- (1.) The assessee who is the Kartha of a Hindu Undivided Family was assessed in that status for the relevant assessment year, 1944-45, 1945-46, 1946-47 not only to income-tax but also to excess profits tax. On February 1, 1941 he purchased from Randhi Appalaswamy (hereinafter referred to as the vendor) a spinning mill known as Sri Satyanarayana Spinning Mills, Rajahmundry for a sum of Rs. 54,731. 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. 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. Nos. 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-third 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 compromise with the plaintiffs on September 7, 1945 by virtue of which he got a release of the interest of the vendor's sons on payment of Rs. 1,15,000. While the appeal was pending before the Privy Council the plaintiffs had applied to the High Court for recovery of their share of the profits. The High Court appointed the assessee as the Receiver directing him to deposit the profits in the High Court. 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 July 2, 1947, AIR 1947 PC 189 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 Income-tax Officer issued on March 2, 1948 a notice under Section 34 of the Income-tax 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 Section 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 Income-tax Officer rejected these contentions and treated the whole amount of Rs. 1,15,000 as paid towards capital expenditure in acquiring an asset. The Appellate Assistant Commissioner rejected the appeal of the assessee. The Tribunal affirmed the order of the Appellate Assistant Commissioner. 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 subjudice 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 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 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 fact and in the circumstances of the case, the assessee is not entitled to set off Rs. 1,15,000 being the amount paid to the minors for releasing their rights in the property from out of the amount received from the Mill R. A. No. 780 which related to assessment year 1945-46: (1) Whether, on the facts and in the circumstances of the case, the assessment made under Section 34 of the Act is valid in law (2) Whether, on the facts and in the circumstances of the case, in respect of the assessment year 1945-46, the assessment on the assessee in the status of a Hindu undivided family in respect of the income received by him as Receiver could be justified notwithstanding the provisions of Section 41 of the Act (3) Whether, on the facts and in the circumstances of the case, the assessment of the entire income of Rs. 31,087 in the hands of the assessee is valid in the face of the compromise memo dated 7th September, 1945 approved by the Court (4) Whether, on the facts and in the circumstances of the case, the assessee if not entitled to set off Rs. 1,15,000 being the amount paid to the minors for releasing their rights in the property from out of the amount received from the Mill - R.A. No. 781 which relates to assessment year 1946-47: (1) Whether, on the facts and in the circumstances of the case, in respect of the assessment year 1946-47, the assessment on the assessee in the status of a Hindu undivided family in respect of the 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. 4,775 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 if not entitled to set off Rs. 1,15,000 being the amount paid to the minors for releasing their right in the property from out of the amount received from the Mill -
(2.) The Appellate Tribunal pointed out in the statement of the case that question No. 1 in R. A. No. 780 for the assessment year 1945-46 pertained to the earlier assessment year 1944-45 in R. A. No. 779 and also that question No. 2 in R. A. No.780 and R. A. No. 779 for the assessment year 1945-46 and the corresponding; excess profits tax assessment did not arise in that year but pertained to the earlier assessment year 1944-45 in R. A. No. 779 and the corresponding excess profits tax assessment in R. A. No. 782 (sic).
(3.) The High Court answered question Nos. 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 re-assessment 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 towards capital and income in the proportion of 90/85. C. As. Nos. 1381 to 1386 of 1966 are brought by certificate from the judgment of the High Court on behalf of the Commissioner of Income-tax and C. A. Nos. 893 to 898 of 1966 were brought by special leave from the same judgment to this Court on behalf of the assessee.;