Case: The Commissioner Of Income-Tax,Madhya Pradesh And Bhopal Vs. Messrs. Vyas &amp; Dotiwala

the financiers and also managers under the Deputy Commissioner to carry out the scheme and that the assessees only helped to work the scheme. The Tribunal held that the profits that may have resulted from such working were not therefore theirs nor represented their income and the assessees could not be assessed to income-tax thereon. In this view of the matter the Tribunal set aside the orders of assessment.4. Thereafter, on the application of the revenue authorities the Tribunal referred the following question to the High Court under S. 66 (1) of the Act :Whether on the facts of this case any income accrued to Messrs. Vyas and Dhotiwala as the result of their associating themselves as financiers in the scheme for the distribution of standard cloth; and, if so, whether such income was assessable in their hands.5. On that reference the High Court held that under the charging Section in the Indian Income-tax Act, 1922, namely, Section 4, it was necessary for the revenue authorities to prove that the assessees received or should be deemed to have received income or profit from the scheme during the relevant period. It held that the assessees had not actually received any such income and further that the expression "deemed to be received" in that Section only meant deemed by the provision of the Act to be received, and no such provisions of the Act had been relied upon an behalf of the revenue authorities. In this view of the matter the High Court answered the question framed, in the negative.6. The learned Solicitor-General contends that the High Court failed to appreciate the real question. He says that the question was not whether income was received or deemed to be received but whether income had accrued and the point for decision was, as appeared from the judgment of the Tribunal, whether the profits formed the income of the assessees. We agree with this criticism of the judgment of the High Court.7. On the point that arises from the question framed, we think that the Tribunal went wrong. It is not disputed that the assessees worked the scheme and such working produced the profits as found in the assessment orders. The Tribunal thought that since the scheme was completely under the control of the Deputy Commissioner, the assessees could not be said to have carried on business by working the scheme.We are unable to see that the fact of the control of the Deputy Commissioner can prevent the working of the scheme by the assessees from being a business carried on by them. In our view, it only comes to this that the assessees had agreed to do business in a certain manner. The fact that the Deputy Commissioner guaranteed the payment by the Tehsildars of the price due from them, to the assessees would indicate that the assessees were treated as the owners of the business.It would indicate that if there had been no such guarantee, the loss due to the failure of the Tehsildars to pay their dues would have to be borne by the assessees. Again the claim, may be in the alternative, by the assessees for exemption under S. 4 (3) (i-a) would not arise unless the assessees were carrying on a business.Lastly, paragraph 14 of the scheme which we have earlier set out, clearly contemplates profits resulting from the scheme.The provision that the profits would be devoted to charity to be decided by the Deputy Commissioner, would indicate that without it the profits would have been utilisable by the assessees. The profits belonged to the assessees and hence the necessity for this agreement so that the assessees might be made to spend them on charity. If, as the Tribunal thought, the profits were of the Government, there was no necessity for the Government providing for the profits being expended on charity, for the Government if minded to do so, could have done it without such a provision. The fact remains that the working of the scheme produced profits and apart from paragraph 14 such profits undoubtedly belonged to the assessees.If they chose to agree by paragraph 14 to devote the profits to charity, that was their business; the profits made by them would not change their character and cease to be the assessees income because they agreed to devote their income to charity.We might also say that there is nothing in the scheme which shows that the assessees had undertaken not to make any profits on the distribution work under the scheme; they had only agreed to finance the scheme without receiving any interest or profit.Furthermore, since the assessees actually made the profits, they are liable to pay tax thereon whether they agreed not to make any profits or not.We wish also to point out that it is not the assessees case that they have been made to pay out the profits for any charity. For these reasons we think that the profits were the profits of the assessees and they are liable to pay tax on them.8. With regard to the assessees claim for exemption under S. 4 (3) (i-a), they are clearly not entitled to any. That claim of the assessees has not been accepted by any of the Courts below. Section 4 (3) (i-a) applies to income derived from business carried on behalf of a religious and charitable institution when the income is applied solely to the purpose of the institution and the business is carried on in the manner provided. It is enough to say that the scheme considered as a business, was not carried on on behalf of any religious or charitable institution. Once it is held that the assessees made the profits, how they use it would not matter.9. In the result, we would answer both parts of the question framed, in the affirmative. We hold that the profits were the income which accrued to the assessees and such income is assessable to income-tax and is not exempt from taxation under S. 4(3)(i-a),

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]6. The learneds that the High Court failed to appreciate the real question. He says that the question was not whether income was received or deemed to be received but whether income had accrued and the point for decision was, as appeared from the judgment of the Tribunal, whether the profits formed the income of the assessees.We agree with this criticism of the judgment of the High Court.7. On the point that arises from the question framed, we think that the Tribunal went wrong. It is not disputed that the assessees worked the scheme and such working produced the profits as found in the assessment orders. The Tribunal thought that since the scheme was completely under the control of the Deputy Commissioner, the assessees could not be said to have carried on business by working the scheme.We are unable to see that the fact of the control of the Deputy Commissioner can prevent the working of the scheme by the assessees from being a business carried on by them. In our view, it only comes to this that the assessees had agreed to do business in a certain manner. The fact that the Deputy Commissioner guaranteed the payment by the Tehsildars of the price due from them, to the assessees would indicate that the assessees were treated as the owners of the business.It would indicate that if there had been no such guarantee, the loss due to the failure of the Tehsildars to pay their dues would have to be borne by the assessees. Again the claim, may be in the alternative, by the assessees for exemption under S. 4 (3)would not arise unless the assessees were carrying on a business.Lastly, paragraph 14 of the scheme which we have earlier set out, clearly contemplates profits resulting from the scheme.The provision that the profits would be devoted to charity to be decided by the Deputy Commissioner, would indicate that without it the profits would have been utilisable by the assessees. The profits belonged to the assessees and hence the necessity for this agreement so that the assessees might be made to spend them on charity. If, as the Tribunal thought, the profits were of the Government, there was no necessity for the Government providing for the profits being expended on charity, for the Government if minded to do so, could have done it without such a provision. The fact remains that the working of the scheme produced profits and apart from paragraph 14 such profits undoubtedly belonged to the assessees.If they chose to agree by paragraph 14 to devote the profits to charity, that was their business; the profits made by them would not change their character and cease to be the assessees income because they agreed to devote their income to charity.We might also say that there is nothing in the scheme which shows that the assessees had undertaken not to make any profits on the distribution work under the scheme; they had only agreed to finance the scheme without receiving any interest or profit.Furthermore, since the assessees actually made the profits, they are liable to pay tax thereon whether they agreed not to make any profits or not.We wish also to point out that it is not the assessees case that they have been made to pay out the profits for any charity. For these reasons we think that the profits were the profits of the assessees and they are liable to pay tax on them.8. With regard to the assessees claim for exemption under S. 4 (3)they are clearly not entitled to any. That claim of the assessees has not been accepted by any of the Courts below. Section 4 (3)applies to income derived from business carried on behalf of a religious and charitable institution when the income is applied solely to the purpose of the institution and the business is carried on in the manner provided. It is enough to say that the scheme considered as a business, was not carried on on behalf of any religious or charitable institution. Once it is held that the assessees made the profits, how they use it would not matter.9. In the result, we would answer both parts of the question framed, in the affirmative. We hold that the profits were the income which accrued to the assessees and such income is assessable toand is not exempt from taxation under S.