1958 (10) TMI 5 - SC - Income Tax

Whether on the facts of this case any income accrued to Messrs. Vyas and Dhotiwala as the result of their associating themselves as financiers in the scheme for the distribution of standard cloth ; and if so whether such income was assessable in their hands ? Held that - Section 4(3)(i-a) applies to income derived from business carried on on behalf of a religious and charitable institution when the income is applied solely to the purpose of the institution and the business is carried on in the manner provided. It is enough to say that the scheme considered as a business was not carried on on behalf of any religious or charitable institution. Once it is held that the assessees made the profits how they use it would not matter. In the result we would answer both parts of the question framed in the affirmative. We hold that the profits were the income which accrued to the assessees and such income is assessable to income-tax and is not exempt from taxation under section 4(3)(i-a). The appeal is allowed

Summary

Issues:
1. Interpretation of the Income-tax Act regarding taxation on profits earned from a specific scheme.
2. Determination of whether the profits earned by the assessees were assessable income.
3. Examination of the claim for exemption under section 4(3)(i-a) of the Indian Income-tax Act.

Analysis:
The case involved an appeal to the Supreme Court against the judgment of the High Court at Nagpur concerning the taxation of profits earned by the assessees from a cloth distribution scheme. The scheme was devised by the Deputy Commissioner to address cloth scarcity, with the assessees acting as financiers and distributors. The profits generated by the scheme were subject to dispute regarding their taxability. The Income-tax Officer initially assessed the assessees to tax on the profits, which was challenged through the appellate process. The Appellate Tribunal eventually set aside the assessment orders, leading to a reference to the High Court under section 66(1) of the Act.

The High Court's decision focused on the requirement for the revenue authorities to prove that the assessees received or should be deemed to have received income from the scheme during the relevant period. The High Court ruled that the assessees had not actually received such income and that the provision of "deemed to be received" in the Act was not applicable in this case. The High Court answered the reference question in the negative based on these findings.

However, the Supreme Court criticized the High Court's judgment, emphasizing that the crucial issue was whether income had accrued to the assessees, not just whether it was received or deemed to be received. The Court disagreed with the Tribunal's view that the assessees were not carrying on a business by working the scheme due to the Deputy Commissioner's control. The Court held that the profits belonged to the assessees, as evidenced by the scheme's provisions and the assessees' actions. Therefore, the profits were deemed assessable income, and the claim for exemption under section 4(3)(i-a) was dismissed.

In conclusion, the Supreme Court allowed the appeal, stating that the profits earned by the assessees were assessable income and not exempt from taxation. The Court held that the assessees were liable to pay tax on the profits generated from the cloth distribution scheme, rejecting their claim for exemption under section 4(3)(i-a). The decision highlighted the assessees' ownership of the profits and their obligation to pay tax on the income accrued from the scheme.