RAM SARUP Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a case stated under section 66 (1) of the Income-tax Act of 1922 (hereinafter referred to as the Act). The question referred is :

(2.) THE material facts are these : THE assessee, Ram Sarup, is the son of Lala Roshan Lal. Roshan Lal is the assessee in the connected I. T. Reference No. 245 of 1963. THEse two constitute one group representing one family. THE other group is represented by Lala Purshottam Das and L. Jugul Kishore, who are brothers. THE aforesaid four persons were the only shareholders of a private limited company, M/s. Ram Chand and Sons Sugar Mills Ltd. (hereinafter referred to as the mills company). This was, therefore, a family company. THE aforesaid four persons had almost equal shareholdings of 25% each. In order to avoid friction between the two families of shareholders, it was agreed between them that the control and management of the mill company should be for a period of one year each by rotation. During the relevant assessment year of 1954-55, it was the turn of Lala Pushottam Das of the second group and he was the direction in charge. It appears that there was large accumulated stock of sugar with the mills for lack of buyers and the prices were falling. THE Government was contemplating to give the sugar mills some subsidy in the matter of stocks of sugar lying with them. Lala Purshottam Das, however, did not know about any such move by the Government and he, therefore, considered it advisable to ask the Government to release some of the stocks of sugar lying with the mills so that it could be sold in the open market. This request was repeated two or three times and the Government ultimately agreed to release stock of sugar totalling 850 tons. However, just before the company received the Governments release order, it came to know from an unofficial source that the Government of India was planning to give a subsidy to the sugar mills and the same would be computed with reference to the unreleased stock of sugar lying with different mills. L. Purshottam Das, therefore, immediately wrote to the Government praying that the release order, if issued, be cancelled. THE government, however, did not withdraw the release order, with result that the company was deprived of the subsidy which it might have otherwise received from the Government of India. THE company thus did not receive any subsidy whatsoever and there was no alternative but to sell the released stocks of sugar in the open market. THE sale proceeds so received were credited to the companys sale account. THE assessee, Ram Sarup, and his father, Roshan Lal, claimed that a subsidy of Rs. 1,04,000 was lost as a result of Lala Purshottam Dass action in asking the Government to release stocks of sugar and threatened Lala Purshottam Das and L. Jugul Kishore that they would apply for the liquidation of the company. THE latter, thereupon, it appears, agreed to make good the loss and entered into an agreement dated 29th March, 1954, with the members of the first group, i.e., the assessee, Lala Ram Sarup and his father, Lala Roshan Lal. THE material portion of this agreement reads :

(3.) THIS provision appears to be advisedly worded vary widely and would enable almost everything to be swept into the net of taxation provided it has the quality of income, profits or gains. Undoubtedly, the sum of Rs. 26,000 was a gain and the source thereof, whether be it the company or the director-in-charge or a group of directors, would not be very material for purposes of the Act. That sum would require to be included in the total income of the assessee unless there was a provision in the Act. That sum would require to be included in the total income of the assessee unless there provision in the Act exempting such income, profits or gains from being included in the total income of the person to whom it accrues, arises or is received. Clause (vii) of sub-section (3) of section 4 is the provision which is pressed into service by the assessee in order to escape from the mischief of section 4 (1) of the Act. The material portion of this runs :