1965 (11) TMI 12 - HC - Income Tax

Expenditure on the maintenance of the dependants within the intendment of allotment would fall within the scope of s. 4(ii) Expenditure Tax Act 1957

Summary

Issues Involved:

1. Validity of assessment for the year 1958-59 under the Expenditure-tax Act.
2. Validity of preliminary notices for assessment for the years 1959-60, 1960-61, and 1961-62 under the Expenditure-tax Act.
3. Applicability of sections 4(i) and 4(ii) of the Expenditure-tax Act before and after the amendment by the Finance Act of 1959.
4. Constitutional validity of section 3 of the Expenditure-tax Act.

Issue-wise Detailed Analysis:

1. Validity of assessment for the year 1958-59 under the Expenditure-tax Act:

The appellant's counsel supported the assessment for the year 1958-59 by relying on the provisions of section 4(i) and section 4(ii) of the Expenditure-tax Act as they were before their amendment by the Finance Act of 1959. The disputed items of expenditure were incurred by five allottees of the family, including four junior members and the Kalari Unit, out of the income of properties allotted to them under two karars, exhibit P-5 of 1909 and exhibit P-6 of 1943. The appellant included these expenses in the taxable expenditure of the assessee, the Hindu undivided family.

Section 4(i):

The conditions to be fulfilled under section 4(i) are:
(i) The expenditure was incurred by any person other than the assessee.
(ii) The expenditure was incurred in respect of any obligation or personal requirement of the assessee.
(iii) The expenditure was such that but for its having been incurred by that other person, would have been incurred by the assessee.

The court found that conditions (ii) and (iii) were not fulfilled in the context of exhibits P-5 and P-6. The family had made other arrangements for such expenses being met, and thus, it had no obligation to incur those expenses.

Section 4(ii):

The conditions for the application of section 4(ii) are:
(i) The expenditure should have been incurred by a dependant of the assessee.
(ii) It must have been incurred for the benefit of the assessee or any of his dependants.
(iii) It must have been incurred out of any gift, donation, or settlement on trust, or out of any other source created by the assessee, directly or indirectly.

The court held that the five allottees were dependants of the assessee and that the expenditure was incurred out of a source created by the assessee. However, the term "any of his dependants" was construed to mean some other dependant than the one who incurs the expenditure. The expenditure incurred by the dependants for their personal requirements did not fall within section 4(ii).

2. Validity of preliminary notices for assessment for the years 1959-60, 1960-61, and 1961-62 under the Expenditure-tax Act:

The court noted that the appellant had not proceeded beyond issuing notices calling for returns of expenditure for these years. The provisions applicable were the amended provisions of section 4, which have a different scope compared to the pre-amendment provisions. The court did not find it necessary to deal with sections 4(i) and 4(ii) as amended in detail for these years.

3. Applicability of sections 4(i) and 4(ii) of the Expenditure-tax Act before and after the amendment by the Finance Act of 1959:

The court highlighted the differences between the pre-amendment and post-amendment provisions of sections 4(i) and 4(ii). The pre-amendment provisions included any expenditure incurred by dependants out of any gift, donation, or settlement on trust created by the assessee. The post-amendment provisions specifically addressed expenditures incurred by dependants from income or property transferred directly or indirectly by the assessee. The court emphasized that the correct approach was not made in the assessment for the year 1958-59 and directed the appellant to proceed with the assessment in accordance with the law and the court's observations.

4. Constitutional validity of section 3 of the Expenditure-tax Act:

The constitutional objection raised to the validity of section 3 of the Act was decided by the Full Bench, which repelled the contention that section 3 was discriminatory against the Hindu undivided family. The court set aside the order quashing the preliminary notices and directed the appellant to proceed with the assessment proceedings in due course of law after issuing fresh notices.

Conclusion:

The court set aside the orders on O. P. No. 820 of 1962 and O. P. No. 1752 of 1962, quashed the assessment order for the year 1958-59, and directed the appellant to proceed with the assessment in accordance with the law. The writ appeals were allowed to the extent indicated, with no order as to costs.