Commissioner of Income-tax, Bangalore Vs. R. Hanumathappa and Son - Court Judgment

Excerpt:
- [ s.m. sikri,; r.s. bachawat and; k.s. hegde, jj.] the appellant was a manufacturer of iron and steel products.it was importing steel rods from which steel wires were manufactured. on.april 24, 1962 finance act (no. 2) 1962 imposed excise duty on iron and steel products by introducing item 26aa in the central excise and salt act, 1944. under that item, on wires, 5% ad valorem plus the excise duty for the time being leviable on pig iron and steel ingots as the case may be was payable. pig iron 'and steel ingots were already subject to excise duty under items 25 and 26 respectively. on the same day, the first schedule of the tariff act 1934 was amended and two notifications nos. 70 and 77 were issued in exercise of the powers conferred by r. 8(1) of the rules framed under the excise act. in the tariff act item 63(36) which deals with imported iron and steel products was added to the first schedule by. finance act (no. 2),. 1962.the items included therein are the very items set out in item 26aa of the excise act. the standard rule of duty is mentioned as 'the excise duty for the time being leviable on like articles if produced or manufactured in india... and the duty so leviable shall be in addition to the duty which would have been levied if this entry had not been inserted.under notification 70, the central government exempted iron and steel products falling under item 26aa if made from pig iron or steel in gots on which the appropriate amount of excise duty has already been paid,from so much of the excise duty leviable thereon as is equivalent to the duty leviable under item 25 or 26 as the case may be. under notification 77, the central government exempted other iron and steel products falling under sub-items (2), (3), (4) and (5) of item 26 aa if made from articles which have already paid the 'appropriate. excise duty under sub-item (1) of item 26aa, from so much of the excise duty as is equivalent to the duty payable under sub-item (1). this notification was later superseded by another notification no. 89. by, which the government exempted with effect from april, 24, 1962, iron and steel products falling under item 26aa if made from another article falling under the said item and having already paid the appropriate amount of' duty, from so much of the excise duty as is equivalent to the duty payable on the said article. on and after april 24, 1962, the appellant cleared from its warehouse wires produced from the imported steel rods. the required permission from the excise authorities was obtained and the duty assessed was paid', at that time the excise authorities proceeded on the basis that only ad valorem duty had to be levied and not 'excise duty for the time leviable on pig iron or steel ingots.' on march 21, 1963, the assessing authority issued a written demand under r. 9(2) demanding steel ingot duty which, according to the authority the appellant had evaded to pay. the appellant paid the duty demanded under protest and appealed to higher authorities. the government, in revision. treated the demand as one under r. 10, because, there was no question of any evasion by the appellant, and confined the demand to clearances effected after december 21, 1962. in appeal to this court against the order of the central government, the. appellant contended that: (1) the clause 'excise duty for the time being leviable under the act on pig iron or steel ingots' is attracted only when any pig iron or steel ingot dutiable under the act is used in the manufacture of any article dutiable under item 26aa (1), and, as the steel bars used in the manufacture of wire were imported and were not made out of steel ingots dutiable under the act, that loan of the levy was not attracted to the wires; and (2) the demand by the central government was barred by limitation under r. 10. held: (1) (per sikri and bachawat, jj.) the excise duty was levied correctly as determined by the central government. item 26aa prescribes a rate of duty as the heading of its column 3 indicates. the rate consists of two parts, one part is the ad valorem duty and the other excise duty. the context indicates that the words 'as the case may be' denote the excise duty leviable on pig iron under item 25 is to be charged if the product is an iron product; if it is a steel product then the excise duty leviable on steel ingots under item 26 is to. be levied. the weight to be taken into consideration for determining the excise duty would be the weight of the products made out of iron steel ingots and not that of the pig iron or steel ingot out of which they were made. that is, the duty will be the duty leviable on the hypothetical piece of pig iron or steel ingot 'as the case may be of the same weight as the particular products to be assessed. the duty is not -concerned with the actual price of pig iron or steel ingot out of which other articles are made, and it is not concerned with whether any excise duty or countervailing duty was paid on the pig iron or steel ingot used. therefore it is irrelevant whether the article out of which the assessed article was manufactured was imported or not. [486 a b; f--h; 487 b--e] the effect of item 63(36) in the tariff act, is to levy a countervailing duty as an additional custom duty equivalent to the prevalent .excise duty on like articles produced and manufactured. the manufacturer in india, who used steel rods made in india and made wires from them was given a certain relief under notification 77, but the manufacturer who used steel rods made abroad was not given this exemption. later by notification 89, and suitable amendments, he was also given a similar exemption. but the item in the tariff act does not throw any light on item 26aa(1) of the excise act. [487 h; 488 a b] assuming that it is permissible to look at the notifications issued by the. central government for interpreting item 26aa, they proceed on the interpretation of the item that it refers to a rate. the notifications do not exempt an article from the levy of duty; they give relief which may in a particular case be the excise duty or the countervailing duty levied on the article out of which the assessed article has been manufactured. the rule that a fiscal enactment should be strictly construed does not mean that close reasoning should not be employed to arrive at the true meaning of a badly drafted entry in an excise act. [487 a-c] per hegde, j. (dissenting): the expression leviable of pig iron and steel ingots as the case may be' has reference to pig iron or steel ingots dutiable under the excise act. therefore. the wires which 'are the subject matter of the impugned levy in the present case, are not liable to pay the duty in dispute as they were made out of imported steel rods and hence not dutiable under the excise act. [495 a-b; 505 b] if the item 26aa refers to a rate parliament would have conveyed such intention without any ambiguity as it has done in item 5. the words used are 'the excise duty'. if the clause refers to a rate the article 'the' has no place in the context. the expression 'the excise duty for the time being leviable' by necessary implication refers to an article dutiable under the act that must necessarily be the 'article which is one of the components of the article on which duty is sought to be levied, that is, in the instant case, the steel ingot used in the production of wires. moreover pig iron is the intermediate form through which iron must pass in the manufacture of steel. therefore, every steel product is also an iron product. if the clause in item 26aa refers to a rate and not to the duty leviable on the material used in the manufacture of the dutiable article, then the question would be whether the rate is that at which duty is leviable on steel ingot or that leviable on pig iron. if it merely depends on the practice prevailing in the trade then the power of the assessing authorities to determine the nature of an. article would be an arbitrary power, and the legislature is not likely to have conferred such an arbitrary power on the authorities. if on the other hand. the item refers to the material from which the article on which duty is sought to be levied is made--the proximate, raw material and not the material from which that raw material is made, then there is definiteness for the purpose of finding out the amount. [495 a--c, e--f; 496 e--g; 497 a-b] observations in c.a. abraham v. i.t.o. kottayam [1961] 2 s.c.r. 765, 771; c.i.t.v. karamchcmd premchand, ahmedabad, [1960] 3 s.c.r. 727, 742; inland revenue commissioners v. duke of west minister [1936] a.c. 1, 24 and partington v. the attorney-general, (1869) 4 h.l 100, 122, applied entry 63(36) in the tariff act and item 26aa in the excise act were enacted simultaneously, came into force on the same day from one code and are pari materia. they were introduced in pursuance of a common purpose, namely, that the articles listed in item 26aa, whether produced out of indigenous pig iron or steel ingot or made of imported pig iron or steel ingot must bear the same amount of duty. the duty levied under item 63(36) being a countervailing duty it cannot be considered as an additional duty over and above the duty imposed under item 26aa of the excise act. [497 c--e, f---g] for finding out the scope of a particular levy, notifications issued by the executive government providing for exemption from levy can be looked into as they disclose the overall scheme. the notifications nos. 70, 77 and 89 were issued with a view to avoid double taxation, and the exemption granted provides a clue to the scope of item 26aa. the effect of finance act (2), 1962, and the various notifications is that excise duty is leviable at the rate mentioned in item 26-aa on pig iron or steel ingot used in the production of the article on which duty under item 26aa is sought to be levied but. to the extent any excise duty or countervailing custom duty has been paid on any of the material used in the manufacture of the article, the same is exempt. therefore, when item 26aa speaks of 'the excise duty for the time being leviable on pig iron or steel ingots as the case may be' it refers to the excise duty payable on pig iron or steel ingots used in the production of the article dutiable under that item. [503 c--e; 504 g--h] kailash nath v. state of u.p.a.i.r. 1957 s.c. 790, followed. (2) (by full court): if the exercise, of a power can be traced to a legitimate source, the fact that it was purported to have been exercised under a different power does not vitiate the exercise of the power. in the present case, a common form is prescribed for issuing notices under rr. 9(2) and 10 and the incorrect statements in the written demand did not prejudice the appellant as shown from its answer to the demand: therefore, though the demand was made under r. 9(2), the revenue could change its position and justify the demand under r. 10. [484 e; 505 d--h; 506 a--b] b. balakotaiah v. union of india [1958] s.c.r. 1052 and afzal ulah v. state of u.p. [1964] 4 s.c.r. 991, referred to. - it is apparent that the facts of this case were different and clearly distinguishable from those of the present case.a.n. grover, j.1. this is an appeal by special leave and is directed against the judgment of the mysore high court rendered in its advisory jurisdiction on a case stated by the commissioner of income tax mysore under section 66 (2) of the mysore income tax act, 1923, hereinafter called the 'mysore act'.2. the facts are not in dispute. the family of r. hanumanthappa and son was being assessed in the status of hindu undivided family with late r. hanumanthappa as its karta till there was a partition and all the family assets including the cotton business were divided after the disruption of the joint family which took place on november 2, 1948. the division took place among the following three coparceners, (1) r. hanumanthappa, karta, (2) r. rama setty his son and (3) r.r. sreenivasa murthy his grandson. after the disruption of the family the partnership firm was formed on november 22, 1948, the partners being the aforesaid erstwhile three coparceners of the hindu undivided family, hereinafter referred to as 'h.u.f.' and r. gopamma a widowed daughter of r. hanumanthappa. the partnership worked under the name and style of r. hanumanthappa & son, cotton merchants. it is common ground that it did the same business which was being done by the h.u.f. the business assets and liabilities falling to each coparcener's share were entered in their personal accounts and then retransferred to the partnership firm as contribution of capital with the exception of a few trade debts. in the deed of partnership it was stated in paras 2 and 3 as follows:(2) whereas the aforesaid r. hanumanthappa, r. rama setty and r.r. srinivasamurthy were carrying on, as members of a hindu undivided family, a family business as cotton merchants, till they became divided on 2-11-1948 and the said three parties desire to continue the family business constituting themselves into a partnership.(3) whereas it is agreed that the aforesaid sreemathi gopamma shall also be admitted into the partnership constituted for the purpose of the carrying on the family business after the partition of the family as aforesaid.now it is agreed between the four parties hereto:(1) that the partnership shall carry on, as successor to the business, originally carried on by the hindu undivided family of cotton merchants ginners and pressers.3. the assessment for the assessment year 1949-50 was completed on december 29, 1949 on the h.u.f. the previous year was the deepavali year i.e. november 30, 1947 to november 1, 1948. this assessment was sought to be reopened under the provisions of section 34 of the mysore act and an additional demand of rs. 2,25,942/-was raised by the order of the income tax officer dated september 23,. 1959. before the income tax officer an exemption had been claimed on behalf of the disrupted h.u.f. under section 25(3) of the mysore act. this provision which was in the same terms as section 25(3) of the indian income tax act, hereinafter called the 'indian act', as it stood before the amendment of 1939 was as follows:where any business, profession or vocation...on which tax was at any time charged under the provisions of the mysore income tax act 1920, is discontinued, no tax shall be payable in respect of the income, profits and gains of the period between the end date of the previous year and the date of such discontinuance and the assessee may further claim that the income, profits and gains of the previous year shall be deemed to have been the income profits and gains of the said period. where any such claim is made, an assessment shall be made on the basis of the income profits and gains of the said period and if an amount of tax has already been paid in respect of the income, profits and gains the previous year, exceeding the amount payable on the basis of such assessment, a refund shall be given of the difference.4. the mysore income tax act 1920 referred to in the above provision was in pari materia with a similar provision in the earlier indian income tax act of 1918. under those acts the income tax was paid for each income tax year in respect of the income of that year. as pointed out by the high court the position was changed with the introduction of the indian income tax act 1922 in british india and the mysore act 1923 in the erstwhile state of mysore according to which during each assessment year tax was paid in respect of the income earned during the previous year. a situation, therefore, arose that upon the introduction of the new act the assessee had to pay tax in respect of the income of the same year both under the earlier statute and under the later enactment. it was with a view to removing this hardship and saving the assessees from double taxation that provision was made in sub-section (3) of section 25 of the new act to give relief to the assessees to the extent possible. the assessee, in the present case, was being assessed under the mysore income tax act 1922 and it could certainly claim the benefit of section 25(3) of the mysore act provided it could prove discontinuance of the business within section 25(3).5. in support of the contention that there had been discontinuance of the assessee's business as contemplated by section 25(3) of the mysore act it was urged, inter alia, before the income tax authorities that on partition the business had disintegrated into several parts which had been allotted individually to each coparcener thereby connoting discontinuance of the business. the assets which had been acquired by the firm were of the divided members and did not belong to the h.u.f. and a fourth partner had joined the partnership. this showed that the partnership had not succeeded to the business of the h.u.f. the income tax officer rejected these contentions. apart from other matters he relied on the clause in the partnership deed which showed that the business which was being carried on by the h.u.f. continued to be carried on by the partnership firm and that the cash balance, book account and the stocks of the family business had been transferred from the books of the family to that of the firm.6. in appeal the appellate assistant commissioner upheld the view of the income tax officer. it may be mentioned that the appellate authority under the mysore act was designated as deputy commissioner but since that act was no longer in force the appeal was heard by the appellate assistant commissioner. he took the view that the case was one of succession and not of discontinuance and affirmed the order of the income tax officer. the commissioner agreed with the reasons of the appellate assistant commissioner. on application being made under section 66(2) of the mysore act the following question was referred for the opinion of the high court:whether on the facts and in the circumstances of the ease, the assessee is entitled to exemption under section 25(3) of the mysore income-tax act7. the high court answered the question in favour of the assessee and against the revenue.8. there are numerous decisions relating to the question as to what is meant by business being discontinued as also of there having been a succession with reference to section 25(3) of the indian act. the language of section 25(3) of the mysore act was different and was the same as of the indian act before its amendment in 1939. we have to ascertain the correct scope and ambit of the words 'business is discontinued' which would mean discontinuance of business for the purpose of section 25(3) of the mysore act9. in commissioner of income tax bombay v. p.e. poison 13 i.t.r. 384 if was observed as follows:before the amending act came into force the words 'discontinued' and 'discontinuance' in section 25 of the 1922 act had been the subject of numerous decisions in the courts of india, among them commissioner of income tax, bombay v. sanjana & co. ltd. (1925) 50 bom. 87, kalumal shorimal v. commissioner of income tax, punjab (1929) 3 i.t.r. 341 and hanutram bhuramal v. commissioner of income tax, bihar : [1938]6itr290(patna) and it had been uniformly decided that these words did not cover mere change of ownership but referred only to a complete cessation of the business. their lordships entertain no doubt of the correctness of these decisions, which appeal to be in accord with the plain meaning of the section and to be in line with similar decisions upon the english income tax acts. nor has their correctness been challenged in the judgment under appeal or in the argument before their lordships.10. it was pointed out that under the indian act before it was amended in 1939, section 25(3) gave relief in the event of discontinuance. the amendment only introduced a qualification that if there was a succession in respect of which relief was given there should not be any relief upon discontinuance. it did not enlarge or alter the meaning of 'discontinuance'. in the first case referred to by their lordships, a company went into voluntary liquidation and the liquidator transferred the business to a new company which continued that business. it was held that the business was not discontinued within the meaning of section 25(3) of the indian act. (this was before the amendment made in 1939). macleod c.j. analysed the scheme of the indian act and emphasised the fact that under its provisions tax was chargeable on the profits of a business and it made no difference if there was any change in the persons who carried on the business so long as the business was continued. in the next case i.e. kalumal shorimal there had been a partition of the h.u.f. the assessee got the family business as its share. the other coparceners relinquished their rights therein and started separate business of their own. the assessee carried on the business under the old name and style. the assessee's contention was that the family firm had ceased to exist because the family had disrupted. this was rejected by the high court on the ground that the business of the family could continue in spite of its disruption. the question really was whether the business was discontinued or not in consequence of the breaking up of the family. it is unnecessary to refer to the third case as a similar principle was laid down therein grille c.j. and niyogi j., discussed elaborately the case law relating to sub-section (3) and (4) of section 25 of the indian act in income tax appellate tribunal bombay v. bachraj nathani of raipur (1946) i.t.r. 191. the observations made there are pertinent for the purpose of the present case. this is what was said:it must be observed that sub-section (3) is concerned with business, profession or vocation and sub-section (4) with person. when an owner of a business dies or transfers his business or when partners dissolve their partnership, there is discontinuance so far as the person dying or transferring or the separating partners are concerned but there may be no discontinuance of the business as such. thus the word discontinuity is capable of double interpretation according as it is vis-a-vis the owners of vis-a-vis the business. in the former case, the discontinuity is notional or jural and in the latter case, it is real or factual.11. all the above decisions proceed on the footing that the requirement of sub-section (3) of section 25 is that the business should be discontinued and not that the person or persons who own the business should cease to be the same. the discontinuity as pointed out in bachraj nathani (1946) i.t.r. 191 case must be real and factual and it has to be of the business and not of its owner or owners of the business.12. a great deal of emphasis has been laid on behalf of the respondent-assessee on the integrity of the business carried on by the h.u.f. having been broken by the disruption of the family and it is claimed that the business of the family must be deemed to have totally ceased or discontinued on such disruption. reliance has been placed on a number of decisions out of which mention may be made only of s.n.a.s.a. annamalai chettiar v. commissioner of income, tax, madras : [1951]20itr238(mad) in which a h.u.f. consisting of a father and son carried on money lending business under different vilasams. there was a partition in 1939 under which some of the vilasams were allotted to the father and the rest were allotted to the assessee. the madras high court held that as the assets of the h.u.f. were split up on partition the family business no longer continued its existence but was terminated and there was, therefore, a discontinuance within the meaning of section 25(3) of the indian act. it was observed by the court that the mere fact that after continuing the same books of account and the customers of the money lending business were to some extent identical, would not make the business of the father a continuation of the old business when once what was a single unit was split up into various component parts. the parts separated were distinct and separate parts of a unified whole but the unity and integrity between parts were no longer possible unless there was a reunion or partnership. it is apparent that the facts of this case were different and clearly distinguishable from those of the present case. here apart from the circumstances and facts which have been found and established the partnership deemed itself made it clear that the three coparceners who had effected partnership desired to continue the family business as partner after the partition of the family. nothing could be clearer than the language used in sub-clause (1) of clause (3) of the partnership deed that the partnership shall carry on as successor to the business originally carried on by the h.u.f. of cotton ginners and pressers. thus there was no factual cessation of business or its discontinuance. all that happened was that previously the owner of the business was the h.u.f. and subsequently the partnership became the owner. there was merely a change of ownership and the business as such continued. in other words the business was never discontinued so as to attract the provision of section 25(3) of the mysore act. the judgment of the high court cannot thus be sustained. the answer given by it in favour of the assessee will have to be discharged and in its place the question referred is answered in favour of the revenue.13. we may mention a preliminary objection that was raised on behalf of the respondent. it was argued that the matter related to the pre-constitution period under the mysore act by which the mysore high court had been constituted as the highest court and no appeal lay to any higher court. the decision of the mysore high court, therefore, was final and no appeal could be entertained by this court. we find no force in this objection. by section 3 of the finance act 1950, the indian act was amended. the following amendment is relevant for our purposes:section 3 amendment of act xi of 1922-with effect from 1st day of april, 1950, the following amendments shall be made in the income tax act,-(a) for sub-section (2) of section 1 of the following sub-section shall be substituted, namely:(2) it extends to the whole of india, except the state of jammu & kashmir...14. the effect of section 13 of the finance act dealing with repeals and savings was that the mysore act ceased to have any effect except to the extent mentioned in the section.15. in the present case the judgment of the mysore high court was delivered on january 4, 1967 and the appeal which has been brought to this court is by leave granted under article 136 of the constitution. we are unable to see how under article 136 special leave to appeal could not be granted against the judgment of the mysore high court when the language of article 136(1) is very wide and expressly covers any judgment etc. passed or made by any court or tribunal in the territory of india.16. in the result the appeal is allowed and the question is answered as mentioned above. owing to the previous order of this court dated february 2, 1968 the appellant shall pay the costs of the respondent in this court.