PETITIONER: JAWAHARMAL Vs. RESPONDENT: STATE OF RAJASTHAN AND OTHERS DATE OF JUDGMENT: 22/09/1965 BENCH: GAJENDRAGADKAR, P.B. (CJ) BENCH: GAJENDRAGADKAR, P.B. (CJ) WANCHOO, K.N. HIDAYATULLAH, M. SHAH, J.C. SIKRI, S.M. CITATION: 1966 AIR 764 1966 SCR (1) 890 CITATOR INFO : RF 1975 SC1389 (11,15,17,26,28) MV 1985 SC 421 (75) RF 1988 SC 191 (30) ACT: Rajasthan Passengers and Goods Taxation (Amendment and Vaii- dation) Act 1964 (22 of 1964), ss. 2 and 4-Act validating State Finance Act s of 1961 and 1962-Whether legislature can itself validate defect caused by non-observance of Art. 255 of the Constitution-Retrospective taxation whether valid and reasonable. HEADNOTE: <ORG> passed Act 18 of 1959 to levy tax Oil passengers and goods carried in motor vehicles. For the purpose of the tax roads were divided into two categories i.e. those which were asphalted etc. arid those which were not. In respect of goods Carried on the, former category of roads the State Government was authorised by s. 3 of 'he Act to levy tax at a maximum of 1/8th of the value of the fares and freights in respect of goods carried on the second category of roads the maximum was 1/12th. By, a notification under the Act the maximum rates were levied with effect from May 1, 1959. The said s. 3 was amended by the Finance Act s of 1961 and 1962 to raise the maximum rates leviable under that section and the relevant notifications actually levied the same. The Act s of 1961 and 1962 however suffered from the infirmity that that the assent of the President had not been obtained in respect of them as required by Art. 255 of the Constitution. To cure the defect Ordinance No. 4 of 1964 was issued. The Ordinance was replaced on September 9, 1964 by Act 22 of 1964 for which the assent of the President was duly obtained. Section 2 of the Act of 1964 retrospectively re-enacted the amendments to s. 3 of the principal Act made law the Acts of 1961 and 1962. Section 4 of the Act validated all the collections and levies under the earlier Acts and also purported to cure the infirmity in the said earlier Act arising from noncompliance with Art. 255. The petition who was asked to pay tax under the Ordinance of 1964 challenged the validity of the said Ordinance -,is well as the Act of 1964 in petitions under Art 32 of the Constitution of India. It was contended on behalf of the petitioners that ss. 2 and 4 of the imputed Act purported to validate the earlier invalid Finance Act of 1961 1964. It was urged that the failure of the legislature to comply with the provisions of Art. 255 rendered 'he said Acts void ab initio and as such they Could not be validated by subsequent legislation. It was further urged that the said earlier Acts had been held invalid by <ORG> in the case of <NAME> and it would be incompetent to <ORG> to validate the said Acts in spite of the decision of a court to competent jurisdiction HELD(i) It was factually not correct to say that the Acts of 1961 and 1962 had been struck down as void ab initio by a court of competent jurisdiction. <ORG> in <NAME>'s case had on the office hand though it unnecessary to pronounce its considered opinion on that aspect of the matter. Act 22 of 19641 was passed on September 9, 1964 while the judgment of <ORG> was delivered in Novem- 891 be, 1964 and so at the time when the Act was passed the earlier Finance Act s had Dot been struck down at all. [899 B-E] <NAME> and Another v. Deputy Commissoiner Excise & Tax tion (Appeals) Ajmer and Kotah Divisions, Jaipur & Ors. I.L.R. (1965) 15 Raj. 285, referred, referred to. (ii) An Act which suffers from the infirmity that it does riot comply with the requirements of Art. 255 can be validated by subsequent legislation. Article 255 itself provides that no Act of the <ORG> 01 a State and no provision in any such Act shall be invalid by reason only that some recommendation or previous sanction required by the Constitution was not given, if assent to the Act was given by the President later. If an Act is passed without obtaining the previous assent of the President it does not become void but remains unenforceable till such assent is obtained. The said infirmity is cured by subsequent assent and the law becomes enforceable. The legislature can also in a suitable case adopt the course. of passing a subsequent law reintroducing the provisions of the earlier law which had not received the assent of the President and obtaining his assent thereto is prescribed by the Constitution. Legally there is no bar to the legislature adopting either of the courses mentioned above. [899 F-H; 900 A-D] (iii) Section 2 of the Act of 1964 does not in fact purport to validate the Finance Act s of 1961 and 1962. What it does is to amend retrospectively s. 3 of the principal Act by inserting a proviso to sub-s. (1) of the said section. On its plain reading s. 2 has the effect of inserting the said proviso to s. 3(1) of the principal Act; and since the amendment so made is,in term retrospective, when a tax is levied for the periods covered by clauses (a) and (b) of the proviso thus introduces in s. 3(1) of the principal Act, the Court must proceed to deal with the matter on the basis that these clauses had been introduced in the principal at Art right up from the commencement. [900 E-G] The power to legislate includes the power to legislate. prospectively as well as retrospectively and in that behalf, tax legislation is no different from any offer legislation. The power to tax can be competently exercised by the legislature either prospectively or retrospectively; and that is precisely what s. 2 has done in the present case. Therefore there was no substance in the argument that s. 2 of the Act was invalid  (iv) The Act of 1964 and all its provisions had received the assent of the President and so prima facie the assent of the President to the Act would help the Act to validate the provisions of The earlier Acts which were not enforceable by reason of the fact that they had not secured his assent as required by Art. 225. But the assent of the President could not serve to make s. 4 valid. 1902 C-D] What s. 4 in truth and in substance says is that the failure to comply with the requirements of Art. 255 does not invalidate the Finance Act s in question and will not invalidate any action taken or to be taken, under their respective relevant provisions. In other words the legislature seems to say by s. 4 that even though Art. 255 may not have been complied with by the earlier Finance Act s, it is competent to s. 4 whereby it will prescribe that the failure to comply with Art. 255 does not really matter and the assent of the President to the Act amounts to this that the President also agrees that the <ORG> is empowered to say that the infirmity resulting from the non-compliance with Art. 255 does not matter. This approach is entirely misconceived. [902 D-F] The legislature no doubt can validate an earlier Act which -"s invalid by reason of Art. 255 and such an Act may receive 'he assent of the 892 President which will make the Act effective. The legislature cannot, however, itself declare by a statutory provision that the failure to comply with Art. 255 can be cured by its own enactment, even if the said enactment received the assent of the President. Even the assent of the President cannot alter the constitutional position tinder Art. 255. The assent of the President cannot by any legislative provision be deemed 'to have been given to an earlier Act at a time when it was not so given. In this context there is no scope for a retrospective deeming provision in regard to the assent of the President. The infirmity in question can be cured only by obtaining the assent of the President and not by any legislative flat. In enacting s. 4 <ORG> clearly exceeded its jurisdiction. [903 A-D, F-G] M. P. V. Sundararamier & Co. v. The State of Andhra Pradesh & Another,  S.C.R. 1422, distinguished. (v) It is idle to contend that merely because a taxing statute purports to operate retrospectively the retrospective operation per se involves contravention of the fundamental right of the citizen guaranteed under Art. 19(1) (f) or (g). In the present case having regard to the legis- lative background of the provision prescribed by s. 2 there could be little doubt that there was no element of unreasonableness involved in the retrospective operation of cl. (b) of the, proviso added by the said section to s. 2(1) of the principal Act. [905 D-F] (vi) Section 2 of the impugned Act had laid down the rates of tax only up to the period ending March 26, 1962. It was silent about the period after that date. The petitioner therefore could not be taxed for the period after that date on the strength of cls. (a) and (b) of the proviso to s. 2 . If s. 4 had been valid then the tax at the enhanced rates prescribed by the Act of 1962 would also have been valid; but r.ince s. 4 was invalid the tax could be validly and legitimately le-tied for the period after March 26, 1962 only at the rates prescribed in 1959. [906 D-F] JUDGMENT:

ORIGINAL JURISDICTION.-Write Petition No. 19 of 1965. Petition under Art. 32 of the Constitution of India for en- forcement of fundamental rights.

<NAME> and <NAME>, for the petitioner. <NAME>, Advocate-General <NAME>, <NAME> and <NAME>, for the respondents.

The Judgment of the Court was delivered by <NAME> The petitioner, <NAME>, carries on business of plying his motor buses on four routes under the Stage Carriage Permits granted to him under the relevant provisions of the Motor Vehicles Act , 1939. The three respondents to his petition respectively are : <ORG>, the Deputy Commissioner, Excise and Taxation (Appeals), Jaipur, and the Taxation Officer, (<ORG>) Sikar, State of Rajasthan. It appears that respondent No. 3 passed several :assessment orders imposing different amounts of tax against his five vehicles which were running on the four routes in question. The periods for which these assessment orders were passed differed from vehicle to vehicle; but, on the whole, they covered the period between the 1st April, 1962 and the 30th September, 1964. The total amount of tax imposed in respect of these vehicles by the assessment orders in question is Rs. 19,062-93P. These orders have been passed under section 2 of the Rajasthan Passengers and Goods Taxation (Validation) Ordinance, 1964 (Ordinance No. 4 of 1964). This Ordinance was made and promulgated by the Governor of Rajasthan on May 15, 1964.

Aggrieved by these orders, the petitioner filed appeals before respondent No. 2, but respondent No. 2 refused to entertain the said appeals unless the petitioner paid in advance the tax imposed by the orders under appeal. Whilst these appeals were pending before respondent No. 2, the petitioner moved for stay in respect of the recovery of the tax assessed, but the said application was rejected on the ground that there was no provision in law to. entertain any such application. That is why the petitioner submitted an application before the Commissioner, <ORG>, Rajasthan on the 3rd February, 1962 and prayed that his buses should not be attached and sold in execution of the orders of assessment, against which he had preferred appeals, pending the hearing and final disposal of the said appeals. The Commissioner rejected this application on the 8th February, 1962. Respondent No. 3 then proceeded to attach one of the buses of the petitioner, viz., Bus No. RJP-854 and took possession of it. The petitioner thereupon paid the amount of the taxes as assessed by the impugned orders, but the payment was made under protest.. The present petition has been filed by the petitioner under Art. 32 of the Constitution challenging the validity of the assessment orders in question. The main ground on which the validity of the said orders is challenged, is that the Ordinance under which the impugned orders were passed and the Rajasthan Passgengers and Goods Taxation (Amendment and Validation) Act 1964 (No. 22 of 1964) (hereinafter called the Act) which repealed and replaced the said Ordinance, are constitutionally invalid. The petitioner prays that this Court should hold that the Act is invalid, and should, by an appropriate writ, quash the impugned orders of assessment passed against him. The petitioner also claims that pending the final disposal of his petition, the respondents, their servants, and agents should be, restrained from realising the tax as directed by the impugned orders and from seizing the other buses of the petitioner for the purpose of recovering the said tax.

In order to appreciate the contention of the petitioner that the Act is invalid, it is necessary to mention the legislative background of the Act. The Le-islature of respondent No. 1 passed an Act in 1959 (No. 18 of 1959 known as the Rajasthan Passengers and Goods Taxation Act, 1959 (hereinafter called the principal Act'). This Act received the assent of the President on April 2, 1959; was published in <ORG> on April 30, 1959, and came into force on May 1, 1959. The validity of this Act has been upheld by this Court in <CITATION> (1). Section 3 of the, principal Act authorised <ORG> to levy, charge and collect tax on all fares and freights in respect of all passengers carried and goods transported by motor vehicles in Rajas- than. The said section further provided that the rate of the tax shall not exceed 1/8th of the value of fare or freight in the case of cemented, tarred, asphalted, metalled, gravel and kankar roads, and shall not exceed 1/12 of such value in other cases as may be notified by <ORG> from time to time.

Section 21 of the principal Act authorised <ORG> to frame rules consistent with the said Act for securing the payment of tax and generally for the purposes of carrying into effect its provisions. Accordingly, <ORG> framed suitable rules which came into force on the 21st May, 1959. Thereupon, a notification was issued by respondent No. 1 on the 30th April, 1959 under s. 3 of the said Act and ;It came into force, on May 1, 1959; it directed the manner in which, and the rates at which, the tax shall be charged and recovered. These rates were the same as had been prescribed by s. 3 of the same Act as maximum permissible rates. This notification was made effective on and from the 1st May, 1959. There is no dis- pute that the principal Act is valid and that the notification issued under it is also valid. In 1961, the Rajasthan Finance Act (No. 14 of 1961) was passed. Section 8 of this Act purported to amend s. 3 of the principal Act. As a result of this amendment, the maximum rate at which the State Government could levy, charge and collect tax on fares and freights was increased from 1/8th to 15 per cent in the first category of cases; and in the second category of cases it was increased from 1/12th to 10 per cent. In pursuance of the provisions of this Finance Act , respondent No. 1 issued a notification on the 9th March, 1961 levying tax at the said maximum permissible rates. Neither the bill in respect of this Act received (1)  1 S.C.R. 517.

assent of the President before it was introduced in <ORG>, nor did this Act receive his assent after it was passed.

In 1962, the Rajasthan Finance Act (No. 11 of 1962) was passed. Section 9 of this Act amended s. 3 of the principal Act authorised the increase of the two respective taxes to 20 per cent and 15 per cent respectively. A notification was then issued respondent No. 1 under the provisions of s. 9 of tile said Act. is notification authorised levy of taxes at the maximum rates permissible under s. 9 . Neither the bill in respect of this Act before it was introduced in <ORG>, nor this Act after it was passed received the assent of the President.

Then followed the Finance Act (No. 13 of 1963). This Act purported to amend s. 11 of the principal Act; but with this amendment we are not concerned in the present proceedings. It appears that the constitutional validity of the, material provisions of the principal Act and rules and notifications issued under it as well as the constitutional validity of the Finance Act s 1961 and 1962 and the notifications issued respectively thereunder was challenged by a number of bus operators by writ petitions filed by them before <ORG> under Art. 26 of the Constitution. During the pendency of these writ petitions, the Rajasthan Ordinance No. 4 of 1964 was promulgated. Later, the said Ordinance was repealed and replaced by the Act with which we are concerned in the present proceedings. This Act came into force on the 9th September, 1964, having received the assent of the President on the 8th September, 1964. The writ petitions filed by the other bus operators were decided by the said <ORG> on the 30th November, 1964 vide <NAME> and another v. Deputy Commissioner, Excise & Taxation (Appeals), <ORG>, Jaipur & other(1). In substance, the <ORG> has held in that case that the earlier Finance Act s of 1961 and 1962 suffered from the infirmity that they did not comply with the requirements of Art. 255 of the Constitution. It, however, did not think it necessary to finally determine the question as to whether by reason of the said infirmity, the said earlier Acts were void or not, because in its opinion, the Act of 1964 "is not merely an amending and a curative Act in that limited sense, but it is really an Act which virtually re-enacts the provisions of the earlier Acts which suffered from a constitutional infirmity" (P. 300). The <ORG> examined the contentions raised by the petitioners that (1)  I.L.R. 15 Raj. 285.

the provisions of the Act were invalid, and has rejected the petitioners' case that the said provisions suffered from any constitutional infirmity. In the result, the petitions filed before it challenging the validity of the Act failed. It appears that the petitioners had also challenged the validity of the recovery of penalty for non-payment of tax, and <ORG> held, following its earlier decisions, that the levy of any penalty in the cases before ,At would be illegal and, therefore, must be struck down. In other words, except for the limited relief granted in respect of the levying of the penalty, the substantial contention raised by the petitioners challenging the validity of the Act has been rejected by <ORG>. Against this judgment, <ORG> has -ranted certificates of fitness for leave to appeal to this Court and the record in the said appeals is being printed in <ORG>. In that sense, the said appeals can be said to be pending before this Court.

The learned Advocate-General who has appeared for the res- pondents in the present writ proceedings, requested us to postpone the hearing of this writ petition and take it up along with the appeals to which we have just referred. We did not, however, accede to this request, because we thought that it would not be right to postpone the hearing of the present writ petition for an indefinitely long period, and so, we allowed the learned Advocate General to argue the matter fully and refer us to the judgment of <ORG> which is under appeal in the said appeals. We made it clear to the learned Advocate-General that our deci- sion in the present writ petition would cover the decision of the said appeals in so far as it would relate to the validity of the provisions of the Act which are impugned before us by the present petitioner and not to that part which covered the question of penalty. Accordingly, the learned Advocate-General has elaborately addressed us on the relevant points and has taken us through the relevant portions of the judgment of <ORG> in the case of <NAME>).

The respondents filed their written statement in the present proceedings and they urged that the petitioners challenge to the validity of the relevant provisions of the Act should not be sustained. According to them, the Act is constitutionally valid and the impugned orders of assessment are fully justified by the said provisions. That is how the main question which falls to be considered in the present writ petition is whether the relevant provisions of the Act are valid or not.

(1) (1965) I.L.R. 15 Raj. 285.

Let us therefore proceed to refer to the provisions of the Act enquire whether the petitioner is justified in challenging their validity. The Act consists of five sections. Section 1 gives its tile; s. 2 amends s. 3 of the principal Act; s. 3 deals with validation of certain lump sum payments in lieu of tax s. 4 purports to validate certain sections of the Rajasthan Acts 14 of 1961, 11 of 1962 and 13 of 1963; it also purports to validate the tax levied, paid or payable and action taken or things done during the period between the 9th day of March, 1961 and the date of commencement of this Act. The last section 5 repeals Ordinance No. 4 of 1964. In the present proceedings we are not concerned with lump sum payments; and so, s. 3 does not fall to be considered.

At this stage it is convenient to set out sections 2 and 4 ; they read as under "2. In section 3 of the Rajasthan Passengers and Goods Taxation Act, 1959 (Rajasthan Act 18 of 1959) hereinafter referred to as the principal Act, to subsection (1), the following proviso shall be and be deemed always to have been added, namely --

Provided that the tax shall be charged in respect of all passengers carried and goods transported by motor vehicles,-

(a) during the period between the 1st day of May, 1959 and the 8th day of March, 1961, at the rate of-

(i) one-eighth of the value of the fare or freight in case of cemented, tarred, asphalted, metalled, gravel and kankar roads and

(ii) one-twelfth of the fare or freight, in other cases, subject to a minimum of one Naya Paisa in any one case, the amount of tax being calculated to the nearest Naya Paisa; and

(b) during, the period between the 9th day of March, 1961 and the 25th day of March, 1962, at the rate of-

(i) fifteen per cent of the value of the fare or freight in the case of cemented, tarred, asphalted, metalled, gravel and kankar roads, and C.I/65-14

(ii) ten per cent of the fare or freight in other cases subject to a minimum of one Naya Paisa in any one case, the amount of tax being calculated to the nearest Naya Paisa".

"4. Notwithstanding any judgment, decree or order of any Court, but subject to the provisions of this Act, section 8 of the Rajasthan Finance Act, 1961 (Rajasthan Act 14 of 1961), section 9 of the Rajasthan Finance Act, 1962 (Rajasthan Act 11 of 1962), and section 14 of the Rajasthan Finance Act, 1963 Rajasthan Act 13 of 1963) shall not be deemed to be invalid, or ever to have been invalid during the period between the 9th day of March, 1961 and the date of commencement of this Act, merely by reason of the fact that the Bills, which were enacted as the Acts aforesaid, were introduced in <ORG> without the previous sanction of the President under the proviso to Art. 304(b) of the Constitution and were not assented to by the President and the tax levied, paid or payable, the composition fee paid ,or payable and any action taken or things done or purporting to have been taken or done during the period aforesaid under the Rajasthan Passengers and Goods Taxation Act, 1959 (Rajasthan Act 18 of 1959), as amended by the Acts aforesaid, shall be deemed always to have been validly levied, paid, payable, taken or done in accordance with law and the aforesaid enactments shall be, and be deemed always to have been, validly enacted, notwithstanding the aforesaid defects, and accordingly.

(a) no suit or other proceeding shall be instituted, maintained or continued in any court for the refund of any tax or fee so paid or for any other relief on the ground of invalidity of the said sections of the Acts aforesaid; and

(b) no court shall enforce any decree or order directing any such refund or relief". Mr. <NAME> for the petitioner contends that ss. 2 and 4 pur- port to validate the earlier invalid Finance Act s of 1961 and 1962. He argues that the failure of the <ORG> to comply with the provisions of Art. 255 of the Constitution renders the said Acts void ab initio and as such, they cannot be validated by subsequent legislation. Mr. <NAME> also urges that the ,aid earlier Acts have been held to be invalid by <ORG> in the case of <NAME>) and it would be incompetent to the State <ORG> to validate the said Acts in spite of the decision of a court of competent jurisdiction.

We are not impressed by this argument. In the first place, it is not clear that <ORG> has held that the, said earlier Finance Act s are void ab initio; in fact, as we have already pointed out, the said <ORG> thought it unnecessary to pronounce its considered opinion on that aspect of the matter, because it held that the Act of 1964 with which it was primarily dealing in the said proceedings not merely amended or cured the earlier Finance Act s, but re-enacted the provisions of the said Acts, and so, the provisions of the said Acts became operative by their own force. Therefore, factually, it is not correct to say that the said earlier Acts have been struck down as void ab initio by any court of competent jurisdiction. Besides, in assessing the validity of this argument, it is necessary to remember that the Act was passed on September 8, 1964 and the judgment of <ORG> was pronounced on November 30, 1964; and so, it is clear that at the time when the Act was passed the earlier Finance Act s had not been struck down at all.

The next question to consider is whether an Act which suffers from the infirmity that it does not comply with the requirements of Art. 255 , can be validated by subsequent legislation. There are two answers to this question. Article 255 provides, inter alia, that no Act of the Legislature of a State and no provision in any such Act, shall be invalid by reason only that some recommendation or previous sanction required by this Constitution was not given, if assent to the Act was given by The President later. The position with regard to the laws to which Art. 255 applies, therefore, is that if the assent in question is given even after the Act is passed, it serves to cure the infirmity arising from the initial non-compliance with its provisions. In other words, if an Act is passed without obtaining the previous assent of the President, it does not become void by reason of the said infirmity; it may be said to be unenforceable until the assent is secured. Assuming that such a law is otherwise valid, its validity cannot be challenged only on the ground that the assent of the President was not obtained earlier as required by the other relevant provisions of the Constitution. The said infirmity is cured by the (1) (1965) I.L.R. 15 Raj. 285.

subsequent assent and the law becomes -enforceable. It is unnecessary for the purpose of the present proceedings to consider when such a law becomes enforceable, whether subsequent assent makes it enforceable from the date when the said law purported to come into force, or whether it becomes enforceable from the date of its subsequent assent. Besides, it is plain that the <ORG> may, in a suitable case, adopt the course of passing a subsequent law re- introducing the provisions of the earlier law which had not received the assent of the President, and obtaining his assent thereto as prescribed by the Constitution. We see no substance in the argument that an Act which has not complied with the provisions of Art. 255 , cannot be validated by subsequent legislation even where such subsequent Act complies with Art. 255 and obtains the requisite assent of the President as prescribed by the Constitution. Whether the infirmity in the Act which has failed to comply with the provisions of Art. 255 , should be cured by obtaining the subsequent assent of the President or by passing a subsequent Act re-enacting the provisions of the earlier law and securing the assent of the President to such Act, is a matter which the <ORG> can decide in the circumstances of a given case. Legally, there is no bar to the legislature adopting either of the said two courses. Therefore, the preliminary objection raised by Mr. <NAME> against the validity of the Act fails.

That takes us to the construction of section 2 and 4 of the Act. It would be noticed that s. 2 in fact does not purport to validate the earlier Finance Act s of 1961 and 1962. What it does ;Is to amend retrospectively S. 3 of the principal Act by inserting a proviso to sub-s. (1) of the said section. On its plain reading, s. 2 has the effect of inserting the said proviso to s. 3(1) of the principal Act; and since the amendment so made is, in terms, retrospective, when a tax is levied for the periods covered by clauses (a) & (b) of the proviso thus introduced in s. 3(1) of the principal Act, the <ORG> must proceed to deal with the matter on the basis that these clauses had been introduced in the principal Act right up from the commencement. We have already noticed that the principal Act has been held to be valid by this court; and so, we see no basis for the argument that in amending s. 3(1) of the principal Act, S. 2 of the Act has contravened any Constitutional prohibition. It is well-recognised that the power to legislate includes the power to Legislate prospectively as well as retrospectively, and in that behalf, tax legislation is no different from any other legislation. If the <ORG> decides to levy a tax, it may levy such tax either prospectively or even retrospectively. When retrospective legislation is passed imposing a tax, it may, in conceivable cases, become necessary to consider whether such retrospective taxation is reasonable or not. But apart from this theoretical aspect of the matter, the power to tax can be competently exercised by the legislature either prospectively or retrospectively; and that is precisely what s. 2 has done in the present case. Therefore, there is no substance in the argument that s. 2 of the Act is invalid. As the said S. 2 has been drafted, it appears clear that clause (a) of the priviso added by it to s. 3 (1) of the principal Act, covers the period between last of May, 1959 and the 8th of March, 1961, whereas clause (b) covers the period between the 9th March, 1961 and the 25th March, 1962. The first period had in fact been already covered by a notification validly issued on April 30, 1959 under s. 3 of principal Act; and so, it is not easy to understand why it was thought necessary to refer to this period by the said retrospective amendment. The second period had been attempted to be covered by Finance Act 14 of 1961 and the notification issued thereunder. In order to make the provisions of the-said notification effective, the <ORG> has adopted the legitimate expedient it of making the said provisions a part of the amendment which has been introduced to s. 3 (1) of the principal Act; and so, the rates prescribed by clause (b) can be validly imposed during the said retrospective amendment. The second period had been the Finance Act 11 of 1962 and the notification issued under it has not been included in the retrospective amendment introduced by s. 2 ; this period ranges between 26th March, 1962 and the 9th September, 1964; and so, the rates prescribed by the notification issued under the, relevant provisions of the said Finance Act are not re- enacted by the amendment made by s. 2 . In other words, s.2 does not purport to re-enact, by retrospective amendment, the rates prescribed by the notification issued under the Finance Act 11 of 1962. We are inclined to take the view that the draftsmen of the Act have referred to the first period unnecessarily in the said proviso and have failed to refer to the third period, through oversight. This infirmity tends to show that the drafting of :2 has been casual and somewhat careless. As we will presently point out, the consequence would be that the higher rates prescribed for the period between 26th March, 1962 and the 9th September. 1964 by the notification issued under Finance Act 11 of 1962, are not saved by the general provisions of s. 4 of the Act. It is to the said provisions that we must now turn.

Section 4 consists of three parts. In its first part, it provides that the several sections of the three Finance Act s enumerated by it, shall not be deem-Id to be invalid, or ever to have been invalid, during the period there specified, merely by reason of the fact that Art. 255 of the Constitution had not been complied with. Part 2 of the said section provides inter alia that the tax levied, paid or payable during the period as amended by the said specified Acts, shall be deemed always to have been validly levied, paid or payable; and part 3 prescribes that the aforesaid enactments shall be, and be deemed always to have been, validly enacted, notwith- standing the aforesaid defects. The question which arises for our decision is whether this section is valid. ln dealing with this question, we must, of course bear in mind the fact that the Act and all its provisions have received the assent of the President and so, prima a facie, the assent of the President to the Act would help the Act to validate the provisions of the earlier Acts which were not enforceable by reason of the fact that they had not secured his assent as required by Art. 255. But can the assent of the President to the Act serve the purpose of making s. 4 valid ? What s. 4 in truth and in substance says is that the failure to comply with the requirements of Art. 255 will not invalidate the Finance Act s in question and will not invalidate any action taken, or to be taken, under their respective relevant provisions. In other words, the <ORG> seems to say by s. 4 that even though Art. 255 may not have been complied with by the earlier Finance Act s, it is competent to pass s. 4 whereby it will prescribe that the failure to comply with Art. 255 does not really matter, and the assent of the President to the Act amounts to this that the President also agreed, that the <ORG> is empowered to say that the infirmity resulting from the non- compliance with Art. 255 doe,; not matter. In our opinion, the <ORG> is incompetent to declare that the failure to comply with Art. 255 is of no consequence and, with respect, the assent of the President to such declaration also does not serve the purpose which subsequent assent by the President can serve under Art. 255.

The learned Advocate-General has strenuously contended before us that we should look at the substance of the matter and not decide the validity of s. 4 merely because the words used in it may not be happy or appropriate. We agree that questions of this character must be judged on considerations of substance and not merely of form, and we have tried to read s. 4 as favourably as we can while appreciating the argument of the learned Advocate General; but the words used in all the three parts of s. 4 are clear and unambiguous; they indicate that the <ORG> thought that it was competent to it to cure, by its own legislative process, the infirmity resulting from the non-compliance with Art. 255 When it passed the earlier Finance Act s in question, and it was probably advised that such a legislative declaration would'be valid and effective, provided it received the assent of the President. In our opinion, the approach adopted by the <ORG> in this case is entirely misconceived. The <ORG>, no doubt, can validate an earlier Act which is invalid by reason of non-compllance with Art. 255 and such an Act may receive the assent of the President which will make the Act effective. The <ORG> cannot, however, itself declare by statutory provision that the failure to comply with Art. 255 can be cured by its own enactment, even if the said enactment received the assent of the President. In our opinion even

-the assent of the President cannot alter the true constitutional position under Art. 255. The assent of the President cannot, by any legislative process, be deemed to have been given to an earlier Act at a time when in fact it was not so given. in this context there is no scope for a retrospective deeming provision in regard to the assent of the President. It is somewhat unfortunate that the casual drafting of s. 2 leaves the period covered by Act It of 1912 and the notification issued thereunder as unenforceable as before, and the omnibus and general provisions of s. 4 are of no help in regard to the said period.

The learned Advocate-General strongly relied on the last part of S. 4 . This part provides that the aforesaid enactments shall be, and be deemed always to have been, validly enacted, notwithstanding the aforesaid defects. The clause "notwithstanding the aforesaid defects" emphatically points to the fact that the <ORG> thought that it could legislate retrospectively, and by such retrospective legislation, it could itself cure the infirmity in question. What has been overlooked by the <ORG> is the fact that the infirmity in question can be cured only by obtaining the assent of the President and not by any legislative fiat. We have given our anxious consideration to the problem raised by the wording of s. 4 and we have come to the conclusion that it would not be possible to uphold its validity. On many occasions, this <ORG> has tried to look at the substance of the matter and determine the issue in spite of the fact that the words or expressions used in the relevant provisions are either slovenly inappropriate or unhappy. But in the present case, however benevolently or favourably we look at the provisions of s. 4 , we see no escape from the conclusion that in enacting it, the <ORG> appears to have clearly assumed that it can by itself cure the infirmity resulting from the non-compliance with Art. 255 and all that it has to do in such a case is to obtain the a,-,sent of the President to its own view about its power to cure such an infirmity. We are satisfied that it is necessary that the true position in regard to the scope and effect of Art. 255 must be ,clearly brought out in order to avoid any misapprehension in future.

In support of his argument that the form adopted by the <ORG> in enacting s. 4 is not inappropriate, the learned Advocate General has referred us to a decision of this <ORG> in <CITATION> (1). It is true that in that case, s. 2 of the Sales Tax Laws Validation Act, 1956 (No. 7 of 1956), which is a Central Act , used phraseology which is similar to the phraseology adopted by s. 4 of the Act; but it would be fallacious to compare the said provision with s. 4 , because the ban which s. 2 of the said Act intended to lift could validly be Iifted by a <ORG>ary statute. Art. 286(2) of the Constitution which was, in force at the relevant time had provided, inter alia, that except in so far as <ORG> may by law otherwise provide, no law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of goods where such sale or purchase takes place in the course of inter-State trade or commerce. What s. 2 of the said Act did was to make a law as expressly authorised by Art. 286(2); and naturally in exercise of the power conferred on it by the said provision, it enacted the provisions of s. 2 and made them retrospective. It is significant that the power to lift the ban which was exercised retrospectively by <ORG>, vested in <ORG> and not in any outside authority like the President; and so, <ORG> was perfectly competent to validate the several State Act s which were held to be invalid, by adopting the legislative expedient of making a law as authorised by Art. 286(2) and providing for its retrospective operations The position with regard to s. 4 is logically and fundamentally different; the infirmity which rendered the earlier Finance Act s unenforceable, could' be cured not by the <ORG> itself acting on its own, but by the assent of the President; and in so far as the <ORG> by enacting s. 4 purports to prescribe by its own fiat that the infirmity in question should be deemed to have been cured, it has clearly exceeded its legislative jurisdiction. Therefore, we do not think that the decision of this <ORG> in <NAME> & Co.'s case(1) can be of any help to the learned Advocate-General in support of his argument that s.4 has been validly enacted. There is one more point which still remains to be considered. Mr. <NAME> urged that the retrospective operation of the amend-

(1) [1958] S.C.R. 1422.

ment made by s. 2 of the Act in s. 3 (1) of the principal Act, should be held to be unconstitutional inasmuch as the retrospective operation of the provision prescribed by cl.

(b) of the proviso added by s. 2 suffers from the infirmity that it imposes enhanced tax duty retrospectively. His argument is, where a taxing statute purports to impose a tax retrospectively, it necessarily involves an element of unreasonableness and that virtually amounts to contravention of the citizens' fundamental rights guaranteed under Art. 19(1)(f) or (g) of the Constitution. For the purpose of the present writ petition, we will assume that notwithstanding the proclamation of emergency issued by the President under Art. 352 , the constitutional bar created by Art. 358 does not operate against the petitioner inasmuch as he relies upon the contravention of his fundamental right prior to the date, of the proclamation. It is on that assumption that we wish to deal with the contention raised by Mr. <NAME>. In our opinion, the said contention is plainly unsound. We have already stated that the power to make laws involves the power to make them effective prospectively as well as retrospectively, and tax laws are no exception to this rule. So, it would be idle to contend that merely because a taxing statute purports to operate retrospectively, the retrospective operation per se involves contravention of the fundamental right of the citizen taxed under Art. 19(1) (f) or (1). It is true that Cases may conceivably occur where the <ORG> may have to consider the question as to whether excessive retrospective operation prescribed by a taxing statute amounts to the contravention of the citizens' fundamental right; and in dealing with such a question, the <ORG> may have to take into account all the relevant and surrounding facts and circumstances in relation to the taxation. In the present case, having regard to the legislative background of the provision prescribed by s. 2 , there can be little doubt that there is no element of unreasonableness involved in the retrospective operation cl.

(b) of the proviso added by the said section to s. 3(1) of the principal Act.

The result is that s. 2 of the Act is valid and the tax in question can be recovered from the petitioner for the periods covered by clauses (a) and (b) of the proviso as therein prescribed. In this connection, it will be recalled that the provision prescribed by cl. (a) of the proviso is really superfluous, because the same lax could have been validly recovered at the prescribed rates under e notification issued on April 30, 1959 under s. 3 of the principal Act. But as we have already pointed out, the period between arch 26, 1962 to September 9, 1964 is not covered by the provisions inserted by s. 2 in s. 3(1) of the principal Act; and so, the provisions of s. 2 are of no assistance to the respondents in imposing a tax against the petitioner at the enhanced rates initially prescribed by s. 9 of the Finance Act 11 of 1962. If we bad held that s. 4 of the Act was valid, then the impositoin of the tax at the enhanced rates prescribed by ,he said s. 9 would also have been valid; but ;in view of the fact that we have come to the conclusion that s. 4 is invalid, it follows that the tax which can be legitimately and validly imposed against the petitioner for the said period must be levied under the notificaion issued on April 30, 1959 under s. 3 of the principal Act. No doubt, Mr. <NAME> attempted to argue that in view of the fact that the said s. 3 had been amended by s. 9 of the Finance Act 11 of 1962, the notification issued under the original section 3 of the principal Act ceases to be operative. This contention is clearly misconceived. If the said Finance Act is unenforceable and the notification issu- ed thereunder is of no effect, then S. 3 of the principal Act would remain unamended for the period in question and the notification initially issued under it would remain. operative.

As a consequence of this conclusion, it follows that the petitioner is entitled to claim that the tax assessed against him in respect of his vehicles for the period between 26th March, 1962and the 9th September, 1964 at the enhanced rates is invalid, and that the taxing authorities concerned will have to levy the tax at the rates prescribed by the notification issued on the 30th April, 1959 under s. 3 of the principal Act as it originally stood. It is true that this result sounds very anomalous, because for the period immedeately preceding the period in question, the tax is validly recoverable at the enhanced rates, whereas for the period in question, it has to be recovered at a lower Tate; but, for this anomaly, the defective drafting of S. 2 and s. 4 of the Act is entirely responsible. Before we part with this petition, we would like to refer briefly to two decisions of this Court to which --reference was made during the course of the argument, before us. 'in <CITATION> (1), the validity of the Bihar Taxation on Passengers and Goods (Carried by Public Service Motor Vehicles) Act, 1961 (No. 17 of 1961) was challenged on the ground that it sought to validate taxes already recovered under an invalid Finance Act . Rejecting the argument that such retrospective validation of tax illegally recovered amounts to the contravention of the citizens' fundamental right under Art. 19(1) (f) or (g), this Court held that if in its essential features a taxing (1)  1 S.C.R. 897.

statute is within the competence of the <ORG> which passed 1 its character is not necessarily changed merely by its rotrospec tive operation so as to make the said retrospective operation either unreasonable or outside its 'legislative competence.

A similar view has been expressed by this Court in <CITATION> (1).

The result is, the writ petition is partly allowed and the pugned orders of assessment are set aside in so far as they relate to the period between 26th March, 1962 and the 9th Septemberm, 1964, and we direct the assessing authorities to levy a proper assessment in the ligght of the judgemnt. The assement orders in respect of the remaining period are valid and the petitioner's prayer that they should be sot aside, is rejected. in view of the fact that the petitioner has succeeded only partially, we direct that parties should bear their own costs.

Petition allowed in part.

(1) [1966] 1 S.C.R. 518.


JUDGMENT <NAME>, J.

1. These four references have been submitted by the <ORG> in respect of the same assessee raising identical issues arising out of the same facts relating to asst. yrs. 1967-68, 1968-69, 1969-70 and 1970-71.

2. The relevant facts appearing from the statement of the case in IT Ref. No. 336 of 1982 are that the assessee had entered into an agreement with <NAME> Basle w.e.f. 1st Jan., 1956 onwards and was getting assistance in the manufacture of wide range of products listed in the agreement as well as vide supplementary agreement from time to time. Tinopal was one such product the assessee was licensed to manufacture under the provisions of this agreement. In the manufacture of Tinopal cyanuric chloride is one of the raw materials and was being consumed in large quantities. Until the assessee decided to manufacture the said raw material by himself, the same was bought from the market. The assessee entered in another supplementary agreement on 14th July, 1965 for manufacturing cyanuric chloride. Under this agreement the assessee had to pay certain amounts in five equal instalments to <NAME> for acquiring technical know-how. The first instalment was payable on the commission of the cyanuric plant on 31st March, 1966. The second instalment was payable in the financial year 1966-67 and each subsequent instalment was payable in the following financial years. Towards payment of these instalments in each year, which was paid in foreign currency and its rupee value was claimed as a deduction for the asst. yr. 1967-68, and subsequent assessment years. The first payment in respect of which was made in financial year 1966-67. The rupee value of these instalments was Rs. 1,51,500. The assessee claimed deduction thereof as business expenditure of manufacturing cyanuric chloride commencing from financial year 1966-67 as a revenue expenditure. The <ORG> rejected the contention of the assessee by taking the view that because the payments were made for getting sub-licence to manufacture cyanuric chloride for a period not less than 10 years, it could not be claimed as a revenue expenditure. The CIT(A) held that the payment in question represented normal revenue expenditure which should have been allowed as a deduction by the <ORG>. The <ORG> confirmed the order. It held that the agreement dt. 14th July, 1965 was entered into for manufacture of raw material for the purpose of production of Tinopal. It is also held that on termination of agreement there would be no useful knowledge left which would help the assessee in manufacturing cyanuric chloride. It also noticed that under clause 22 of agreement dt. 1st Jan., 1956 the assessee had to refrain from using any of the <ORG>'s patents.

3. In the first instance the <ORG> having rejected the application under s. 256(1) of the IT Act submitted the question of law arising out of its order, the <ORG> applied under s. 256(2) before this Court and as per the direction contained in the order dt. 22nd Sept., 1981 in IT Ref. No. 233 of 1981 the following question of law has been referred to this Court for its opinion :

"Whether, on the facts and in the circumstances of the case, the <ORG> has been right in law in holding that the amount of Rs. 1,51,500 being the instalment payable by the assessee to <NAME> under the agreement dt. 14th July, 1965 is allowable as revenue expenditure ?"

For subsequent years also the same question has been referred. However, the amount claimed in each case is different.

4. We have heard the learned counsel for the parties.

5. <NAME>, learned counsel appearing for the applicant-Revenue, contended that under the agreement dt. 14th July, 1965, the assessee was granted sub-licence which goes to show that <NAME> with whom the assessee had collaboration agreement w.e.f. 1st Jan., 1956 had acquired the right to manufacture in India cyanuric chloride under the licence from <ORG> ("<ORG>" for brevity) under or according to <ORG>'s patents processes, know-how and improvements under a supplemental agreement dt. 22nd April, 1963. Likewise, <ORG> has also obtained licence from a German company "<ORG>" to manufacture in India cyanuric chloride under or according to <ORG>'s patents, processes, know-how and improvements.

Under this right to manufacture the said product in India from the said two companies. <ORG> had a right to sub-licence <ORG>'s associates in India for manufacture of the said products. In exercise of that right <ORG> had entered into the agreement with the assessee on 14th July, 1965. The <ORG> sub-licensed the assessee to manufacture cyanuric chloride under <ORG>'s as well as <ORG>'s patents processes, know-how and improvements. In consideration of the said sub-licence permitting the assessee to manufacture cyanuric chloride under the said two processes, the assessee was to pay a fee of 50,000 US $ in five equal annual instalments of 10,000 US $ each to <ORG>. On these precincts <NAME>, learned advocate, contends that the assessee has acquired an advantage or benefit of enduring nature. Under the said agreement by which cyanuric chloride was required to be manufactured by the assessee. Once technical know-how disclosed to the assessee, permanently with the assessee and even after the expiry of the agreement the knowledge of the process of manufacturing cyanuric chloride whether by <ORG> or by <ORG> will not be obliterated. Even on returning of the designs, etc. The plant for manufacturing cyanuric chloride would not be discontinued even after the expiry of the period, but continue to manufacture the same under the process already made known to the assessee, inasmuch as there was no stipulation under the agreement either principal or supplementary that on termination of the agreement, the assessee would discontinue the manufacture of cyanuric chloride.

6. On the other hand it was contended by the learned counsel for the assessee <NAME> that the technical know-how acquired under the said agreement was operational cost for the running the business and the amount paid to the collaborator of technical know-how was only paid for the use of the process developed by <ORG> or <ORG> for manufacturing cyanuric chloride in India and acquisition of right to use is distinct from acquisition to the right itself. Expenditure for regularly operating the business cannot be considered to be the capital expenditure. Mere right to use technical know-how without having proprietary right therein cannot be considered capital in the hands of the assessee. He relied on the decision of the Hon'ble Supreme Court in <CITATION> . (1987) 165 ITR 51 (SC).

7. We have given careful consideration to the rival contentions. Under s. 37 of the IT Act, 1961 all expenditure laid out wholly and exclusively for the purpose of business or profession are to be allowed as deduction while computing the income provided the same are not in the nature of capital expenditure or personal expenses of the assessee, apart from the condition that the same may not be governed by any other express provision of the Act. In the present case the only question that arises for consideration is other condition being satisfied that the expenses are wholly and exclusively for the purpose of business and are not governed by any other express provision, whether the expenses claimed are of capital nature.

8. The expression "capital expenditure" has not been defined in the statute, nor the words in the 'nature of capital expenditure' has been subject to any definition clause. Therefore, the expression has to be construed in ordinary business term. The <ORG>, in the course of determining this question have evolved various tests to determine as to when any expenditure can be said to be a capital and when a particular expenditure can be said to be of revenue nature.

9. In some cases it has been held that expenditure which brings into existence asset or advantage of enduring benefit is to be considered as capital expenditure. A disbursement, when it is referable to fixed capital or capital asset is treated as capital expenditure, but when it relates to circulating capital or stock in trade it is treated as revenue. Yet another test that has been applied is that where an expenditure relates to the framework of the assessee's business, it is to be treated as capital as opposed to revenue when it is related to running of the business. Initial expenditure for commencement of a business is ordinarily considered a capital outlay. So also money spent on acquiring goodwill has been held to be capital outlay. But no one test is of universal application. <ORG> in <CITATION> (1989) 177 ITR 377 (SC) quoted with approval following observation of Lord <NAME> in <ORG> vs. Commr. of Taxation of the Commonwealth of Australia (1966) AC 224 :

"The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction and some in the other. One consideration may point so clearly that it dominates other and vague indications in the contrary directions. It is a common sense appreciation of all the guiding factors which must provide the ultimate answer."

10. Test which was laid by Viscount <NAME> in the case of <ORG> (1925) 10 Tax Cases 155. "When an expenditure is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of trade. I think that there is good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such expenditure attributable not to revenue but to capital."

11. The opinion was quoted with approval by <ORG> in <CITATION> (1951) 20 ITR 475 (SC) and in catena of cases thereafter.

12. Lord <NAME> in <ORG> vs. <NAME> (1910) Tax Cases 529 opined that the capital expenditure is a thing which is going to be spent once and for all income expenditure is a thing which is going to be recur every year. In the same case Lord <NAME> in his concurring opinion said :

"It is also not essential that the word "asset" be confined to something material."

What is meant by expression 'once and for all' ? However, the test is as was explained in <CITATION> (1955) 27 ITR 34 (SC) the expression "once and for all" in Viscount <NAME>'s test does not mean that the payment should be made in a single sum and at one time. The expression "once and for all" is used to denote an expenditure which is made once and for all for procuring an enduring benefit to the business as distinct from recurring expenditure in the nature of operational expenses. It was said :

"If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business, it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand, it is made not for the purpose of bringing into existence any such asset or advantage for but for running the business or working it with a view to produce the profit, it is a revenue expenditure.

The aim and object of expenditure would determine the character of expenditure whether it is a capital expenditure or a revenue expenditure."

13. Another test evolved was to find out as to whether the expenses incurred are part of the working expenses or the expenditure laid out as part of the process of profit earning. In other words, it is capital outlay if such expenditure is necessary for the acquisition of property or of rights of a permanent character, the possession of which is a condition of carrying on its trade at all. This was said by the Lord <NAME> in <ORG> vs. <ORG> (1924) 8 Tax Cases 671.

"Is it part of the company's working expenses ? Is it expenditure laid out as part of the process of profit making ? Or on the other hand is it a capital outlay; is it expenditure necessary for the acquisition of property or of rights of a permanent character, the possession of which is a condition of carrying on its trade at all ?"

14. The test was quoted with approval by <ORG> in <CITATION> (1980) 124 ITR 1 (SC). Further principle which their Lordships of the Hon'ble Supreme Court in <ORG> (supra) quoted with approval from the case of <ORG> vs. Federal Commr. of Taxation 72 CLR 634 is that - "What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any secured, employed or exhausted in the process."

15. <ORG> said that "when dealing with cases of this kind where the question is whether expenditure incurred by an assessee is capital or revenue expenditure, the question must be viewed in the larger context of business necessity or expediency. If the outgoing expenditure is so related to the carrying on or the conduct of the business that it may be regarded as an integral part of profit earning process and not the acquisition of asset or right of a permanent character, the possession of which is a condition of carrying on business, the expenditure may be regarded as revenue expenditure."

16. Another test which was laid out that the advantage which is secured must be in the capital field that the expenditure would be disallowed. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably by leaving the fixed capital untouched, the expenditure would be on revenue account even though the advantage may endure for an indefinite future. That was the view expressed by <ORG> in IRC vs. Carron Co. (1968) 45 Tax Cases 18 (HL) and was approved and applied by <ORG> in <CITATION> (supra).

17. This test invariably lead to another inquiry. What is meant by enduring or advantage of permanent nature. The words "permanent" and "enduring" are not the words of art, but are only relative terms. They are not synonymous. What is the degree of durability of permanence always depends upon the facts of each case. Another test which has been applied while considering the nature of expenses is that if it is made for initiation of business or extension of business or substantial replacement of equipment. The outlay is deemed to be the capital. This is so because initial expenditure is incurred not for earning profit, but for setting it in motion. However, it is now well settled that no one test dealt with in various cases distinguishing between the capital and revenue expenditure is of permanent or conclusive nature or of universal application.

18. Here it will be appropriate to notice another decision of <ORG>. <CITATION> . (1968) 69 ITR 692 (SC), the assessee was Indian subsidiary of <ORG>, a Swiss company. The pharmaceutical section of <ORG> in India was taken over by the assessee in 1948. Under an agreement, the <ORG> undertook to deliver to the assessee all processes, formulae, scientific data, working rules and prescriptions pertaining to the manufacture or processing products discovered and developed in the <ORG>'s laboratories and to forward to the assessee as far as possible all scientific and bibliographic information, pamphlets or drafts which might be useful to introduce the licensed preparation and to promote their sale in India, it granted to the assessee full and sole rights and licence under patent listed in the agreement to make use of the same and also a licence to use certain specified trade marks in the territory subject to any existing licence to third parties held at the date of the agreement or the <ORG> may grant to third party thereafter. In consideration of that right to receive scientific and technical assistance, payments were to be made to the <ORG> Repelling the <ORG>'s contention that the contribution made to the <ORG> was not entitled to deduction under s. 10(2)(xv) because expenses were capital in nature, the Court said :

"The assessee did not under the agreement become entitled exclusively even for the period of the agreement, to the patents and trade marks of <ORG>; it had merely access to the technical knowledge and experience in the pharmaceutical field which <ORG> commanded. The assessee was on that account mere licensee for a limited period of the technical knowledge of <ORG> with the right to use the patents and trade marks of that company. The assessee acquired under the agreement merely the right to draw, for the purpose of carrying on its business as a manufacturer and dealer of pharmaceutical products, upon the technical knowledge of <ORG> for a limited period; by making that technical knowledge available <ORG> did not part with any asset of its business, nor did the assessee acquire any asset or advantage of an enduring nature for the benefit of its business."

19. <CITATION> . (supra) lump sum payment was made to a distributor chosen by the foreign collaborator as a condition of the agreement under which the assessee became entitled to the benefit of using trade marks and specialised process of the collaborator. The <ORG> sought to disallow the said expenses treating it to be the capital in nature. The Court said applying tests that aim and object for incurring expenses is one of the guiding factors and as the expenses in the case was for the acquisition of the know-how as it was a condition on which the collaboration agreed to part with the technical knowledge to the assessee, it was treated to be the revenue expenditure on commercial principle.

20. <CITATION> (supra), the assessee-company was engaged in manufacture of antibiotics and pharmaceuticals. It was granted licence for manufacture of penicillin. Until 1963 it has already made substantial investment of over Rs. 66 lakhs for setting up plants, etc., for production of penicillin. Initially, the appellant was able to achieve only moderate yield. With a view to increasing the yield the appellant negotiated with <ORG>, a reputed Japanese enterprise whereunder in consideration for once for all payment of 50,000 US $ it agreed to supply the assessee pilot plant, technical information, know-how and written description of <ORG>'s process for fermentation of penicillin with a flow sheet of the process on pilot plant and to arrange for the training of appellant's representatives in various plants in Japan at assessee's expenditure and advise the assessee in large scale manufacture for a period of 2 years. The assessee was to get technical know-how confidentially and secretly and not to seek any patent for the processes. Assessee's claim for deduction of the sum paid to the Japanese company as revenue expenditure was disallowed by the <ORG> holding that the expenses were capital in nature. For the purpose of setting up of new plant and new process and that the for complete replacement of the business inasmuch as the new process and new establishment of plant was to be put up in place of old process and old plant. <ORG> also rejected the assessee's claim. Reversing the decision of <ORG>, Hon'ble Supreme Court observed that there was no material before the <ORG> to come to the finding that the appellant had obtained under the agreement a completely new plant with a completely new process and completely new technical know-how. The business of the appellant was to manufacture penicillin. Even after the agreement the product continued to be penicillin. There was no material before the <ORG> that the area of improvisation was not part of the existing business.

21. There was no material to hold that it amounted to a new or fresh venture. What was stipulated was improvement of operation of existing business and its efficiency and profitability not removed from the area of day to day business of the appellants' established enterprise. The financial outlay under the agreement for the better conduct and improvement of the existing business and as revenue in nature and was allowable deduction in computing the business profit of the appellant.

22. In coming to this conclusion the <ORG> also noticed the principles which should govern while deciding such issues by the <ORG>s.

23. The most important aspects relevant for the present purpose which can be culled out from above discussion is that where expenses are incurred in areas which supplement the existing business and is not a fresh or new venture and agreement of acquiring technical know-how pertain to product already in the line of the established business which was intended to improve the operations of the existing business, its efficiency and profitability from the area of day to day business of the appellant's established enterprise's expenses be treated as revenue and not capital. On the other hand, if the technical know-how is acquired for the purpose of establishing altogether a new or fresh venture, launching of a new enterprise, the same expenditure may be treated as capital and not revenue. In such cases the test of enduring benefit might break. That to say the argument that knowledge having become once the part of knowledge bank of the acquirer, cannot be taken back in a sense and will always remain with the assessee and is enduring. But looking to the business realities, namely, the purpose of which knowledge has been enduring knowledge acquired becomes determining true character of the expenditure.

24. In view of the aforesaid, looking to the facts of the present case the mere fact that the knowledge to the Musashino, the process of manufacturing cyanuric chloride would become permanent part of the assessee's knowledge bank and will remain with the assessee even after expiry of the agreement and will not be determinative of the character of the expenditure.

25. The principal agreement with the <ORG> was to last for 20 years commencing from 1st Jan., 1956. The supplementary agreements in furtherance of the principal agreement were co-terminus with the principal agreement. In fact, the agreement was terminated even before the expiry of the period of the agreement. Under the principal agreement (clause 14) the assessee was though free to purchase raw materials and intermediaries from any source, but the purchase of products manufactured by <ORG> or from those who produce and manufacture raw material and intermediaries under the <ORG> patent, there was a prohibition to purchase such raw material from any source manufacturing the intermediary products in violation of <ORG> patent. From the agreement under which the assessee was licensed to manufacture in India cyanuric chloride as per the process developed by <NAME> or <NAME>, <ORG> was the person authorised under respective patent orders to manufacture that product in India. It was also permissible for <ORG> to sub-licence its associates in India for the manufacture of the said product in India. However, <ORG> himself was not the proprietor of the patents, nor it could transfer proprietary rights in such patents to any of his associates in India. From this it is apparent that the period for which the agreement was to operate was barely 11 years which in fact lasted less than that. The assessee was purchasing raw materials, namely, cyanuric chloride from the market. However, the same was not being produced under a licence from <ORG>. Once <ORG> having licensed to manufacture cyanuric chloride which was through <NAME> or <NAME> process in India had decided to start manufacturing that product either by himself or through his associates, the assessee was under obligation to purchase that raw material required for its principal product - Tinopal from such manufacturer only under clause 14 of the principal agreement. It is in the light of these circumstances the case has to be examined. The question will be whether such knowledge was for establishing the business or for running the business. In the former it shall be capital, in the latter it is revenue.

26. From the statement of the case, we find that Tinopal was one of the products which was manufactured by the assessee under the provisions of the principal agreement. Cyanuric chloride was one of the raw materials used in the manufacture of Tinopal which was consumed in large quantities. The object of the assessee undertaking manufacture of cyanuric acid was stated to be manufacturing raw materials for the purpose of production of Tinopal. If, therefore, applying the test laid down in <ORG> case (supra), which in our opinion does apply to the facts of the present case, the assessee's existing business was the business of manufacturing Tinopal, the product which the assessee intended to manufacture, namely, cyanuric chloride was one of the raw materials which until it started manufacturing was being purchased in large quantities from the market, the purpose of production of cyanuric chloride was found by the <ORG> to be the manufacture of raw material or production of Tinopal, that is to say, the purpose was in the area of existing business of the assessee for carrying on the existing business with more profitability and was not for the purposes of entering into a new adventure for operating in a new area of business. If that be so, the expenses incurred for acquiring the technical know-how to manufacture raw material necessary for the principal product of the assessee to cut down the cost of producing raw materials from the market was the operational cost of the existing business incurred for the purpose of cutting down the day to day cost of the business and not for the purpose of installing a new business, the expenses had to be held to be revenue in nature and not capital though we observe that the <ORG> was not correct in observing that there would be no useful knowledge left which would help the assessee in manufacturing cyanuric chloride after the agreement is concluded. As a result of operation of clause 22 which required the assessee to return <ORG> all documents put at the assessee's disposal and relating to manufacturing of engineering plants, designs, etc., in respect of the patents and the assessee was refrained from using <ORG> patents and trade marks which knowledge was acquired in respect of patents vesting in a third party. But, the knowledge bank of the assessee and production is already in process, according to that method, ordinarily it would not come to an end with the expiry of the agreement and would remain with the assessee. However, as we observe in the present case particularly, in the matter of acquisition of the technical know-how it is of great importance that for what purpose technical know-how was acquired.

27. In this connection concerning expenses incurred for acquiring the right to acquire raw material for the purpose of running business the matter was examined by their Lordships of <ORG> in <CITATION> (supra); by way of illustration it is said :

"Take a case where acquisition of raw material is regulated by quota system and in order to obtain more raw material the assessee purchases the quota right of another. Now, it is obvious that by purchase of such quota right, the assessee would be able to acquire more raw material and that would increase the profitability of his profit making apparatus, but the amount paid for purchase of such quota right would indubitably be revenue expenditure, since it is incurred for acquiring raw material and is part of the operating cost."

The principle fully applies to the facts found by the <ORG> in the present case, according to which the assessee had entered into an agreement on 14th July, 1965 for manufacturing raw material for the purpose of production of Tinopal.

28. Even applying the test of "acquisition of assets" it can be said that under the agreement the assessee did not acquire the capital asset itself, namely, the technical know-how as a proprietor thereof. What it acquired under the agreement on 14th July, 1965 was only the right to use technical knowledge available with <ORG> or <ORG>. It had right only to use that knowledge for the purpose of manufacturing cyanuric chloride within India. Therefore, what the assessee has acquired was not the capital asset, but only the access to the knowledge to the method. The finding that said two companies had developed process of manufacturing cyanuric chloride does not mean that these were only two methods known for manufacturing cyanuric chloride and the assessee could not at all have been able to commence production, but for acquisition of technical know-how from the said two concerns. Therefore, mere right of use of the technical knowledge of others has to be distinguished from the acquisition of right as proprietor to the knowledge in the sense that no one else could use that knowledge except with the permission or at the wish of the owner. A patent holder is the proprietor or the owner of the knowledge so long as that right remains with the proprietor and his permission is required by the users thereof, when such owner permits to use that knowledge under that name with condition of confidentiality/secrecy, what is transferred is not the capital asset, but only the right to use. So far as knowledge of such process is concerned that always remains with the acquirer and can never be recalled back. But it cannot be said that by such acquisition of knowledge the assessee has acquired any capital asset. So far as question as to whether it amounts to acquisition of advantage/benefit of enduring nature is concerned as we have already discussed, it depends upon the object with which such advantage or benefit has been acquired. If the advantage or benefit had been acquired to facilitate running of the existing business, it should be treated as the expenditure on revenue account. If the advantage or benefit acquired for establishing a fresh venture it may be treated as part of expenditure on capital account. As in the present case the finding of the <ORG> reveals that the advantage was acquired for the purpose of manufacturing raw material for production of Tinopal which was the existing business of the assessee, we have no hesitation in coming to conclusion that the expenditure incurred was rightfully held to be on revenue account.

29. Accordingly we answer the question referred to us in affirmative in all the four cases in favour of the assessee and against the <ORG>. There shall be no order as to costs.


PETITIONER: <ORG>. Vs. RESPONDENT: THE COMMISSIONER OF INCOME-TAX, BOMBAY DATE OF JUDGMENT: 11/08/1970 BENCH: <NAME>, K.S. BENCH: <NAME>, K.S. SHAH, J.C. GROVER, A.N. CITATION: 1970 AIR 1982 CITATOR INFO : R 1986 SC1857 (7) F 1987 SC1768 (3,5) ACT: Indian Income-tax Act , 1922, s. 10(2)(vii) and s. 34-Full disclosure of material facts to Income-tax Officer within meaning of s. 34(1)(a) , what amounts to-Failure to show excess of price for which assets sold in return and further failure to show written down value amounts to failure to disclose facts-<ORG> must determine whether any profits are made under section 10(2) (vii)-Without this being first determined <ORG> in reference under section 66(1) cannot decide whether there has been failure to disclose material facts. HEADNOTE: The appellant was a private limited company. The business and assets of the appellant were purchased by another company under agreement dated September 9, 1951. In the original proceedings for assessment to income-tax for the assessment year 1952-53 the appellant brought the transactions of sale to the notice of the Income-tax Officer and placed before him certain relevant documents and also furnished the information asked for. Setting off the unabsorbed depreciation brought forward against the income as found by him the Income-tax office determined the income of the appellant for the said assessment year at 'NIL'. Sometime later the successor-in-office of the said Income- tax Officer issued a notice under s. 34(1) (a) of the Indian Income-tax Act , 1922 to the appellant after obtaining sanction from the Commissioner of Income-tax. He hold that the appellant had not disclosed its profit under s. 10(2) (vii) of the Act resulting from the sale of its assets and determining the said profits at Rs. 4,88,386, he made a re- assessment. The Appellate Assistant Commissioner confirmed the order. The <ORG>, however, held that the material facts were all disclosed to the Income-tax Officer at the time of the original assessment and a mere change of opinion did not justify proceedings under s. 34(1)(a) . At the request of the Commissioner of Income-tax the <ORG> referred to <ORG> the questions (i) whether in the circumstances of the case it could be held that in the original assessment proceedings the assessee had made a full disclosure of material particulars; and (ii) whether having initiated proceedings under s. 34(1) (a) the Income-tax Officer could have later relied on s. 34(1)(b) . HELD : The law casts a duty on the assessee to 'disclose fully and truly all material facts necessary for his assessment' for the relevant year. ,Further the explanation to section 34(1) says that mere production before the Income-tax Officer of account books or other evidence from which material facts with due diligence could have been discovered by the Income-tax Officer will not amount to disclosure within the meaning of the section. In the present case the price realised at the sale in excess of the written down value of the assets sold, had not been included as profits in the return submitted by the assessee. It had also not shown the same in section 'D' of Part I of the return. The assessee had not shown either in its return or in any of the documents submitted to the Income-tax Officer. the written down value of the assets sold. This failure amounted to a failure on the part of the assessee to disclose fully and truly the material 762 facts necessary for its assessment. From the cryptic statement of the Income-tax Officer in the original assessment order that 'no adjustment is necessary' the <ORG> was not justified in drawing the interence that the Income-tax Officer had considered all the facts. [766 F-G] V.D.M.RM.M.RM. Muthiah Chettiar v. Commissioner of Income- tax, Madras, 74 I.T.R. 183, held inapplicable. <CITATION> 1, Calcutta, 41 I.T.R. 191, distinguished. <ORG> should not have and this Court would not answer the questions referred under s. 66(1) of the Act because those questions ,could not be answered without first deciding whether a part of the sale price received by the assessee amounted to profits under s. 10(2)(vii) . [768 C-D] [<ORG> directed to decide first whether the assessee had any profits failing within s. 10(2)(vii) and thereafter decide the appeal] JUDGMENT:

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1345 of 1967.

Appeal from the judgment and order dated February 10, 1966 of <ORG> in Income-tax Reference No. 19 of 1962.

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

<NAME>, Solicitor-General, <NAME>, <NAME> and <NAME>, for the respondent.

The Judgment of the Court was delivered by <NAME> This is an appeal by certificate under S. 66A(2) of the Indian Income-tax Act, 1922 (to be hereinafter referred to as the 'Act'). The assessee is <ORG> The assessment year with which we are concerned in this case is 1952-53, the relevant accounting year ending on March 31, 1952. The assessment for that year was completed by the Income-tax Officer ,on August 4, 1953. He determined the assessee's business profits ,of the year ended on March 31, 1952 at Rs. 33,096/- subject to the assessee's claim of unabsorbed depreciation brought forward to the extent of Rs. 42,000/- and odd. After setting off the unabsorbed depreciation to the extent of Rs. 33,096/-, he determined the assessee's total income for the assessment year 1952-53 at '<ORG>'. In the course of the assessment proceedings, the assessee -company informed the Income-tax Officer by its letter of July 2, 1953 about the sale of the assessee company to <ORG> (to be hereinafter referred to as <ORG>'). It also brought to the notice of the Income-tax Officer, the following documents:

(a) Appropriate extract from the minutes of the meeting of the Board of Directors of <ORG> held on 16-4-1951 agreeing to purchase the assets of the assessee company;

(b) Resolution passed on 19-9-1951 by <ORG> for the assessee company deciding to sell the concern to <ORG>;

(C) Agreement dated 19-9-1951 between the said two companies;

Later on in response to a letter from <ORG>, the assessee company informed him the manner in which the sale price of Rs. 9,35,24-6/15/8 was determined. It also submitted a statement of unabsorbed depreciation. That statement set out the depreciation accrued as well as that allowed. The entire consideration for the sale was paid in cash on October 4, 1951 and the profits earned by the assessee for the period of six months ended on September 30, 1951 were paid over to <ORG>. In completing the original assessment, the Income-tax Officer observed:

"On going through these documents and the copies of the Resolution passed by the shareholders of <ORG>, it is seen that no adjustment is necessary in the matter. The position of the company's total income is determined as under........"

We may mention at this stage that the consideration received by the assessee company for the sale of- its assets was much more than their written down value. Yet the assessee company did not show in its return any profits under s. 10(2)(vii) of the Act nor did it show the price received in excess of. the written down value of the assets sold in Part I of Section 'D' of the Return.

Sometime later the Income-tax Officer found out that the profits deemed to have been earned by the assessee company under S. 10(2)(vii) had not been assessed'. Hence after obtaining the sanction of the Commissioner, he commenced proceedings under s. 34(1)(a) . After hearing the assessee, the Income-tax Officer reassessed the assessee on August 26, 1957 determining its total income for the assessment year in question at Rs. 4,48,893/on the, basis that the profits earned by the assessee under s. 10(2)(vii) were Rs. 4,88,386/-. He rejected the contention of the assessee that the notice issued by him under s. 34(1)(a) was invalid inasmuch as it had placed before him all the primary facts necessary for the assessment. The assessee unsuccessfully contended that there was no basis for his conclusion that there was any failure on its part to disclose fully and truly all material facts necessary for its assessment. The Income-tax Officer opined that the failure of the assessee to disclose its profits under S. 10(2)(vii) brought the case within the, scope of S. 34(1)(a) . In appeal the Appellate Assistant Commissioner concurred with the view taken by the Income-tax Officer. lie held that the assessee had a statutory duty to submit a return showing all profits including the-deemed profits under S. 10(2)(vii) .

On a further appeal to the tribunal, the impugned assessment was challenged on various grounds. It was urged before the tribunal, on behalf of the assessee that no portion of the price realised by the sale of its assets came within the scope of s. 10(2) (vii) and further even if any portion of that price can be considered as deemed profits under s. 10(2)(vii) , it was impermissible for the Income-tax Officer to initiate proceedings under S. 34(1)(a) as the assessee had placed all the primary facts before the Income-tax Officer and therefore it cannot be said that it had not fully and truly disclosed all material facts. On behalf of the <ORG>, it was urged before the tribunal that the part of price realised by the sale of the assets should be deemed as profits under s. 10(2)(vii) ; those profits had 'not been included in the return of the assessee nor has the assessee placed all the material facts necessary for determining its tax liability; therefore,, the income-tax Officer was justified in initiating proceedings under s. 34(1)(a) and at any rate the impugned assessment can be justified under s. 34(1)(b) . The tribunal did not go into the question whether any part of the sale proceeds can be considered as deemed profits under s. 10(2)(vii) but it held that the assessee had placed before the Income-tax Officer, all the primary facts necessary for its assessment and therefore it cannot be said that it had failed to disclose fully and truly all material facts. It observed "There can be no manner of doubt that all primary facts regarding the transaction of the sale of assessee's assets were placed by the assessee before the Income-tax Officer at the time of the original assessment. The then Income-tax Officer appears to have applied his mind to the facts of the case and after doing so he arrived at the finding that no adjustment in regard to the surplus arising out of the sale of the assets was necessary. Whether or not there was any profit under s. 10(2)(vii) , and, if so, whether it was taxable was an inference to be drawn from the facts which were fully placed before the Income-tax Officer. The mere omission of the sale transaction from section D of Part I of the return of income would not enable the Departmental authorities to hold that the assessee had failed to disclose fully and truly all material facts necessary for its assessment. In' -;dew of the fact that all the relevant facts were available to the Income-tax Officer who made the original Assessment, the present assessment on those very facts amounts to merely a change of opinion by the Income-tax Officer. There has been no suppression of any material information at the time of the original assessment and as such the action under section 34(1)(a) cannot be sustained."

It rejected the contention of the <ORG> that the impugned assessment can be justified under s. 34(1)(b) as according to it the facts proved in the case do not bring the case within that Provision and further the Income-tax Officer did not proceed under that provision.

At the instance of the Commissioner of Income-tax the tribunal submitted the following questions-for the opinion of <ORG>:

"(1) Whether in the circumstances of this case it can be held that in the course of original assessment proceedings for the assessment year 1952-53, the assessee company omitted or failed to disclose fully and truly all the material facts necessary for its assessment for that assessment year ?

(2) Whether, where as a matter of fact, action for reassessment proceedings had been initiated on the belief that the provisions of s. 34(1) (a) were properly applicable to the facts of the case <ORG> was precluded from sustaining the validity of the reassessment made on the grounds that the reassessment fell as well within the scope of s. 3  4 (1 ) (b) ?"

<ORG> answered both these questions in `favour of the <ORG>., Hence this appeal.

In our judgment the tribunal erred in declining to decide the question whether any portion of the sale price came within the scope of s. 10(2) (vii). That question should have been examined. at the very outset for the purpose of considering whether the assessee had placed before the Income-tax Officer truly and fully all material facts necessary for -the purpose of its assessment. If it is found that any portion of that sale price are profits then in our opinion <ORG> was right in holding that the assessee had failed to place before the Income-tax Officer during the original assessment truly and fully all material facts necessary for the 'purpose of assessment. Admittedly the price realised at the sale 'in excess of the written down value of the assets sold, had not been included as profits in the return submitted by the assessee. It had also not shown the same in section 'D' of Part I of the return. It may also be noted that the assessee had not shown either in its return or in any of the documents submitted to the Income-tax Officer, the written down value of the assets sold. Hence not only the Income- tax Officer was not told that the assessee had earned any profit under s. 10(2)(vii) nor even the essential fact viz. the written down value of the assets sold was supplied to him so as to enable him to -find out the price in excess of the written down value realised by the assesee. It is true that if the Income-tax Officer had made some investigation particularly if he had looked into the previous assessment records, he would have been able to find out what the written down value of the assets sold was and consequently he would have been able to find out the price in excess of their written down value realised by the assessee. It can be said that the Income-tax Officer; if he had been diligent could have got all the necessary information from his records. But that is not the same thing as saying that the assessee had placed before the Income-tax Officer truly and fully all material facts necessary for the purpose of assessment. The law casts a duty oil the assessee to 'disclose fully and truly all material facts necessary for his assessment for that year'. Further, Explanation to Section 344(1) says :

"Production before the Income-tax Officer of account-books or other evidence from which material facts could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure within the meaning of this section".

If the assessee had disclosed to the Income-tax Officer, the surplus price realised by it over and above the written down value of the assets sold or in the alternative if it had informed the Income-tax Officer the price realised as well 'as the written down value of the assets sold, then it, could have been said that the assessee, had done its duty and it was for the Income-tax officer to draw any inference on the facts placed before him. But the failure of the assessee to disclose to the Income-tax Officer the fact that the price realised by it by sale of its assets was more than the written down value of those assets or at least the written down value of those assets amounts, in our opinion, to a failure on its part to disclose fully and truly the material facts necessary for its assessment. From the cryptic statement of the Income-tax Officer in the original assessment order that "no adjustment is necessary" the tribunal was not justified in drawing the inference that the Income-tax Officer had considered all the relevant facts. In Support of his contention that the disclosure made by the assessee was true and full in all material particular and hence no proceedings could have been taken under s. 34(1)(a) . Mr.<NAME>, learned Counsel for the assessee relied on the decision of this <ORG> in <CITATION> ('). In that case the question that arose for decision was whether the assessee's failure to include in his return the income of his wife and his minor sons admitted to the partnership of which he was a partner assessable in his hands under s. 16 (3) (a) (ii) can be considered as a failure to disclose. truly -and fully all facts material for the assessment. This <ORG> came to the conclusion that the omission in question did not come within the scope of s. 3  4 (1 ) (a). Therein this <ORG> observed that in the form of return prescribed under rule 19, of the Indian Income-tax Rules, 1922, framed under s. 59 of the Act, there was no clause which required disclosure of the income of any person other than the income of the assessee, which was liable to, be included in his total income. Nor was the assessee required under s.22(5) of the Act, in making a return, to disclose that any income was received by his wife or minor child admitted to, the benefits of partnership in a firm of which he was a partner. Hence by not showing the income of his wife and minor children, the assessee cannot be deemed to have failed to disclose fully and truly all material facts necessary for his assessment within the meaning of s. 34(1)(a) of the Act. Therein this <ORG> further observed that s. 16(3) of the Act imposes an obligation upon the. Income-tax Officer to compute the total income of an individual for the purposes of assessment by including the items of income set out in cls.(i) to (iv) and (b) but thereby no obligation is imposed upon the taxpayer to disclose the income liable to be included in. his assessment under s. 16(3) . For failing or omitting to disclose that income proceedings for reassessment cannot "therefore be commenced under s. 34(1)(a) . The ratio of the above decision is inapplicable to the facts of the present case. If any part of -the. price with which we are concerned in this case can be considered as deemed profits under s. 10(2)(vii) , then the assessee had a duty to include it in his return. His failure to do so brings his case within the scope of s. 34(1)(a) . Mr. <NAME> next relied on the decision of this <ORG> in <CITATION> tax Officer, Companies Distt. I Calcutta and anr.(2). There this <ORG> had observed :

"Once all the primary facts are before the assessing .authority, he requires no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be drawn. It is not for somebody else-far less the assessee-to tell the assessing authority what inferences whether of facts or law, should be (1) 74 I. T. R. 183.

(2) 41 I. T. R. 191 at 201.

drawn. Indeed, when it is remembered that people often differ as regards what inferences should be drawn from given facts, it will be meaningless to demand that the assessee must disclose what inferences-whether Of. facts or law-he would draw from the primary facts." In that case the question for consideration was whether the assessee had a duty to inform the Income-tax Officer with what intention the shares concerned in that case were sold. We do not think that the, decision in question is of any assistance to the assessee.

For the reasons mentioned above, we are of the opinion, 'that <ORG> should not have and we in our turn will not answer the questions referred under s. 66(1) of the Act because in our opinion those questions cannot be answered without first deciding whether the part of the sale price received by the assessee amounts to profits under s. 10(2)(vii) . The tribunal must first decide that question and thereafter decide the other questions of law arising for decision on the basis of its decision whether there was any profits falling within s. 10(2)(vii) .

In the result we allow this appeal and in place of the answers given by <ORG> we enter a decision to decline to answer those questions. It is for the tribunal to decide the appeal before it in the light of this decision. In the circumstances of 'the case we make no order as to costs.

<NAME>

Appeal allowed.