <ORG> (ex-parte) <ORG>) it was held that a conference of Headmasters incorporated under the Companies Act as an Association limited by guarantee, of which under the Memorandum of Association income was to be applied towards the promotion of its expressed objects, one of which was the promotion of or opposition to, legislative or administrative educational measures, the holding of examinations, etc. was not a body of persons established for charitable purposes only within the meaning of the Income Tax Act s. Similarly an incorporated <ORG> incorporated under the Companies Act as an Association limited by guarantee, income (1)  A.C. 531.

(2) 10 T.C. 73 whereof was to be applied solely towards the promotion of its expressed objects which included the advancement and promotion of, or opposition to, legislative or administrative educational measures etc. was not an association whose income was applicable to charitable purposes only. <ORG> held in the case of each of the two trusts that because the income could be utilised for promotion of, or opposition to, legislative or administrative educational measures, and those being the primary objects, the income was not liable to be applied solely to charitable purposes.

In <ORG> v. <ORG> (1) a Council constituted by resolution at a meeting of representatives of the temperance Organisation of <ORG>, the purpose of which being united action to secure legislative and other temperance reform was held not to be a council established for charitable purposes only, nor was its income applicable to charitable purposes only, and that it was therefore not entitled to the exemption sought.

In <NAME> v. <ORG>) Lord <NAME> observed:

"A trust for the attainment of political objects has always been held invalid, not because it is illegal but because the Court has no means of judging whether a proposed change -in the law will or will not be for the public benefit."

This Court in a recent judgment, <NAME> by Dr. <NAME> v. Charity Commissioner, Bombay (3) considered whether for the purposes of the Bombay Public Trust Act 29 of 1950 a trust to educate public opinion and to make people conscious of political rights was a trust for a charitable purpose. The Court held (<NAME>, dissenting) that the object for which the trust was founded was political, and political purpose being not a charitable purpose did not come within the meaning of the expression "for the advancement of any other object of general public utility" in S. 9(4) of the Bombay Public Trusts Act, 1950. The definition of "Charitable purpose" in s. 9 of the Bombay Public Trusts Act closely follows the language used in the definition given under the Income-tax Act s. 4(3) . But in <NAME>'s case(1), as in the cases of the Courts in England which we (1) 10 T.C. 748. (2)  A.C. 406, 442.

(3) [1963] 2 S.C.R. 625.

have referred to, it was held that the primary or the principal object was political and therefore the trust was not charitable. In the present case the primary purpose of the assessee was not to urge or oppose legislative and other measures affecting trade, commerce or manufactures. The primary purpose of the assessee is, as we have already observed, to promote and protect trade, ,commerce and industries to aid, stimulate and promote the development of trade, commerce and industries and to watch over and protect the general commercial interests of India or any Part thereof. It is only for the purpose of securing these primary aims that it was one of the objects mentioned in the Memorandum of Association that the assessee may take steps to urge or oppose legislative or other measures affecting trade, commerce or manufactures. Such an object must be regarded as purely ancillary or subsidiary and not the primary object. -

The appeals therefore fail and are dismissed with costs. One hearing fee.

Appeals dismissed.


PETITIONER: DEPUTY COMMISSIONER, SALES TAX (LAW) BOARD OF REVENUE(TAXES) Vs. RESPONDENT: PIO FOOD PACKERS DATE OF JUDGMENT09/05/1980 BENCH: <NAME>, R.S. BENCH: <NAME>, R.S. <NAME>, P.N. <NAME>, V.D. CITATION: 1980 AIR 1227 1980 SCR (3)1271 CITATOR INFO : R 1981 SC 976 (1) RF 1981 SC1014 (5) R 1986 SC 662 (31) R 1986 SC1809 (5) D 1987 SC1885 (8) RF 1988 SC 113 (5) R 1988 SC 992 (5) RF 1988 SC 997 (7,11) R 1988 SC1133 (2,3,5) R 1988 SC2237 (6) RF 1989 SC 516 (17,18) RF 1991 SC2222 (22) ACT: Kerala General Sales Tax Act, Section 5-A(1)(a) "consumes such goods in the manufacture of other goods for sale or otherwise", meaning of-Exigibility to tax of pineapple fruit. when processed into slices for the purpose of being sold in sealed cans. HEADNOTE: The respondent assessee, <ORG> carries on the business of manufacturing and selling canned fruit besides other products. The Pineapple purchased by the assessee is washed and then the inedible portion, the end crown, skin and inner core are removed, thereafter the fruit is sliced and the slices are filled in cans, sugar is added as a preservative, the cans are sealed under temperature and then put in boiling water for sterilisation. In its return for the year 1973-74 under the Kerala General Sales Tax Act, 1963 the assessee claimed that a turnover of Rs. 3,84,138-89 representing the purchase of pineapple fruit was not covered by Section 5-A(1)(b) of the Act. It was asserted that the pineapple was converted into pineapple slices, pineapple jam, pineapple squash and pineapple juice. The assessee maintained that by the conversion of pineapple fruit into its products no new commodity was created and it was erroneous to say that there was a consumption of pineapple fruit "in the manufacture of" these goods. The Sales Tax Officer did not accept the contention and completed the assessment on the finding that a manufacturing process was involved and that, therefore, the case fell within s. 5-A (1) (a). In revision before <ORG>, the assessee conceded that pineapple jam and pineapple squash would be covered by s. 5- A(1)(a), and in regard to pineapple juice the <ORG> found that s. 5-1(a) was attracted. The only question which remained was whether the preparation of pineapple slices fall within s. 5-A(1)(a). On that question two members of the <ORG> found in favour of the assessee, and the third member found in favour of the <ORG>. The <ORG> then applied in revision to <ORG> and <ORG>, has by its judgment dated 24th January, 1978, maintained the order of the <ORG>. Dismissing the appeal, by special leave, the court ^ HELD : 1. When pineapple fruit is processed into pineapple slices for the purpose of being sold in sealed cans, there is no consumption of the original pineapple fruit for the purpose of manufacture within the meaning of Section 5A(1)(a) of the Kerala General Sales Tax Act, 1963 [1277 E-F] 2. Section 5-A(1)(a) of the Kerala General Sales Tax Act envisages the consumption of a commodity in the manufacture of another commodity. The goods purchased should be consumed, the consumption should be in the process of manufacture, and the result must be the manufacture of other goods. 1272 There are several criteria for determining whether a commodity is consumed in the manufacture of another. The generally prevalent test is whether the article produced is regarded in the trade, by those who deal in it, as distinct in identity from the commodity involved in its manufacture. Commonly, manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experience a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct article that a manufacture can be said to take place. Where there is no essential difference in identity between the original commodity and the processed article it is not possible to say that one commodity has been consumed in the manufacture of another. Although it has undergone a degree of processing, it must be regarded as still retaining its original identity. [1274 F-H, 1275 A-B] In the present case, there is no essential difference between pineapple fruit and the canned pineapple slices. The dealer and the consumer regard both as pineapple. The only difference is that the sliced pineapple is a presentation of fruit in a more convenient form and by reason of being canned it is capable of storage without spoiling. The additional sweetness in the canned pineapple arises from the sugar added as a preservative. The pineapple slices continue to possess the same identity as the original pineapple fruit. [1275 G-H, 1276- <CITATION> ,  10 S.T.C. 827 (SC); Commissioner of Sales Tax, U.P., Lucknow v. <NAME> & Sons,  21 S.T.C. 17 (SC); followed. <ORG> v. <ORG>, 100 L.ed. 917; <ORG> v. United States, 52 L. ed. 336-338; quoted with approval. <CITATION> .,  11 STC 698, <CITATION> ,  15 STC 719; <CITATION> ,  17 STC 316 and <CITATION> .,  32 STC 623; held inapplicable. 3. The fact that the pineapple slices have a higher price in the market than the original fruit does not imply that the slices constitute a different commercial commodity. The higher price, is occasioned only because of the labour put into making the fruit more readily consumable and because of the can employed to contain it. It is not as if the higher price is claimed because it a different commercial commodity. [1277 A-B] 4. The fact that the pineapple slices appeal to a different sector of the trade and that when a customer asks for a can of pineapple slices he has in mind something very different from fresh pineapple fruit does not give to the canned pineapple slices a separate identity either. The distinction in the mind of the consumer arises not from any difference in the essential identity of the two, but is derived from the mere form in which the fruit is desired. [1277 B-C] 1273 5. Clause (1) (a) of Section 5-A of the Kerala General Sales Tax Act, speaks of goods consumed in the manufacture of other goods for sale or goods consumed in the manufacture of other goods for purposes other than sale.[1277 C-D] JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2398 of 1978.

Appeal by Special Leave from the Judgment and Order dated 24-1-1978 of <ORG> at Ernakulam in T.R.C. No. 2 of 1976.

<NAME>, <NAME> and <NAME> for the Appellant.

<NAME>, <NAME> and Mrs. <NAME> for the Respondent.

The Judgment of the Court was delivered by <NAME>, J. This appeal by special leave is directed against the judgment of <ORG> holding that the turnover of pineapple fruit purchased for preparing pineapple slices for sale in sealed cans is not covered by s.5-A(1)(a) of the Kerala General Sales Tax Act, 1963.

The respondent, Messrs. <ORG> ("the assessee"), carries on the business of manufacturing and selling canned fruit besides other products. In its return for the year 1973-74 under the Kerala General Sales Tax Act, 1963 the assessee claimed that a turnover of Rs. 3,64,138-89 representing the purchase of pineapple fruit was not covered by s. 5-A(1)(a) of the Act. It was asserted that the pineapple was converted into pineapple slices, pineapple jam, pineapple squash and pineapple juice. Section 5-A(1)

(a) of the Act provides:

"5-A. Levy of purchase tax-

(1) Every dealer who, in the course of his business, purchases from a registered dealer or from any other person any goods the sale or purchase of which is liable to tax under this Act, in circumstances in which no tax is payable under section 5, and either-

(a) consumes such goods in the manufacture of other goods for sale or otherwise; or ........................................ shall, whatever be the quantum of the turnover relating to such purchase for a year, pay tax on the taxable turnover relating to such purchase for the year at the rates mentioned in section 5."

The assessee maintained that by the conversion of pineapple fruit into its products no new commodity was created and it was erroneous to say that there was a consumption of pineapple fruit "in the manufacture of" those goods. The Sales Tax Officer did not accept the contention and completed the assessment on the finding that a manufacturing process was involved and that, therefore, the case fell within s. 5-A(1)(a). In revision before <ORG>, the assessee conceded that pineapple jam and pine-apple squash would be covered by s. 5-A(1)(a), and in regard to pineapple juice the <ORG> found that s. 5-1(a) was attracted. The only question which remained was whether the preparation of pineapple slices fell within s. 5-A(1)(a). On that question two members of the <ORG> found in favour of the assessee, and the third member found in favour of the <ORG>, The <ORG> then applied in revision to <ORG> and <ORG> has, by its judgment dated 24th January, 1978, maintained the order of the <ORG>.

It appears that the pineapple purchased by the assessee is washed and then the inedible portion, the end crown, skin and inner core are removed, thereafter the fruit is sliced and the slices are filled in cans, sugar is added as a preservative, the cans are sealed under temperature and then put in boiling water for sterilisation. Is the pineapple fruit consumed in the manufacture of pineapple slices ?

Section 5-A(1)(a) of the Kerala General Sales Tax Act envisages the consumption of a commodity in the manufacture of another commodity. The goods purchased should be consumed, the consumption should be in the process of manufacture, and the result must be the manufacture of other goods. There are several criteria for determining whether a commodity is consumed in the manufacture of another. The generally prevalent test is whether the article produced is regarded in the trade, by those who deal in it, as distinct in identity from the commodity involved in its manufacture. Commonly, manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct article that a manufacture can be said to take place. Where there is no essential difference in identity between the original commodity and the processed article it is not possible to say that one commodity has been consumed in the manufacture of another. Although it has undergone a degree of processing, it must be regarded as still retaining its original identity.

A large number of cases has been placed before us by the parties, and in each of them the same principle has been applied: Does the processing of the original commodity bring into existence a commercially different and distinct article ? Some of the cases where it was held by this <ORG> that a different commercial article had come into existence include <CITATION> (where raw tobacco was manufactured into bidi patti), <CITATION> (raw hides and skins constituted a different commodity from dressed hides and skins with different physical properties), <CITATION> (raw tobacco manufactured into chewing tobacco) and <CITATION> , (paddy dehusked into rice). On the other side, cases where this <ORG> has held that although the original commodity has undergone a degree of processing it has not lost its original identity include <CITATION> (where hydrogenated groundnut oil was regarded as groundnut oil) and Commissioner of Sales Tax, U.P., Lucknow v. <NAME> and sons (where bristles plucked from pigs, boiled, washed with soap and other chemicals and sorted out in bundles according to their size and colour were regarded as remaining the same commercial commodity, pigs bristles).

In the present case, there is no essential difference between pineapple fruit and the canned pineapple slices. The dealer and the consumer regard both as pineapple. The only difference is that the sliced pineapple is a presentation of fruit in a more convenient form and by reason of being canned it is capable of storage without spoiling. The additional sweetness in the canned pineapple arises from the sugar added as a preservative. On a total impression, it seems to us, the pineapple slices must be held to possess the same identity as the original pineapple fruit.

While on the point, we may refer to <ORG> v. <ORG>, where <ORG> held that dressed and frozen chicken was not a commercially distinct article from the original chicken. It was pointed out:

"Killing, dressed and freezing a chicken is certainly a change in the commodity. But it is no more drastic a change than the change which takes place in milk from pasturising, homogenizing, adding vitamin concentrates, standardising and bottling." It was also observed:

".................. there is hardly less difference between cotton in the field and cotton at the gin or in the bale or between cottonseed in the field and cottonseed at the gin, than between a chicken in the pen and one that is dressed. The ginned and baled cotton and the cottonseed, as well as the dressed chicken, have gone through a processing stage But neither has been "manufactured" in the normal sense of the word."

Referring to <ORG> v.

United States the Court said:

"Manufacture implies a change but every change is not manufacture and yet every change in an article is the result of treatment, labour and manipulation. But something more is necessary...................There must be transformation; a new and different article must emerge, having a distinctive name, character or use."

And further:

"At some point processing and manufacturing will merge. But where the commodity retains a continuing substantial identity through the processing stage we cannot say that it has been "manufactured". The comment applies fully in the case before us.

Although a degree of processing is involved in preparing pineapple slices from the original fruit, the commodity continues to possess its original identity, notwithstanding the removal of inedible portions, the slicing and thereafter canning it on adding sugar to preserve it. It is contended for the <ORG> that pineapple slices have a higher price in the market than the original fruit and that implies that the slices constitute a different commercial commodity. The higher price, it seems to us, is occasioned only because of the labour put into making the fruit more readily consumable and because of the can employed to contain it. It is not as if the higher price is claimed because it is a different commercial commodity. It is said that pineapple slices appeal to a different sector of the trade and that when a customer asks for a can of pineapple slices he has in mind something very different from fresh pineapple fruit. Here again, the distinction in the mind of the consumer arises not from any difference in the essential identity of the two, but is derived from the mere form in which the fruit is desired.

Learned counsel for the <ORG> contends that even if no manufacturing process is involved, the case still falls within s. 5-A(1) (a) of the Kerala General Sales Tax Act, because the statutory provision speaks not only of goods consumed in the manufacture of other goods for sale but also goods consumed otherwise. There is a fallacy in the submission. The clause, truly read, speaks of goods consumed in the manufacture of other goods for sale or goods consumed in the manufacture of other goods for purposes other than sale.

In the result, we hold that when pineapple fruit is processed into pineapple slices for the purpose of being sold in sealed cans there is no consumption of the original pineapple fruit for the purpose of manufacture. The case does not fall within s. 5-A(1)(a) of the Kerala General Sales Tax Act. <ORG> is right in the view taken by it.

The appeal fails and is dismissed with costs.

S.R. Appeal dismissed.


JUDGMENT <NAME>, Kt., C.J.

1. The plaintiff sued to recover possession of the plaint house and Rs. 125 rent due under a registered lease dated the 18th of May 1915. The defendant filed a written statement contending that the sale-deed was effected through fraud in order to defraud the creditors, that the lease was inoperative and that the sale was declared to be ineffective in a miscellaneous application filed by the plaintiff.

2. It appears that after the sale-deed had been executed by the defendant in favour of the plaintiff, the property was attached by a creditor of the defendant. The plaintiff took proceedings under Order XXI for removing tie attachment. But in summary proceedings the Court came to the conclusion that the sale-deed was inoperative as it was effected to defraud the creditors. Plaintiff then filed Suit No. 86 of 11)1916 to set aside this order. That suit was withdrawn on the 15th. of August 1916, because defendant settled with the judgment-creditor and the attachment was withdrawn. This suit was filed on the 25th of May 1917.

3. The trial (Court dismissed the suit relying on the decision in the attachment proceedings against the plaintiff In first appeal the learned District Judge remanded the case for the trial of the issue whether the transfer by sale on the 10th of April conveyed any interest to the plaintiff and whether the effect of the lease of 18th May 191 5 created the relation of landlord and tenant between the parties. He disagreed with the finding of the lower Court that the order in miscellaneous proceedings 68 of 1915 was conclusive as against the plaintiff in favour of the present defendant, who was not a party to those proceedings. The lower Court found on those issues in the affirmative. Thereupon the District Judge reversed the decree of the lower Court and decreed the plaintiff's suit.

4. It has been argued in this Court that the plaintiff not having sued within a year of the order passed in the attachment proceedings could not now file this suit against the present defendant. But it appears to me that the decision in Go-pal Purshotam v. <NAME> (1893) I.L.R. 18 Bom. 241 decides the question. It is true in that case the defendant, who had made an unsuccessful attempt to remove the attachment on the property which she claimed as her own, was in possession. When the plaintiff, who had privately purchased the land which had been attached and consequently withdrew his application for execution, endeavoured to get possession, it was contended by him that because the defendant had not brought a suit within one year to set aside the order of the Subordinate Judge, he was barred from setting up a claim to the land. That contention was disallowed and Sargent <NAME> said: "We agree with the lower appeal Court that, when the plaintiff withdrew his attachment, the parties were restored to the status quo ante. The object of the claim which was preferred by the defendant was, as contemplated by Section 278, Civil Procedure Code, to obtain the removal of the attachment, and when that attachment was removed by the judgment-creditor's own act on the 20th of November 1888, there is no longer an attachment or any other proceedings in execution on "which the order could operate to the prejudice of the claimant. Therefore there was no interest to bring a suit to set aside the order." Applying the reasoning of that case to this case, as soon as the attachment was withdrawn, there was no longer any attachment or any proceedings in execution in which the order against the plaintiff would operate to his prejudice. The defendant, his vendor was not a party to the claimant's proceedings, and once the attachment proceedings were withdrawn, the plaintiff purchaser and the defendant vendor were restored to the position which they occupied before the property was attached. No doubt if the attachment had continued when the property was sold in execution before the claimant filed the suit, then different considerations would apply, and certainly the order would be conclusive against him in favour of the purchaser if the suit was not filed within a year of the date of the order. But if the defendant's argument were to succeed, this result follows that a party entitled to bring an action within a period fixed by the Indian Limitation Act for that particular action would be barred from bringing a suit within a very much lesser period merely because it happened by accident that attachment proceedings had been instituted at the instance of a third party. In my opinion, therefore, the learned District Judge was perfectly correct in disgarding the order in miscellaneous proceedings 68 of 1915.

5. Then it is contended that only Rs. 1,500 consideration has been proved out of Rs. 2,500. Therefore the defendant has a lien for the remaining Rs. 1,000. The lower Court came to the conclusion that Rs. 2,500 had been paid and clearly the defendant had admitted that at a time when it suited him to do so. But the learned District Judge seemed to think that the onus lay on the plaintiff to prove that he had received the whole of the consideration, and dealing with the evidence from that point of view considered that he could not hold it proved that the other thousand rupees had been paid, I think that the onus clearly lay on the defendant, after he had admitted that the whole consideration had been paid, to show that that was incorrect and that he still had a lien on the property for some of the purchase money. However that finding made no difference in the decree passed by the learned District Judge. Apparently no suggestion was made on the part of the defendant that there was a lien for a thousand rupees. I think the probable explanation of that was, that the question, how much of the consideration money was actually paid, was not properly dealt with in the case. No specific issue was raised. What the defendant contended was that the whole sale was inoperative and was a fraud against creditors. The Court very certainly was satisfied that Rs. 1500 out of the Rs. 2,500 went to pay the claim of one of the defendant's creditors, and if once that was proved, it is perfectly clear that it could not be held that the sale was inoperative and it was not necessary to consider whether the plaintiff had received the balance of Rs. 1,000 or not.

6. In my opinion, therefore, the appeal fails and the decree of the learned District Judge must be confirmed with costs.

Fawcett, J.

7. I agree. On the first point I may also refer to the case of <CITATION> (1903) I.L.R. 31 Cal. 223. It was there held, in a case like the present where the attachment was withdrawn, that the plaintiff is not required to institute a suit under Section 283 of the previous Code to establish his right to the property in dispute.


JUDGMENT

1. This is an appeal by the plaintiffs against the dismissal of their suit on a deed dated the 17th of July 1901 on the ground that it was time barred. We have been taken through the terms of the deed in question. We find that the executant, <NAME>, executed the deed for a consideration of Rs. 1,000 and agreed to pay interest at the rate of 24 per cent. per annum. He covenanted to pay the interest year by year and the principal within three years of the date of execution, and in case of default of the payment of the annual interest he empowered the mortgage without waiting for the expiration of the period fixed for payment of the principal to realise the amount due for the principal and interest from the hypothecated property. He also covenanted that so long as the principal remained unpaid interest at 24 par cent, per annum would accrue and that interest at this rate should be payable from the date of default to the date of the payment.

2. We can only interpret these portions of the deed to mean that the privilege of defending payment of the principal to the 17th of July 1904 was conditional on the punctual payment of the annual interest and that the whole amount, principal and interest, became due on the 17th of July 1902 in default of payment of the interest for the first year.

3. On the facts, no interest was paid at all, so the cause of action arose in our opinion on the 17th of July 1902.

4. In these circumstances, the suit which was instituted on the 23rd of February 1916 was time barred in the absence of acknowledgment. If authority be needed for this view, we would refer to <CITATION> 23 Ind. Cas 910 : 31 A. 400 : 13 A.I.J. 510 (F.B.). The document before the Bench in that case was very similar to the document now before us. We have now to consider whether there was any acknowledgment which can be pleaded under the provision's of Section 19 Act IX of 1908 to extend the period. There is a final finding of fact that no interest was paid. Two acknowledgments were set up, one alleged to have been made by <NAME> on the 10th of November 1906 and the other made by <NAME>.

5. With regard to the acknowledgment alleged to have been made by <NAME>, we find, in addition to the fact that it was not an acknowledgment in writings signed by <NAME> personally or by an agent duly authorised in this behalf, that the statement which he made did not amount to an acknowledgment of liability.

6. The learned Counsel for the appellant has not pressed the acknowledgment alleged to have been made by <NAME> as being of any advantage to his client. This concludes all the points taken in argument.

7. We dismiss the appeal with costs including fees on the higher scale.