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TMI Blog1969 (7) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... sons of the vendor and the vendor in respect of the spinning mill and other properties. The sons had filed a suit against the father, the vendor, claiming the schedule properties including the mill as joint family properties and for partition of the same. The vendor claimed that the properties were his self-acquired properties. The District Judge, Rajahmundry, held that the properties were the self-acquired properties of the vendor and dismissed the suit of the plaintiffs. Against the judgment of the District Judge an appeal was filed in the Madras High Court, being A.S. No. 175 of 1938. While the appeal was pending, on February 1, 1941, the assessee purchased the mill from the vendor who purported to sell the same as the sole owner. In A.S. No. 175 of 1938, the Madras High Court held that the properties of the vendor were not his self-acquired properties but were joint family properties in which the plaintiffs had a two-thirds share. Against this judgment the vendor preferred an appeal to the Privy Council. While that appeal was pending the assessee had submitted returns for the relevant assessment years. However, before the assessments were taken up the assessee entered into a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essed the view that the sum of Rs. 1,15,000 could not be allowed to be set off against the assessee's income from the mill as it was an ex gratia payment to the sons of Appalaswamy who had no right, title or interest in the mill and it was paid in order to perfect a supposed defective title and as such was of a capital nature. Thereafter the Income-tax Appellate Tribunal stated a case to the High Court under section 66(2) of the Indian Income-tax Act, 1922, on the following questions of law : "R.A. No. 779 which relates to the assessment year 1944-45 : '(1) Whether, on the facts and in the circumstances of the case, in respect of the assessment year 1944-45, the assessment made on the assessee in the status of a Hindu undivided family in respect of Income received by him as receiver could be justified notwithstanding the provisions of section 41 of the Act ? (2) Whether, on the facts and in the circumstances of the case, the assessment of the entire income of Rs. 1,09,613 in the hands of the assessee is valid in the face of the compromise memo dated 7th September, 1945, approved by the court? (3) Whether, on the facts and in the circumstances of the case, the assessee is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the earlier assessment year 1944-45 in R. A. No. 779 and the corresponding excess profits tax assessment in R. A. No. 782. The High Court answered questions No. 1 and 2 in R. A. No. 779 and question No. 1 in R.A. No. 780 in the affirmative. The High Court held that reassessment proceedings have been validly initiated under section 34 of the Act. The High Court found that the assessment on the assessee in the status of Hindu undivided family in respect of income received by him as receiver was proper. The High Court thought that the basis of the compromise in the Madras High Court entered into between the assessee and the minor sons of the vendor, Appalaswamy, wherein the assessee paid Rs. 1,15,000 to the minor sons cannot be ignored. The High Court negatived the contention of the income-tax department that the sum of Rs. 1,15,000 was paid to cure a supposed defect in the title and that it was a capital payment. Upon the interpretation of the terms of the compromise the High Court took the view that the amount of Rs. 1,15,000 was paid partly towards acquisition of capital asset and partly towards the discharge of the claim towards profits and hence it should be apportioned toward ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the income pending the decision of the appeal before the Privy Council. In our opinion there is no justification for this argument. It is not true to say that the assessee brought all the relevant facts before the Income-tax Officer. On the contrary he deliberately suppressed the fact that there was a compromise between himself and the plaintiffs under which he was entitled to the whole of the income from the mill. At any rate the Privy Council's decision which determined the rights of the parties irrespective of the compromise did constitute definite information within the meaning of section 34 of the Income-tax Act. This view is borne out by the decision of this court in Maharaj Kumar Kamal Singh v. Commissioner of Income-tax. In that case the Income-tax Officer had, following the decision of the High Court in Kamakshya Narain Singh's case, omitted to bring to assessment for the year 1945-46 the sum of Rs. 93, 604 representing interest on arrears of rent due to the assessee in respect of agricultural land on the ground that the amount was agricultural income. Subsequently, the Privy Council, on appeal from that decision, held that interest on arrears of rent payable in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent proceedings start afresh. When once valid proceedings are started under section 34(1)(b) the Income-tax Officer had not only the jurisdiction but it was his duty to levy tax on the entire income that had escaped assessment during that year. The second question involved in this case is whether the High Court was right in holding that any portion of the amount of Rs. 1,15,000 was liable to be treated as business expenditure. It is well established that where money is paid to perfect a title or as consideration for getting rid of a defect in the title or a threat of litigation the payment would be capital payment and not revenue payment. What is essential to be seen is whether the amount of Rs. 1,15,000 was paid for bringing into existence a right or asset of an enduring nature. In other words if the asset which is acquired is in its character a capital asset, then any sum paid to acquire it must surely be capital outlay. Money paid in consideration of the acquisition of a source of profit of income is capital expenditure both on principle and authority. In Atherton v. British Insulated and Helsby Cables Ltd. Viscount Cave said : "But when an expenditure is made, not only once ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. There is the further possibility that by the time the litigation ends the property will have deteriorated and its value will have been materially reduced by the termination of the lease of the land. Taking all these contingencies into consideration we are of opinion that the offer made by the purchaser of Rs. 1,15,000 for the release of the claim, if any, of the two sons in the mill sold to him by their father is a fair offer, the acceptance of which would be be beneficial to the minor second plaintiff." It is true that the High Court took into consideration the income from the mill in testing whether the offer made by the purchaser of Rs. 1,15,000 for the release of the claim of the plaintiffs was a fair offer. But that does, not mean that the sons of Appalaswamy were given as a result of the compromise a share in the profits of the assessee. It is clear from the circumstances of this case that the payment of Rs. 1,15,000 was made by the assessee in order to perfect his title to the capital asset and the assessee is not entitled to set off any portion of the amount as attributable to the lease money. It was a lump sum payment for acquisition of a capital asset and the clai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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