vil Appeals Nos
893 to 892 and 1381 to 1386 of 1966
Appeals from the judgment and order dated December 7 1962 of the Andhra Pradesh High Court in Case Referred No 24 of 1956
D Narsaraju P Ramrao KR Chaudhuri and K Rajendra Chaudhuri for the appellants in CAs
Nos 893 to
898 of 1966 and the respondents in CAs
1281 to 1386 of 1966
Jagdish Swarup Solicitor General SK Aiyar and RN Sachthey for the respondent in CAs
Nos 893 to 898 of 1966 and  the appellant in CAs
1381 to 1386 of 1966
The Judgment of the Court was delivered by Ramaswami J
The assessee who Is the Kartha of a Hindu Undivided Family was assessed in that status for the relevant assessment years 1944 45 1945 46 1946 47 not only to incometax 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 728 Mills Rajahmundry for a sum of Rs 54731
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 AS No 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 AS 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 September 7 194S by virtue of which he got a release of the interest of the vendor s sons on payment of Rs 115000
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 109613 for the year 1944 45 Rs 31087 for the year 1945 46 and Rs 4775 for the year 1946 47
Under the compromise the assessee was entitled to withdraw these amounts on payment of Rs 115000
The Privy Council decided the appeal on July 2 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 Income tax Officer issued on March 2 1948 a notice under section 34 of the Income tax Act in respect of Rs 109613 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 115000 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 729 Income tax Officer rejected these contentions and treated the whole amount of Rs 115000 as paid toward 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 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 115000 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 662 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 a 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 109613 in the hands of the assessee is valid in the face of the compromise memo dated 7 9 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 115000 being the amount paid to the minors for releasing their fights in the property from out of the amount received from the mill  RA No 780 which relates 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 46 730 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 31087 in the hands of the assessee is valid in the face of the compromise memo dated 7 9 1945 approved by the Court  4 Whether on the facts and in the circumstances of the case the assessee is not entitled to set off Rs 115000 being the amount paid to the minors for releasing their rights in the property from out of the amount received from the mill  RA 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 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 4775 in the hands of the assessee is valid in the face of the compromise memo dated 7 9 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 115000 being the amount paid to the minors for releasing their right in the property from out of the amount received from the Mill   The Appellate Tribunal pointed out in the statement of the case that question No 1 in RA No 780 for the assessment year 1945 46 pertained to the earlier assessment year 1944 45 in RA No 779 and also that question No 2 in RA No 780 and RA 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 RA No 779 and the corresponding excess profits tax assessment in RA No 782
The High Court answered question Nos 1 and 2 in RA No 779 and question No 1 in RA No 780 in the affirmative
731 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 115000 to the minor sons cannot be ignored
The High Court negatived the contention of the Income tax Department that the sum of Rs 115000 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 115000 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 9085
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 CA Nos 893 to 898 of 1966 were brought by special leave from the same judgment to this Court on behalf of the assessee
After the Amending Act of 1939 and before the Amending Act of 1948 Section 34 stood as follows 1 If in consequence of definite information which has come into his possession the Income tax Officer discovers that income profits or gains chargeable to income tax have escaped assessment in any year or have been under assessed or have been assessed at too low a rate or have been the subject of excessive relief under this Act the Income tax Officer may in any ease in which he has reason to believe that the assessee has concealed the particulars of his income or deliberately furnished inaccurate particulars thereof at any time within eight years and in any other case at any time within four years of the end of that year serve on the person liable to pay tax on such income profits or gains or in the case of a company on the principal officer thereof a notice containing all or any of the requirements which may be included in a notice under sub section 2 of section 22 and may proceed to assess or re assess such income profit or gains and the provisions of this Act shall
so far as tony be apply accordingly as if the notice were a notice issued under that sub section
     2 No order of assessment under section 23 or of assessment or re assessment under sub section 1 of this 732 section shall be made after the expiry in any case to which clause c of sub section 1 of section 28 applies of eight years and in any other case of four years from the end of the year in which the income profits or gains were first assessable
The first question arising in this case is whether the proceeding under section 34 is legally valid
It was contended by Mr Narasaraju that the decision of the Privy Council could not be said to be definite information within the meaning of the section
It was said that the Income tax Officer was fully aware of the circumstances of the case and the assessee had placed all the relevant facts before him namely that under the High  Court s judgment the vendor was only entitled to one third share of the income pending the decision of the appeal before the Privy Council
In our opinion there is no justification for tiffs argument
It is not true to say that the assessee brought all the relevant facts before the Income tax Officer
On the Contrary he deliberately suppressed the fact that there was a compromise between himself and the plaintiffs under which he was entitled to the whole of the income from the mill
At any rate the Privy Council s decision which determined the rights of the parties irrespective of the compromise did constitute definite information within the meaning of section 34 of the Income tax Act
This view is borne out by the decision of this Court in Maharaja Kumar Kamal Singh vs Commissioner of Income tax
1 In that case the Income tax Officer had following the decision of the High Court in Kamakhya Narain Singh s case  omitted to bring to assessment for the year 1945 46 the sum of Rs 93604 representing interest on arrears of rent due to the assessee in respect of agricultural land on the ground that the amount was agricultural income
Subsequently the Privy Council on appeal from that decision held that interest on arrears of rent payable in respect of agricultural land was not agricultural income
As a result of this decision the Income tax Officer initiated re assessment proceedings under section 341d of the Income tax Act and brought the amount of Rs 93604 to tax
In these circumstances it was held by this Court firstly that the word information in section 341b included information as to the true and correct state of the law and so would cover information as to relevant judicial decisions secondly that escape  in section 341 was not confined to cases where no return had been submitted by the assessee or where income had not been assessed owing to inadvertence or oversight or other lacuna attributable to the assessing authorities
But even in a case where a return had been 1 2 733 submitted if the Income tax Officer had erroneously failed to tax a part of the assessable income it was a case where that part of the income had escaped assessment
The decision of the Privy Council therefore was held to be information within the meaning of section 34 1  b and the proceedings for re assessment were validly initiated
In our opinion the principle of this decision governs the present case and it must be held that the proceedings initiated under section 34 for the assessment year 1944 45were legally valid
It was stated on behalf of the appellant that in any case the income tax Officer could have legitimately assessed one third share of the income which was due to the assessee according to the judgment of the Madras High Court and there was escape only to the extent of two third share of the income
This argument is not of much avail to the appellant because once proceedings under s34 are taken to be validly initiated with regard to two third share of the income the jurisdiction of the Income tax Officer cannot be confined only to that portion of the income
Section 34 in terms states that once the Income tax Officer decides to reopen the assessment he could do so within the period prescribed  by serving on the person liable to pay tax a notice containing all or any of the requirements which may be included in a notice under section 222 and may proceed to assess or re assess such income profits or gains
It is therefore manifest that once assessment is reopened by issuing a notice under sub section
2 of section 22 the previous under assessment is set aside
and the whole assessment proceedings start afresh
When once valid proceedings are started under section 341b the Income tax Officer had not only the jurisdiction but it was his duty to levy tax on the entire income that had escaped assessment during that year
The second question involved in this case is whether the High Court was right in holding that any portion of the amount of Rs 115000 was liable to be treated as business expenditure
It is well established that where money is paid to perfect a title or as consideration for getting rid of a defect in the title or a threat of litigation the payment would be capital payment and not revenue payment
What is essential to be seen is whether the amount of Rs 115000 was paid for bringing into existence a right or asset of an enduring nature
In other words if the asset which is acquired is in its character a capital asset then any sum paid to acquire it must surely be capital outlay
Money paid in consideration of the acquisition of a source of profit or  income is capital expenditure both on principle and authority
In Atherton vs British Insulated and Helsby Cables Ltd1 Viscount Cave said But where an expenditure is made not only once for all but with a view to bringing into existence an 1  213
734 asset or an advantage for the enduring benefit of a trade I think that there is very good reason in the absence of special circumstances leading to an opposite conclusion for treating such an expenditure as properly attributable not to revenue but to capital
 In Commissioner of Taxes vs Nchanga Consolidated Copper Mines Ltd1 Lord Radcliffe observed at p 960 Courts have stressed the importance of observing a demarcation between the cost of creating acquiring or enlarging the permanent which does not mean perpetual structure of which the income is to be the produce or fruit and the cost of earning that income itself or performing the income earning operations
Probably this is as illuminating a line of distinction as the law by itself is likely to achieve
 It is however contended on behalf of the assessee that the amount of Rs 115000 was paid partly for the acquisition of capital asset and partly to discharge the claim towards profits and hence there should be an apportionment of  he amount
It is not possible to accept this contention
It appears from the order of the High Court that the value of the mill was fixed at Rs 115000 after taking into consideration the fact that the mill was built on a leasehold premises
The value of the machinery was fixed at Rs 136000 and the leasehold interest was fixed at Rs 14000
On this basis the share of the minors was taken to be Rs 90000
In respect of the profits the claim of the plaintiffs was taken to be Rs 85000
The total claim was therefore Rs 175000 so that the offer of Rs 115000 for the release of the claim of the plaintiffs in the mill was held to be fair
The High Court
therefore certified the compromise to be for the benefit of the minor plaintiffs
In the course of its order dated September 7 1945 the High Court observed There are however numerous risks which the continuance of the litigation would necessarily involve
The Privy Council might hold that the null was the selfacquired property of the father in which case the plaintiffs would get nothing and would incur a liability for costs
It might also be held that though the property was the family property the father was entitled as the natural guardian to sell the interests of minor sons in discharge of a binding family obligation
There is the further possibility that by the time the litigation ends the property will have deteriorated and its value will have 1 735 been materially reduced
by the termination of the lease of the land
Taking all these contingencies into consideration we are of opinion that the offer made by the purchaser of Rs 115000 for the release of the claim if any of the two sons in the mill sold to him by their father is a fair offer the acceptance of which would be beneficial to the minor second plaintiff
 It is true that the High Court took into consideration the income from the mill in testing whether the offer made by the purchaser of Rs 115000 for the release of the Claim of the plaintiffs was a fair offer
But that does not mean that the sons of Appalaswamy were given as a result of the compromise a share in the profits of the assessee
It is clear from the circumstances of this case that the payment of Rs 115000 was made by the assessee in order to perfect his title to capital asset and the assessee is not entitled to set off any portion of the amount as attributable to the lease money
It was a lump sum payment for acquisition of a capital asset and the claim of the plaintiffs for the lease money from the property was merely ancillary or incidental to the claim to the capital asset
In our opinion the High Court was in error in holding that the amount should be apportioned between capital and income
In the result so far as questions 3 and 4 in RA 779 questions 1 and 2 in RA 780 and questions 2 and 3 in RA 781 are concerned the answer is that the entire amount of Rs 115000 should be treated as capital payment and the assessee is not entiled to exclude from the income sought to be assessed in his hands any portion of that amount
We accordingly allow CA Nos 1381 to 1386 of 1966 to the extent indicated above
CA Nos 893 to 898 of 1966 are dismissed
There will be no order as to costs in either of two sets of appeals
CA Nos 1381 to 138666 allowed
CA Nos 893 to 89866 dismissed


Summary:
The assessee purchased a spinning mill in 1941 from a vendor claiming to be its sole proprietor
In a suit filed by the vendor s sons the trial court had held that the suit property including the aforesaid spinning mill was the vendor s self acquired property
When the assessee purchased the mill an appeal against the trial court s judgment was pending in the High Court the High Court decided that the property was not the self acquired property of the vendor but was coparcenary property in which the sons had two thirds interest
The vendor filed an appeal before the Privy Council
During its pendency the assessee entered into a compromise with the vendor s sons whereby they agreed to release their two thirds interest in the mill and its profits for a sum of Rs 115000
The compromise was certified by the High Court
In 1947 the Privy Council decided that the property including the spinning mill was the self acquired property of the vendor
On receipt of this decision which finally determined the rights of the parties and assessee s ownership of the mill the Income tax Officer issued a notice under section 34 of the Indian income tax Act 1922 for the assessment year 1944 45 and assessed the income from the mill for that year and for the two subsequent assessment years in the hands of the assessee
The assessee s objection that the decision of the Privy Council was not definite information  within the meaning of section 34 was rejected as also the assessee s claim that the sum of Rs 115000 paid to the vendor s sons in pursuance of the compromise should be set off as an expense against the income from the mill for the year in question
The Appellate Assistant Commissioner and the Tribunal upheld the Income tax Officer s order
The High Court in reference held that the notice under section 34 was valid but that the payment of Rs 115000 was made partly towards acquisition of a capital asset and partly towards the discharge of the claim for profits and the part apportionable towards the profits was allowable as revenue expenditure
The assessee as well as the Revenue appealed to this Court
HELD i In Maharaja Kumar Kamal Singh s case this Court held that the word information section 341b included information as to the true and correct state of the law and so would cover information as to relevant judicial decisions
It was further held that even in a case where a return had been submitted if the Income tax Officer had erroneously failed to tax a part of the assessable income it was a case when that part of the income had escaped assessment
The decision of the Privy Council was therefore held to be information within the meaning of section 341b
The principle laid down in Maharaja Kumar Kamal Singh s case governed the present case and it must be held that the proceedings initiated under section 34 for the assessment year 1944 45 were legally valid
732 G 733 B 727 Maharaja Kumar Kamal Singh vs Commissioner of Income tax  followed and applied
Kamakhya Narain Singh s case  referred to
The contention that only two thirds of the income could be said to hrye escaped assessment because the one third share of the vendor could have been validly assessed the Income tax Officer on the basis of the High Court s judgment could not be accepted
When once valid proceedings are started under section 341b read with section 222 the previous under assessment is set aside and the whole assessment proceedings start afresh
The Income tax Officer then has not only the jurisdiction but the duty to levy tax on the entire income that has escaped assessment in that year
733 C E It is well established that where money is paid to perfect a title or as consideration for getting rid of a defect in title or a threat of litigation the payment would be a capital payment and not a revenue payment
Money paid in consideration of the acquisition of a source of profit or income is capital expenditure both on principle and authority
733 F G Atherton vs British Insulated awl Helsby Cables Ltd  213 and Commissioner of Taxes vs Nchanga Consolidated Copper Mines Ltd  referred to
It was true that in the present case the High Court took into consideration income from the mill in testing whether the offer made by the purchaser of Rs 115000 for the release of the claim of the plaintiffs v as a fair offer
But that did not mean that the sons of the vendor were given as a result of the compromise a share in the profits of the assessee
It was clear from the circumstances of the case that the payment was made by the assessee in order to perfect his title to a capital asset and no portion of it could therefore could be set off against the profit
735 C