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In The Matter Of Keshardeo Chamria.
Structured Summary of the Opinion
Factual and Procedural Background
This Reference arises under Section 66(2) of the Indian Income Tax Act. The assessee, Keshardeo Chamria, filed a suit in 1929 (Original Side) seeking a declaration that he had been validly adopted by Amloke Chand (deceased) and was entitled under Mitakshara law to certain immovable properties jointly with the defendant Ramprotap (Amloke Chand's brother), together with a prayer for partition.
By a consent decree dated 23 May 1930 the parties agreed (by a statement annexed to the decree) that the assessee was the validly adopted son of Amloke Chand. The decree declared that the assessee was entitled to an equal half share of the residue of the joint estate after setting aside eleven lacs for allotment to Ramprotap and certain premises for religious and charitable purposes; Ramprotap was declared entitled to the remaining equal half. Commissioners for partition were appointed and directions given for accounts and mutual conveyances on the basis of the award to be made.
The decree's language was ambiguous: it contained no list of admitted joint properties nor any direction to enquire what the joint estate consisted of, and it is admitted that the decree did not settle the dispute as to the alleged joint nature of the properties. A commissioner for partition was holding an enquiry as to the jointness of properties.
On 28 July 1930 an Official Receiver was appointed over the properties described in the order as "the immoveable properties the parties to this suit." By consent order dated 2 April 1931 the Official Receiver was discharged in respect of the properties and the assessee and Ramprotap were jointly given liberty to realize the rents on joint receipt, to meet necessary expenses, to file rent suits, to keep documents of title in joint custody, and to invest or divide received money equally. Either party had liberty to apply for re‑appointment of the Official Receiver; an Official Receiver was re‑appointed by court order dated 23 August 1933 (the Commissioner of Income‑Tax stated the Official Receiver did not obtain possession until February 1934).
For the financial years 1932–33 and 1933–34 the Income‑tax Officer treated the position on the basis that the 2 April 1931 order remained effective, and (having the parties collect and divide rents equally) treated the rents (subject to statutory deductions) as the bona fide annual value under Section 9 and assessed the assessee as owner of half the properties. The assessed amounts included Rs. 33,920 out of total income Rs. 48,628 for 1932–33 and Rs. 28,177 out of Rs. 54,558 for 1933–34.
The assessee's appeals to the Assistant Commissioner were dismissed. The matter went to the Commissioner of Income‑tax who formulated questions of law and referred to the Court the following question:
"Whether in the circumstances described above the present assessee and Rai Bahadur Ramprotap Chamria were the managers of the properties appointed by or under any order of a Court within the meaning of Section 41 of the Indian Income‑tax Act, and whether in the facts and circumstances given above the Income‑tax Officer acted illegally in assessing the present assessee in respect of his share of the property?"
Legal Issues Presented
- Whether the assessee (Keshardeo Chamria) and Ramprotap were "managers of the properties appointed by or under any order of a Court" within the meaning of Section 41 of the Indian Income‑tax Act.
- Whether, given the circumstances, the Income‑tax Officer acted illegally in assessing the assessee in respect of his share of the property.
Arguments of the Parties
Assessee's Arguments
- The assessee contended that for purposes of assessment he was not an "owner" within the meaning of Section 9.
- Alternatively, he argued that, if an owner, he was only so as a member of an "association of individuals" within the meaning of Section 3.
- He further argued that in any event the provisions of Section 41 applied mandatorily: the rents/income were received by him and Ramprotap as "Managers" appointed by or under a court order, and therefore the Department could only look to the managers (i.e., the income should be taxed in the capacity of managers rather than as owners).
Crown / Revenue's Arguments
- The Crown contended that Section 41 did not apply to the circumstances of the case.
- Further, even if Section 41 did apply, it was said to be a machinery/enabling provision (not a charging provision) that the Department could use but was not compelled to employ. The Crown relied on the Madras High Court's observations in Commissioner of Income Tax, Madras v. Saldanha (I.L.R. 55 Mad. 891) to support this view.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner of Income Tax, Madras v. Saldanha (I.L.R. 55 Mad. 891) | Observation that provisions like Section 40 are not charging provisions but machinery/enabling provisions; the Income‑tax Officer may choose to proceed under them but is not compelled to do so. | The Crown relied on this case to argue that Section 41 is machinery and discretionary. The Court noted that Saldanha supports the Crown's contention but also observed that the cited authorities are not directly conclusive on whether the Chapter V provisions (including Section 41) are mandatory or discretionary in every circumstance. |
| Trustees of the Sir Currimbhoy Ebrahim Baronetcy Trust v. Commissioner of Income‑tax, Bombay (L.R. 61 I.A. 209) | Held that, in the circumstances, interest on securities was "receivable" by trustees within the meaning of Section 8 and the property was "owned" by the trustees within the meaning of Section 9. | The assessee relied on this decision to question the Madras High Court's observations. The Court observed that this authority, like Saldanha, is not directly determinative of whether the Chapter V sections are mandatory or discretionary; the Court did not treat it as decisive for the present reference. |
Court's Reasoning and Analysis
The Court proceeded in a stepwise legal analysis, grounded in the facts and the statutory language cited in the opinion:
- Preliminary observation: Many of the assessee's submissions were not strictly within the precise question referred by the Commissioner, but the Court considered them insofar as they affected the legal position.
- On the question of "ownership" under Section 9: The Court held that before an assessee can be taxed as an "owner" it must be decided that he is in fact the owner, and the determination of ownership for assessment purposes rests with the Income‑tax Officer, subject to the assessee's ordinary rights of appeal under Sections 30 and 31. The mere existence of disputed title (even if a suit is pending) does not automatically prevent assessment; otherwise an assessee could indefinitely delay assessment by instituting collusive proceedings.
- Applying that principle to the facts: The Income‑tax Officer had prima facie power to decide the assessee was the owner of a half share without awaiting the final determination in the High Court suit. The assessee had consistently asserted ownership and did not challenge the assessment on the ground that he was not an owner. Although the Commissioner misunderstood the partition decree as conclusively declaring ownership, given the assessee's assertions and the April 2, 1931 arrangement, the Court found it impossible to say the Income‑tax Officer's decision was wrong.
- On the "association of individuals" point under Section 3: The Court noted this point was not raised in the letter of reference. On its merits the Court observed that the phrase "other association of individuals" ought to be construed ejusdem generis with "firm" and does not extend to cover members of a formerly undivided Mitakshara family after a preliminary decree; such members are in a similar position to members of a Dayabhaga family and can be assessed individually in respect of their shares.
- On Section 41 (the core issue): The parties disputed whether Section 41 applied mandatorily when its conditions were fulfilled or was merely a machinery provision the Revenue could optionally employ. The Crown relied on Saldanha for the latter position; the assessee relied on other authorities to support its contention that the Chapter V provisions could be mandatory in some circumstances. The Court observed that neither cited case was directly decisive on the general question of mandatory versus discretionary application of Chapter V provisions.
- Even assuming arguendo that Section 41 is mandatory when its conditions are met, the Court held that the assessee and Ramprotap did not fall within Section 41. The April 2, 1931 order did not specifically appoint them as Receivers or Managers, though, given the order and the powers conferred, they could properly be described as "Managers" in a loose sense. However, to come within Section 41 they must manage the property "on behalf of another."
- The assessee's theory that they managed the property on behalf of whoever ultimately proved entitled was rejected. The Income‑tax Officer had found—as he was entitled to do—that the assessee and Ramprotap were owners in equal shares. Having so found, the Officer could treat them as managing the property on behalf of themselves (i.e., as owners), not as managers managing on behalf of an unascertained third party. Therefore Section 41 did not displace direct assessment of the owners.
- Conclusion from analysis: The assessee and Ramprotap were not managers appointed by or under any court order within the meaning of Section 41, and the Income‑tax Officer did not act illegally in assessing the assessee in respect of his share.
Holding and Implications
Holding: The Court answered the referred question in the negative: the assessee and Ramprotap "were not managers of the properties appointed by or under any order of a Court within the meaning of Section 41 of the Indian Income‑tax Act," and the Income‑tax Officer did not act illegally in assessing the assessee in respect of his share of the property.
Implications:
- The direct consequence for the parties is that the assessments for the years in question (under which half the annual value of the properties was included in the assessee's income) were upheld; the Income‑tax Officer's approach was held to be lawful in the circumstances described.
- The assessee was ordered to pay the costs of the reference; the Rule was discharged with costs fixed at 10 gold mohurs. (COSTELLO, J. concurred.)
- The opinion does not purport to lay down a broad new principle or a definitive rule on whether Chapter V provisions (including Section 41) are always mandatory or discretionary; the Court expressly observed that the cited authorities did not directly decide that general question. Accordingly, no wider precedent on that abstract point was established beyond the resolution of the facts and legal questions in this case.
End of summary — prepared strictly from the text of the provided opinion.
- This Reference under Section 66(2) of the Indian Income Tax Act arises out of circumstances of some complexity.
The assessee Keshardeo Chamria instituted a suit in 1929 on the Original Side of the Court, for a declaration that he had been validly adopted by one Amloke Chand deceased and was accordingly entitled under Mitakshara Law to certain immovable properties jointly with the defendant Ramprotap. Amloke Chands brother. There was also a prayer for partition.
On May 23, 1930, a decree was made by consent. Unfortunately the decree has been drawn up in some what ambiguous language, and still more unfortunately the Commissioner of Income-tax appears to be under a misapprehension as to its effect.
It was agreed under the terms of statement annexed to the decree that the assessee was the validly adopted son of Amloke Chand. The decree further declared that the assessee was entitled tone equal half part of share of the residue of the joint estate mentioned in the terms, after setting apart eleven lacs of rupees for allotment to Ramprotap, and also after setting apart certain of the premises in suit for religious and charitable purposes.
Ramprotap was then declared entitled to the remaining equal half part or share. Commissioners for Partition were appointed and directions given for accounts and for mutual conveyances on the basis of the award to be made. Now from the language of the decree one would expect to find a list of admitted joint properties in the terms of settlement and on the other hand, if no properties were admitted to be joint, one would expect in the body of the decree directions on the commissioners to enquire what the joint estate consisted of.
In fact there is no list of joint properties nor any direction for such an enquiry. Indeed it is admitted that the consent decree did not settle the dispute in so far as the alleged joint nature of the properties claimed in the plaint was concerned and we have been told that the present commissioner of partition is in fact holding an enquiry of the sort indicated. Unfortunately the Commissioner of Income tax states more than once in his Letter of Reference that the consent decree declared the assessee and Ramprotap to be the owners of the properties in suit in equal shares.
On July 28, 1930, the Official Receiver was appointed Receiver of the properties (described in the order as "the immoveable properties the parties to this suit").
An important order was made by consent on April 2, 1931. The Official Receiver was discharged in respect of the properties, and the assessee and Ramprotap were jointly given liberty to realize the rents thereof on joint receipt and to meet the necessary expenses thereout, and to file rent suits. The documents of title were to be kept in the joint custody of the assessee and Ramprotap. Ramprotap and the assessee were given liberty to invest the money which would come into their hands or divide the same equally. There was also liberty to either party to apply for the re-appointment of the Official Receiver, who in point of fact was re-appointed under an order of the Court dated August 23, 1933. The Commissioner of Income-Tax states that the Official Receiver did not obtain possession until the latter part of February 1934.
The Income-tax Officer has in these circumstances disregarded the order August 1933 and has treated financial years 1932-33 and 1933-34 on the basis that the order of April 2, 1931 was effective throughout.
No objection has been taken to this way of treating the 1932 order the Department should have applied Sec. 41 of the Indian Income-tax Act.
During the years in question the assessee and Ramprotap in exercise of the liberty given them under the order have objecting the rents of the properties and dividing them equally.
The income-tax Officer in these circumstances has treated the rents collected subject to the statutory deductions as the bona fide annual value of the properties within the meaning of Sec. 9 of the Income-tax Act, and the assessee and Ramprotap as the "owners" of the properties in equal shares. He has accordingly included half the annual value in the assessable income of the assessee under the head "property" the actual amounts being Rs. 33,920 out of a total income of Rs. 48,628 for 1932-33 and Rs. 28,177 out of a total income of Rs. 54,558 for 1933-34.
The assessee appealed against the orders of the Income-tax Officer made in the two assessments, but the Assistant Commissioner dismissed the appeals and confirmed the orders of the Income-tax Officer.
The matter was then taken to the Commissioner of Income-tax, before whom the assessee formulated certain questions of law (see appendices B and B(1) to the taken Statement of the cases).
The Commissioner has taken the same view as the Assistant Commissioner and the Income-tax Officer, but has referred the following question of law to this court :-
"Whether in the circumstances described above the present assessee and Rai Bahadur Ramprotap Chamria were the managers of the properties appointed by or under any order of a Court with in the meaning of Section 41 of the Indian Income-tax Act, and whether in the facts and circumstances given above the Income tax Officer acted illegally in assessing the present assessee in respect of his share of the property ?"
If I understand the assessee aright he maintains first that for purposes of assessment he is not the owner of the property within the meaning of S. 9.
Alternatively it is said that if the assessee is in any sense the owner he is only so as a member of an association of individuals within the meaning of S. 3.
Next it is argued that whether he is the owner or not the provisions of S. 41 apply and are mandatory. In other words, at the time that the income was received, it was received by the assessee and Ramprotap as Managers appointed by or under an order of the Court and half can only be assessed in that capacity.
It will be noticed that most of these submissions are not directly connected with the question formulated by the Income Tax Commissioner, but at the same time it is, I think, necessary for us to express our views upon them.
It may not at first sight be apparent in what respect assessee has been prejudiced by the suggested failure of the Department to apply S. 41, because if the tax had been deducted while the rents were in the hands of the assessee and Ramprotap as joint managers, although the money available for division would have been less, the dividend presumably would not be liable for tax.
The assessee however suggests that if all or any of the disputed properties are found not to be joint he will be called upon to refund to Ramprotap what he was drawn in respect of that property without any allowance for the income-tax.
I do not think it necessary to speculate as to the position which will arise in such a case, for I cannot see that such considerations can effect the construction of the Section.
Now with regard to the ownership of the property the position is that the assessee has been assessed in respect of property of which at the time of assessment he alleged he was the owner and of which he still alleges himself the owner for he does not object to the assessment on the ground that he is not the owner.
He points out however that his title is disputed and that to establish it he has been compelled to institute a suit which may terminate in part at any rate in favour of Ramprotap who until the Official Receiver was appointed on July 28, 1930, was in possession of the disputed properties.
To adopt the language of the assessees counsel the law says owners shall be taxed, it does not say that claimants shall be taxed.
Now it is clear that before an assessee can be taxed as an "owner" under Section 9 it must be decided that he is in fact the owner of the property in question and in my opinion the decision rests with the Income-tax Officer, subject to the right of appeal under Sec. 30 and 31. The mere existence of a disputes as to title even where a suit has been filed cannot of itself hold up an assessment; otherwise it would be open to an assessee to delay assessment indefinitely by arranging for the institution of collusive proceedings.
This difficulty is not met by pointing to Section 41, because as often as not in a suit for declaration of title and ejectment no Receiver is appointed, and the possession of the party remains undisturbed.
It appears therefore that the Income-tax Officer had prima facie the power to decide that the assessee was the owner of a half share in the properties without waiting for the final determination of the High Court suit.
It is hard to see in this case how the decision, if it is to be called a decision, of the Income-tax Officer could have been other than it was. The assessee has throughout asserted ownership and has never appealed against the assessment on the grounds that he is not the owner. It is true that the Commissioner appears to be in error in considering that the assessees ownership has been declared by the partition decree, but having regard to the assessees assertion of ownership and the arrangement embodied in the order of April 2, 1931, it is impossible to say that the decision of the Income-tax Officer was wrong.
With regard to the contention that the owners are an association of individuals within the meaning of Section 3, it is enough to say that this point is not raised in the letter of reference. In may opinion however, the words "other association of individuals" must be constructed according to the ejusdem generis rule with reference to the word "firm" preceding it and they do not cover the members of a formerly undivided Mitakshara family after a preliminary decree for appear to me to be in the same position as the members of a Dayabhaga family, and it has never been suggested as far as I know that members of such a family cannot be individually assessed in respect of their shares.
As regards the provisions of Section 41, the section with which this reference is directly concerned, the assessees contentions are first that the income, profits and gains represented by the annual value of the immovable properties have been received by him and Ramprotap as "Managers" within the meaning of the Section and secondly, that the provisions of the section are mandatory, and that where its conditions are fulfilled the Department can only look to the manager, and has no recourse to the person upon whose behalf the income, profits and gains are received. On the other hand, the Crown maintains that the section cannot applly in the circumstances of this case, and further submits that even if the section is applicable, it merely provides machinery for collection, which is available to the Department, and which the Department is not compelled to employ.
For the latter contention the Crown relies on the observations of the Madras High Court in Commissioner of Income Tax, Madras v. Saldanha (I.L.R. 55 Mad. 891). There a widow was assessed under S.10(1) of the Income Tax Act in respect of a business carried on by her and belonging partly to her and partly to her children. It was contended that the tax should be separately assessed on the various owners of the business and levied on the widow as guardian under Section 40. Dealing with Section. 40 the Court states at page 898 :-
"Now the argument based on Section 40 may first be disposed of. Section 40 and the following sections have been held to be not charging sections but only machinery sections. Section 40 provides that the trustees or guardians shall be assessed in a like manner and to the same extent as the beneficiaries or wards may be assessed. Apart from the fact that these are not charging sections it may also be observed that they are enabling sections, i.e., the Income-tax Officer can take steps to assess the trustees or guardians as representing their separate beneficiaries or wards as the case may be, if he so chooses. But the sections do not compel the Crown to resort to them. The question in the case before us is not whether the Income-tax Officer can proceed under Secction 40 or not but, where he has not chosen to proceed under Section 40 but proceeded to assess on another basis, Section 40 can be relied upon as preventing him from doing so. It is clear that the section cannot be so utilised."
The assessee questions the soundness of the observations made by the Madras High Court, on the authority of Trustees of the Sir Currimbhoy Ebrahim Baronetcy Trust v. The Commissioner of Income-tax, Bombay (L.R. 61 I.A. 209) where the Judicial Committee held that in the circumstances of the case the interest on securities was "receivable" by the Trustees within the meaning of S. 8 and that the property was "owned" by them within the meaning of S. 9.
Neither case appears to me to be a direct authority on the question whether the application of the sections (including Sec. 41) grouped under Chapter V of the Act is mandatory or discretionary.
Even on the assumption that the sections are mandatory when the conditions specified in them are fulfilled, the assessee and Ramprotap are not in my opinion within the purview of S. 41.
The order of April 2, 1931, does not specifically appoint them to be Receivers or Managers, although having regard to the previous order and to the duties and powers conferred I should hold that they could properly be described as "Managers".
But to bring them within Section 41 it is not enough that they should be appointed to "Manage" the property, they must manage it "on behalf of another".
The assessee maintains that he and Ramprotap are managing the property on behalf of that one of them who will ultimately be found, as a result of the suit, to entitled to the property.
In my judgment the Income-tax Officer, having found, as he was entitled to do, that the assessee and Ramprotap are owners of the property in equal shares, was at liberty, if not bound, to treat them as managing, not on behalf of an unascertained owner, but on behalf of themselves.
It follows that they have been rightly assessed and taxed directly. The answer to the question referred by the Commissioner will accordingly be that the assessee and Ramprotap were not managers of the properties appointed by or under any order of a Court within the meaning of S.41 of the Indian Income Tax Act, and that the Income-tax Officer did not act illegally in assessing the assessee in respect of his share of the property. The assessee must pay the costs of the reference.
The Rule stands discharged with costs - 10 gold mohurs.
COSTELLO, J. - I agree.
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