Asiatic Oxygen Limited v. Commissioner Of Income-Tax.

Ajit K. Sengupta, J.:— In this reference at the instance of the assessee, the following question of law has been referred to this court under section 256(1) of the Income-tax Act, 1961, for the assessment years 1968-69 and 1969-70:

“Whether the Tribunal was right in holding that interest received by the assessee on unpaid calls from the shareholders was not casual income and, therefore, not exempt from income-tax in terms of section 10(3) of the Income-tax Act, 1961?”

2. The facts leading to this reference are that the assessee carries on the business of manufacture of industrial gases. During the said two years, the assessee earned interest on unpaid call money from its shareholders amounting to Rs. 1,48,841 and Rs. 148, respectively. In the previous year relevant to the assessment year 1968-69, the assessee-company had initially offered for taxation the entire sum of Rs. 1,48,841. However, by way of an additional ground sought to be taken in appeal before the Commissioner of Income-tax (Appeals), such interest was claimed to be not taxable on the ground that it was a casual or a windfall gain.

3. In the assessment for the assessment year 1969-70, the interest of Rs. 148 was claimed to be not taxable on the aforesaid ground.

4. The Income-tax Officer, however, in both the years, assessed the said interest as income of the assessee-company under the head “Income from other sources.”

5. In the appeal before the Commissioner of Income-tax (Appeals), the additional ground raised by the assessee-company in the appeal for the assessment year 1968-69 was not admitted by the first appellate authority, but in respect of the assessment year 1969-70, the Commissioner of Income-tax (Appeals) upheld the order of the Income-tax Officer observing that interest accrued to the assessee by virtue of the specific provisions contained in the memorandum and articles of association and, in such circumstances, the receipt of interest could not be termed as casual or a windfall gain. The Commissioner of Income-tax (Appeals) further observed that the interest had been charged by the assessee-company regularly from year to year for non-payment of call money by the defaulting shareholders and that being a regular feature, the interest charged was clearly taxable as income.

6. The assessee-company filed appeals before the Tribunal for both the years. In respect of the assessment year 1968-69, the Tribunal agreed with the assessee's learned counsel that the omission to include the ground regarding the chargeability of interest to tax was not deliberate or wilful and, therefore, it decided to admit such additional ground and deal with the issue on merits having regard to the fact that similar points on merits had also to be disposed of in relation to the assessment year 1969-70. The Tribunal found that the interest was charged from the shareholders pursuant to article 17 of the articles of association, which provided the machinery by which the assessee could earn a definite amount in the event of delay in payment of call money by the shareholders. The Tribunal also noted that it could not be denied that there was some concerted activity in determining the interest on unpaid calls from the defaulting shareholders. The receipt of interest according to the Tribunal was, therefore, neither casual nor in the nature of a windfall gain to the assessee-company.

7. In the course of hearing before us, Sri C.M Chopra, learned counsel appearing for the assessee, submitted that the shareholders of the asses-see-company had subscribed to the share capital and, therefore, they were the source of capital. The amount received from the shareholders by way of interest on account of delay in payment of call money could not constitute income. In any event, the amount in question was not taxable in view of the section 10(3) of the Income-tax Act, 1961, which provides that receipts of a casual and non-recurring nature are not taxable as income. It was also submitted that the interest income in this case was fortuitous in the sense that if the shareholders had paid the call money in time, there would not have been any interest income at all. The payment of interest, according to learned counsel, was, therefore, neither anticipated nor foreseen. It was also submitted that the shareholders could have made the payments of call money in time and, therefore, the payment of interest depended upon the whims of the payer. It was also submitted that interest payable on arrear of capital was in reality part and parcel of capital and could not, therefore, be taxed as income in the hands of the assessee-company. In support of the submissions, learned counsel for the assessee relied on several decisions, namely, CIT v. Shaw Wallace and Co., I.L.R 59 Cal 1343; Surat District Cotton Dealers' Association v. CIT [1959] 35 ITIM 21 (Bom); Janab A. Syed Jalal Sahib v. CIT [1960] 39 ITR 660 (Mad); Commissioner Of Income-Tax, West Bengal-Iv v. Smt. Asrafi Devi Rajgharia. [1983] 142 ITR 380 (Cal); P.H Divecha (Decd.) v. CIT [1963] 48 ITR SC 222; Narain Swadeshi Weaving Mills v. Commissioner Of Excess Profits Tax [1954] 26 ITR 765 (SC) and Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429 (SC).

8. Sri A.C Moitra, learned counsel appearing on behalf of the Revenue, on the other hand, sought to distinguish the cases cited on behalf of the assessee and submitted that the interest has been received by the assessee-company from its shareholders pursuant to clause 17 of the articles of association and, therefore, it could not be said to be a receipt of a casual or windfall nature. In support of his contention, he relied on the decision of the Gauhati High Court in India Carbon Ltd. v. CIT [1976] 102 ITR 797.

9. We have considered the rival contentions. At the outset, it is necessary to set out the provisions of article 17 of the articles of association of the assessee-company in pursuance, whereof the interest in each of the said two years was received by it from its shareholders. Article 17 reads as under:

“If the sum payable in respect of any call or instalment be not paid on or before the day appointed for payment thereof, the member for the time being in respect of the share for which the call shall have been made or the instalment shall be due shall pay interest for the same at the rate of 12 per cent. per annum from the day appointed for the payment thereof to the time of the actual payment or at such lower rate (if any) as the Board may determine.”

10. The articles of association bind the company and the members thereof. The articles must be deemed to contain covenants on the part of the member to observe all the provisions of the articles. The articles constitute a contract between the company and a member in respect of his ordinary rights and liabilities as a shareholder and the company may sue a member and the member may sue a company to enforce and restrain breaches of the regulations contained in the articles dealing in such matters. Admittedly, the interest was charged from the shareholders in pursuance of article 17 of the articles of association., It cannot, therefore, be said that the payment of interest by the shareholders who delayed payment of call money on the shares held by them and the receipt of such interest by the company pursuant of article 17 which is a part of the contract between the company and its shareholders, was fortuitous, accidental, unforeseen and/or casual. When the shareholders delayed the payment of call moneys, it was well known both to the shareholders as well as to the company that the defaulting shareholders are liable to pay interest and the company would be entitled to charge such interest from the shareholders concerned. As such, the receipt of interest in case of default was clearly foreseen, known, anticipated and also provided for in article 17 of the articles of association which constituted an agreement between the company and its shareholders. In these circumstances, the receipt of such interest cannot, in our view, be said to be casual and/or non-recurring within the meaning of section 10(3) of the Income-tax Act, 1961. In the Shorter Oxford English Dictionary, the word “casual” is denned as meaning “(1) subject to or produced by chance; accidental; fortuitous (2) coming at uncertain times; not to be calculated on, unsettled”. A receipt which is foreseen, known, anticipated and provided for by agreement cannot be regarded as casual even if it is not likely to recur ever or at least for a considerable time. Reference in this connection may be made to the decision of this court in Cossimbazar Raj Wards Estate v. CIT [1946] 14 ITR 377. There, at page 395 of the Reports, this court held as under:

“This payment was expressly provided for in the lease and, therefore, it was foreseen, known, anticipated and provided for as it was put by Dr. Gupta. It has its source in the agreement itself where it is clothed with the nature of royalty. In these circumstances, it cannot be held to be a casual receipt.”

11. Similar view has been taken by the Madras High Court in CIT v. V.P Rao [1950] 18 ITR 825, the Patna High Court in Bisheshwar Singh v. CIT [1955] 27 ITR 376 and the Kerala High Court in Helen Rubber Industries Ltd. v. CIT [1959] 36 ITR 544.

12. It is not necessary to discuss any of the cases cited either on behalf of the assessee or on behalf of the Revenue as, in our opinion, none of these cases are relevant in deciding the controversy in issue in this case.

13. For the foregoing reasons, we must answer the question referred to this court in the affirmative and in favour of the Revenue.

14. There will be no order as to costs.

K.M Yusuf, J.:— I agree.