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Commissioner Of Income-Tax, Kerala v. Dr. K. George Thomas.
Judgment Summary — Govindan Nair, A.C.J.
Factual and Procedural Background
This appeal arises from a reference under section 66(1) of the Indian Income-tax Act, 1922, by the Income-tax Appellate Tribunal, Cochin Bench, to this Court asking two questions about the taxability and exemption (under section 4(3)(vii)) of two sums received by the assessee.
The assessee (Dr. K. George Thomas) published a Malayalam daily newspaper called Kerala Dhwani. He had been a college lecturer until 1953, spent 1953–1957 in the United States on a scholarship (obtaining a Ph.D.), and returned to India at the end of 1957. He started Kerala Dhwani in August 1959. During and after his stay in the United States he was engaged in what he described as a movement (Indian Gospel Mission/Indian Christian Crusade) for the spread of religion and against atheism; supporters in the U.S.A. (through the Indian Christian Crusade, U.S.A.) remitted sums to him through banks in India.
Admittedly, the assessee received Rs. 2,90,220 in the accounting period relevant to assessment year 1960–61 and Rs. 3,63,750 for the accounting period relevant to assessment year 1961–62. The Income-tax Officer found the amounts came from the U.S.A. and rejected the assessee's contention that they were not taxable. The Appellate Assistant Commissioner taxed the amounts as income applying the principle in V. Govindarajuly Mudaliar v. Commissioner of Income Tax, Hyderabad, because the appellant had not explained the source of credits. The Tribunal, however, found the source to be remittances from the Indian Christian Crusade (U.S.A.), considered whether the payments were remuneration for services or mere donations, concluded they were donations, and held they were casual, non-recurring and not arising in the course of the exercise of any vocation.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the sums of Rs. 2,90,220 and Rs. 3,63,750 were not assessable as income of the assessee for the assessment years 1960–61 and 1961–62?
- Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law and had material for holding that the sums of Rs. 2,90,220 and Rs. 3,63,750 are exempt from taxation under section 4(3)(vii) of the Indian Income-tax Act, 1922, for the assessment years 1960–61 and 1961–62 respectively?
Arguments of the Parties
Appellant's (Assessee's) Arguments
- The receipts were donations/gifts and testimonials made to the assessee in his personal capacity as a token of esteem and regard and were unconnected with any particular act or service.
- The funds were said to be for the Indian Gospel Mission (or Indian Christian Crusade) — i.e., for a movement — and had been collected and sent by that organisation in the U.S.A.; the assessee maintained that these were not payments for services and were not income from any vocation.
- In a statement through his chartered accountants (3 January 1962), the assessee stated the receipts were "purely personal gifts and testimonials" arising from personal relations and friendship.
Respondent's (Revenue's) Arguments and Position
- The Income-tax Officer and the Appellate Assistant Commissioner treated the sums as assessable income: the Appellate Assistant Commissioner applied the principle in V. Govindarajuly Mudaliar (1958) because the assessee had not satisfactorily explained the source of the credits.
- The revenue's position was that the receipts originated from remittances from the U.S.A. and were therefore assessable unless established to be appropriately exempt.
- The Tribunal, while adjudicating appeals, questioned whether the payments represented remuneration for services or mere donations; it accepted the view (in the Tribunal's decision) that they were donations and not income.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| V. Govindarajuly Mudaliar v. Commissioner Of Income Tax, Hyderabad [1958] 34 I.T.R 807 S.C. | Principle applied where unexplained credits in an assessee's accounts may be treated as income. | The Appellate Assistant Commissioner relied on this decision to tax the amounts because the assessee had not explained the source of the credits. The Supreme Court noted this application by the AAC but the ultimate decision turned on other considerations. |
| Parimisetti Seetharamamma v. Commissioner of Income-tax [1965] 57 I.T.R 532 S.C. | Decision of the Supreme Court dealing with the distinction between donations and income for tax purposes (as invoked by the Tribunal). | The Tribunal considered that the principle of this decision would apply and that receipts did not fall within the category of income. The High Court observed that the principle of Parimisetti Seetharamamma was "not very pertinent" to decide the question before it. |
| H.H Maharani Shri Vijayakuverba Saheb of Morvi v. Commissioner of Income-tax [1963] 49 I.T.R 594 Bom. | Bombay High Court decision used by the Tribunal to support the view that receipts may be non-income donations. | The Tribunal accepted this decision as governing the case and held the receipts did not fall within income. The High Court concluded that the Maharani of Morvi principle was not very pertinent to the specific question before it. |
| Strong & Co. of Romsey Ltd. v. Woodifield (House of Lords) | Principle on whether a sum is "connected with" or arises out of a trade — only losses "really incidental" to the trade are deductible; character of the trade and the relation of the loss to the trade must be considered. | The Court treated the principle of this English decision as apposite for interpreting whether receipts "arise" from an occupation or vocation under section 4(3)(vii). A passage from the judgment was quoted and used to frame the inquiry about the connection between activities and receipts. |
| Commissioners of Inland Revenue v. E.C. Warnes and Co. Ltd. | Similar principle to Strong & Co.: difficulty in framing a formula for what is connected with or arises out of a trade; penal liabilities not regarded as loss connected with trade. | The judgment of Rowlatt J. was cited and adopted to support the approach that whether a receipt arises from a vocation requires consideration of the nature of the activity and the link between the activity and the receipt. |
| Income-tax Act, 1842 — section 100, Schedule D, Case 1, Rule 3 | Statutory provision in an earlier English/colonial tax statute whose words are similar to part of the current section with which the Court was concerned. | The Court observed that the words in that older statute are similar to the part of section 4(3)(vii) under consideration and used that similarity to justify reliance on the English decisions construing the older provision. |
| Kanga, Commentaries to the Income-tax Act (6th ed.), page 318 — heading "Voluntary payments" | Textual commentary stating that voluntary payments arising out of exercise of a vocation are outside the exemption for casual and non-recurring receipts. | The Court relied on this commentary to state the accepted proposition that if voluntary payments arise out of the exercise of a vocation they will be outside section 4(3)(vii). |
Court's Reasoning and Analysis
The Court began by extracting section 4(3)(vii) of the Income-tax Act, 1922, which exempts from total income any receipts (not being capital gains or receipts from business/profession/vocation) which are of a casual and non-recurring nature or are not by way of addition to the remuneration of an employee.
The Court accepted the general and uncontroversial proposition (supported by commentary) that receipts which arise from the exercise of a vocation are not covered by the exemption in section 4(3)(vii), even if they are voluntary, casual or non-recurring. Thus the key question became whether the assessee's activities (propagating religion, fighting atheism and publishing a daily newspaper as a mouthpiece for that mission) amounted to an occupation or vocation and whether the donations "arose" from that occupation.
The Court rejected the Tribunal's and the assessee's attempt to treat the payments as made to an outside organisation (the Indian Gospel Mission) to which the assessee was simply a recipient/ trustee, because that position was contrary to the specific case made by the assessee and there was no material to indicate the existence of such an external agency making payments independently of the assessee.
The Court analysed the nature of the assessee's activities. It concluded from the facts that the assessee was actively and systematically engaged in the propagation of religion and in running the newspaper as the medium for that mission — activities which could properly be characterised as an occupation or vocation even though not undertaken for profit or to earn a livelihood. The Court emphasised that an occupation need only be a systematic engagement and need not have earning as its object.
Turning to the "arising" test, the Court considered English authorities (Strong & Co. of Romsey Ltd. v. Woodifield and Commissioners v. E.C. Warnes and Co. Ltd.) which address whether a receipt or loss is connected with or arises out of a trade or vocation. The Court treated the principles of those decisions as apposite and noted that the language of the older English statute is similar to the portion of section 4(3)(vii) under consideration.
Applying these principles to the present facts, the Court found a clear link between the activities of the assessee and the payments: donors who shared the assessee's ideals and wanted the newspaper (the medium) to continue provided funds specifically to enable him to run the newspaper and pursue the mission. The Court relied on the assessee's own statement on oath (27 March 1967) that the funds were sent to enable him to carry out the ideals of the Indian Gospel Mission, to purchase a plot, start the press and newspaper, and to continue the paper when it was making huge losses.
Given that link, the Court concluded that the receipts "arose from the exercise of an occupation" by the assessee and therefore fell outside the exemption in section 4(3)(vii). The Court also held that if this was even only a prima facie conclusion, it sufficed to shift the evidential burden to the assessee, who had failed to place material showing the payments were truly personal gifts or testimonials arising from personal relationships.
The Court therefore disagreed with the Tribunal's conclusion that the receipts were casual, non-recurring donations unconnected with any vocation, and held that the receipts were assessable as income since they arose from the assessee's vocation.
Holding and Implications
Holding: The Court answered both questions referred under section 66(1) in the negative — i.e., it held against the assessee and in favour of the department.
Direct implications for the parties: The receipts of Rs. 2,90,220 (relevant to assessment year 1960–61) and Rs. 3,63,750 (relevant to assessment year 1961–62) are not exempt under section 4(3)(vii) because they arose from the exercise of the assessee's vocation (the propagation activities and the running of the newspaper) and therefore fall within taxable income. The parties were directed to bear their respective costs.
The Court observed that the case is not free from difficulty and that no direct parallel in reported Indian decisions had been pointed out. The judgment will be forwarded to the Appellate Tribunal under the seal of the High Court and signature of the Registrar, as required by subsection (5) of section 66 of the Income-tax Act, 1922.
End of summary — based exclusively on the content of the provided opinion.
The Judgment of the Court was delivered by
Govindan Nair, A.C.J:— The Income-tax Appellate Tribunal, Cochin Bench, has referred to this court under section 66(1) of the Indian Income-tax Act, 1922, the following two questions for decision:
“(i) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the sums of Rs. 2,90,220 and Rs. 3,63,750 were not assessable as income of the assessee for the assessment years 1960-61 and 1961-62?
(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law and had material for holding that the sums of Rs. 2,90,220 and Rs. 3,63,750 are exempt from taxation under section 4(3)(vii) of the Indian Income-tax Act, 1922, for the assessment years 1960-61 and 1961-62, respectively?”
2. Before we read section 4(3)(vii) of the Act, we shall refer to the admitted facts and the basis on which the Tribunal dealt with the case.
3. The assessee publishes a Malayalam daily newspaper by name Kerala Dhwani. Till 1953, he was a lecturer in History and Political Science in a college at Kottayam. In 1953, he got a scholarship for higher studies in the United States and he was there from 1953 to 1957 during which period he took his Ph. D. degree. He returned to India by the end of 1957, and then started the newspaper, Kerala Dhwani, in August, 1959. According to the assessee, during his stay in the United States and after his return to India, he was engaged in a movement called India Gospel Mission, for the spread of religion and for crusading against the forces of atheism and the political ideologies which favoured atheism. He has further stated that his friends in America and those who believed in the cause which he was espousing were sending him donations and helping the movement. These donations were being handed over or were being collected by the Indian Christian Crusade, U.S.A, and were being remitted to him by the Crusade from the U.S.A through banks in India.
4. From the above source, the assessee admittedly received a sum of Rs. 2,90,220 during the accounting period relevant to the assessment year 1960-61, and a sum of Rs. 3,63,750 during the accounting period relevant to the assessment year 1961-62. The Income-tax Officer found that these amounts came from the U.S.A He, however, rejected the contention of the assessee that they were not taxable for the five reasons which the Tribunal has extracted in paragraph 2 of the statement of the case. Dealing with the assessee's appeal, the Appellate Assistant Commissioner held that the assessee had not explained the source of the credits made in his accounts relating to the above mentioned amounts and, therefore, applied the principle of the decision in V. Govindarajuly Mudaliar v. Commissioner Of Income Tax, Hyderabad [1958] 34 I.T.R 807 S.C. and taxed the amounts as the income of the assessee. In further appeal before the Tribunal, the Tribunal found that the source of the credits was the remittances from the Indian Christian Crusade in the U.S.A The Tribunal then posed the question for decision in these terms:
“The real question that has to be considered is whether these payments represent remuneration for services rendered or whether they were mere donations as represented by the assessee for a movement which he was espousing.” (Paragraph 14).
5. After having held that the amounts did not represent remuneration or payments for services rendered, the Tribunal came to the conclusion that the principle of the decision in Parimisetti Seetharamamma v. Commissioner of Income-tax [1965] 57 I.T.R 532 S.C. would apply. After having said so, the Tribunal also accepted the argument of counsel for the assessee that the principle of the decision of the Bombay High Court in H.H Maharani Shri Vijayakuverba Saheb of Morvi v. Commissioner of Income-tax [1963] 49 I.T.R 594 Bom.. would govern the case and that the receipts did not fall within the category of income. The Tribunal further found that the donors were supporting a movement in which they believed, that there was no obligation cast on them to continue the payments and that the payments were not made under any legal or contractual obligation. This was followed by the finding that the receipts were clearly casual and non-recurring and did not arise in the course of the exercise of any vocation.
6. We shall now extract section 4(3)(vii) of the Act.
“4. (3) Any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them;…………..
(vii) any receipts not being capital gains chargeable according to the provisions of section 12B and not being receipts arising from business or the exercise of a profession, vocation or occupation, which are of a casual and non-recurring nature or are not by way of addition to the remuneration of an employee.”
7. The assessee's case was that the payments were made to him in his personal capacity and were made to him as personal gifts and testimonials because of the personal relations and friendship between the assessee and those who made the contributions. His case has been clearly stated in the communication dated 3rd January, 1962, addressed to the Income-tax Officer by the chartered accountants who represented the assessee:
“The source of credit in the personal account of Dr. K. George Thomas is from the money received by Dr. George Thomas as gifts from the Indian Christian Crusade, California, and from several of his friends in the United States. The receipts are purely personal gifts and testimonials paid as a token of esteem and regard for the personal qualities of Dr. George Thomas, and is unconnected with any particular act or service. There is no specific purpose for the contributions, but are purely contributions made on account of the personal relations and friendship. Complete details as to the contributions received from outside from the commencement till December 31, 1961, will be furnished shortly.”
8. Receipts of a casual and non-recurring nature will not be included in the total income of a person. But if there are receipts arising from the exercise of a vocation they will be included in the total income. In that case, whether they were of a casual and non-recurring nature is of no importance, in fact, irrelevant. This aspect is not seriously disputed before us. This is an accepted proposition is clear from the Commentaries to the Income-tax Act by Kanga, 6th edition, page 318, under the heading “Voluntary payments”. Even if the payments are purely voluntary from the point of view of those making the payments, if such voluntary payments arise out of the exercise of a vocation, the receipts resulting from such payments will be outside section 4(3)(vii). The only question in the case, therefore, is whether the assessee was exercising a vocation or an occupation—it would not be proper to call what he was doing the exercise of a business or a profession—and whether there were receipts arising from the exercise of that occupation or vocation. We do not think that the principle of the decision in Parimisetti Seetharamamma v. Commissioner of Income-tax or Maharani Vijaykuverba Saheb of Morvi v. Commissioner of Income-tax is very pertinent to decide the question before us. We are also of the view that the argument on behalf of the assessee before the Tribunal that the payments were to the “Indian Gospel Mission” or to any movement should not have been entertained, because it was against the specific case of the assessee. There was no material whatever to indicate the existence of any such outside agency to which the payments were made, the assessee merely receiving the payments on behalf of that agency as if he was a trustee or one standing in a fiduciary capacity to that agency.
9. Now, turning to the question as to the nature of the activities of the assessee, it is difficult to postulate that propagating religion and trying to restore faith in God which, according to the assessee, was on the decline, and fighting aginst atheism, were not his occupation or vocation. As far as we are able to glean from the facts of the case, he was very actively, fully, occupied with the activities connected with achieving the objects of strengthening faith in God and fighting against atheism. After his return to India from the U.S.A, he was solely occupied with this affair. The paper which he published for this purpose was a daily coming out with views in support of this mission. There can be various occupations in life. Even religion can be an occupation. It has been so ruled. Teaching religion can be an occupation. And it is unnecessary that an occupation must have for its object the earning of a livelihood. Anything in which a person is engaged systematically can be an occupation or a vocation.
10. If the question of receipts being treated or omitted to be treated as income arises, the further question as to whether those receipts can be said “to arise” from such occupation or vocation will naturally have to be considered. That is the aspect which we must now consider. Two decisions of the English courts and a decision of the Supreme Court which has referred to the English decisions have been brought to our notice. These decisions dealt with the claim for deduction and the question was whether the claim could be said “to arise” from the exercise of a profession or from the business activities of an assessee to income-tax. We think the principle of those decisions is apposite. The earliest decision on the subject referred to was by the House of Lords in Strong & Co. of Romsey Ltd. v. Woodifield. The facts of the case were these. A brewery company owned an inn which was carried on by a manager as part of their business. A customer sleeping in the inn was injured by the fall of a chimney, and recovered damages and costs against the company for the injury, which was owing to the negligence of the company's servants. The question was whether the amounts paid as damages could be claimed as a deduction from the business of carrying on the activities of the innkeeper. The Lord Chancellor was very guarded in his approach to the problem. A passage from this judgment is useful:
“I think only such losses can be deducted as are connected with in the sense that they are really incidental to the trade itself. They cannot be deducted if they are mainly incidental to some other vocation or fall on the trader in some character other than that of trader. The nature of the trade is to be considered. To give an illustration, losses sustained by a railway company in compensating passengers for accidents in travelling might be deducted. On the other hand, if a man kept a grocer's shop, for keeping which a house is necessary, and one of the window shutters fell upon and injured a man walking in the street, the loss arising thereby to the grocer ought not to be deducted. Many cases might be put near the line, and no degree of ingenuity can frame a formula so precise and comprehensive as to solve at sight all the cases that may arise.”
11. In the second case, Commissioners of Inland Revenue v. E.C Warnes and Co. Ltd., Rowlatt J. dealing with a question similar to that dealt with by the Lord Chancellor, said:
“I may shelter myself behind the authority of Lord Loreburn L.C who in his judgment in the House of Lords in Strong & Co. v. Woodifield said that it is impossible to frame any formula which shall describe what is a loss connected with or arising out of a trade. That statement I adopt, and I am not sure that I gain very much by examining a number of analogies; but it seems to me that a penal liability of this kind cannot be regarded as a loss connected with or arising out of a trade.”
12. In both the cases the question that arose for consideration was whe ther within the meaning of section 100, Schedule D, Case 1, Rule 3 of the Income Tax Act, 1842, the sum claimed was or was not a loss connected with or arising out of a trade or business. The words construed are very similar to that part of section 4(3)(vii) of the Act with which we are concerned excepting that the words “connected with” are left out in section 4(3)(vii). We are inclined to think that section 4(3)(vii) may, there fore, have more limited application than the English statute construed in the above decisions. Whatever it be, the question is whether in this case the receipts can be said to arise out of the occupation of the assessee. The Indian Christian Crusade is an organisation having the same objects as those of the assessee. There were many people in the U.S.A who held the same views and the same ideals as those of the assessee and the Indian Christian Crusade. They made voluntary payments to the Indian Christian Crusade who passed them on to the assessee. There is, therefore, a link between the activity of the assessee and the payments, in that the payments were made by those who held similar views as those of the assessee and who were very much interested in the propagation and the acceptance of those views by the general public. These payments were made for the purpose of helping the assessee to run the paper which was the mouth-piece or the medium through which ideas were to be spread. In the statement on oath by the assessee before the Income-tax Officer, on the 27th March, 1967, there is the following passage:
“In 1959 they collected some donations and sent to me. I am the Vice-President of the Indian Gospel Mission from its inception till to date. These funds were sent to me with the idea of enabling me to carry out the ideals of the Indian Gospel Mission in India. With these funds I purchased the plot, etc., and started the press and newspaper. It was giving a huge loss. In November, 1959, or so I represented that I cannot carry on the newspaper with huge losses and suggested that they take over the news paper. They agreed and sent me further money.”
13. This statement clearly established not only the link but the purposes for which the amounts had been paid to the assessee. The donors were interested in the paper being continued which was at the point of being stopped at one time. The connection between the activity of the assessee and the donations was intimate and the payments were made because of the activity in which the assessee was engaged. From the facts of this case this conclusion is inevitable. Even assuming for arguments' sake that this can only be a prima facie conclusion, we think that that would be sufficient to shift the burden from the department to the assessee to displace the prima facie inference that the receipts were income. In this regard the specific case of the assessee, as we pointed out earlier, was that the receipts represented personal gifts or testimonials resulting from personal relationship. No materials had been placed before the assessing authorities to establish any such personal relationship, and there was no evidence to suggest that those were personal gifts to the assessee. On the other hand, the circumstances pointed out that the donors were interested in the assessee continuing to exercise his vocation. There is nothing personal in that. We, therefore, hold that these receipts arose from the exercise of an occupation by the assessee, excluded from the ambit of section 4(3)(vii).
14. The two questions referred to us have, therefore, to be answered in the negative, that is, in favour of the department and against the assessee.
15. The case is not free from difficulty. As far as this court is concerned and for that matter as far as the courts in India are concerned, we have hot been referred to a parallel in any reported decision. We direct the parties to bear their respective costs.
16. A copy of this judgment under the seal of the High Court and the signature of the Registrar will be forwarded to the Appellate Tribunal as required by sub-section (5) of section 66 of the Indian Income-tax Act, 1922.
17. Questions answered in the negative.
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