RAMASWAMI, J. - (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. 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 1st Feb., 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 compromise with the plaintiffs on 7th Sept., 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.
(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: "R.A. No. 779 which relates to the asst. yr. 1944-45 : '(1) Whether, on the facts and in the circumstances of the case, in respect of the asst. yr. 1944-45, the assessment made on the assessee in the status of an HUF in respect of income received by him as receiver could be justified notwithstanding the provisions of S. 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 dt. 7th Sept., 1945, approved by the Court ? (3) Whether, on the facts 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 ? '" ;