V JAGANMOHAN RAO Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee, who is the Karta of an HUF, was assessed in that status for the relevant asst. yrs. 1944-45, 1945-46, 1946-47 not only to income-tax but also to excess profits tax. On 1st Feb., 1941, he purchased from Randhi Appalaswamy (hereinafter referred to as "the vendor") a spinning mill known as Shri Satyanarayana Spinning Mills, Rajahmundry, for a sum of Rs. 54,731.

(2.) THE purchase was made at a period when there was litigation between the 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.

(3.) THE assessee deposited a sum of Rs. 1,09,613 for the year 1944-45, Rs. 31,087 for the year 1945-46 and Rs. 4,775 for the year 1946-47. Under the compromise the assessee was entitled to withdraw these amounts on payment of Rs. 1,15,000. The Privy Council decided the appeal on 2nd July, 1947, reversing the order of the High Court and restoring that of the District Judge holding that Appalaswamy was the absolute owner of the mill and the sons had no right, title or interest therein. On receipt of the Privy Council's decision which finally determined the rights of the parties and the ownership of the assessee in the mill, the ITO issued on 2nd March, 1948, a notice under s. 34 of the IT Act in respect of Rs. 1,09,613 received by the assessee as lease income of the mill. It was contended for the assessee (1) that the proceedings initiated under S. 34 of the Act for the year 1944-45 assessment were invalid in law as there was no new information leading to the discovery that income had escaped assessment, (2) that, in any event, the assessee was entitled to set off the sum of Rs. 1,15,000 paid to the sons of Appalaswamy under the compromise approved by the High Court for releasing their rights, if any, in the mill against the assessee's income from the mill. The ITO rejected these contentions and treated the whole amount of Rs. 1,15,000 as paid toward capital expenditure in acquiring an asset. The AAC rejected the appeal of the assessee. The Tribunal affirmed the order of the AAC. It held in the first place that the assessee had not disclosed the impugned source of income from the mill in his original assessment, that the matter as to the assessee's ownership of the mill was sub judice and that the decision of the Privy Council constituted information not only of law but also as to the factum of the ownership of the mill and the income therefrom. The Tribunal expressed 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 Tribunal stated a case to the High Court under S. 66(2) of the Indian IT Act, 1922, on the following questions of law: