(I)(a). The Income-tax Act: nature and subject-matter.--This Act was enacted by Parliament in exercise of the exclusive power conferred upon it under Articles 245 and 246 of the Constitution of India to make law with respect to matters enumerated in the Union List, particularly in entry 82 dealing with "taxes on income other than agricultural income", in entry 93 dealing with "offences against laws with respect to any of the matters in this list", and in entry 95 dealing with "jurisdiction and powers of all courts except the Supreme Court with respect to any of the matters in this List". That exclusive power extends to making any law with respect to any matter not enumerated in the Concurrent List or State List and such power includes the power of making any laws imposing a tax not mentioned in either of those Lists. (See Article 248 and entry 97 in the Union List).
Parliament has concurrent power with the legislature of a State to make laws with respect to "criminal law" (entry I) and "criminal procedure" (entry II) of the Concurrent List.
 58. The scope of criminal law is explicated by including within its ambit "all matters included in the Indian Penal Code at the commencement of this Constitution but excluding offences against laws with respect to any of the matters specified in List I or List II......" The expression "criminal procedure" in entry II comprehends within its ambit "all matters in the Code of Criminal Procedure at the commencement of this Constitution".
 59. It is thus manifest that the framers of the Constitution intended that offences against laws contained in the Income-tax Act, 1961, should be excluded from out of the purview of "criminal law", whatever else that expression " criminal law " may comprehend.


Addl. Commissioner Of Income-Tax ... vs Dargapandarinath Tuljayya & Co. on 10 December, 1975

60. Offence--Definition.--The expression "offence" is not defined in the Constitution but ^hat expression is defined by Section 3(38) of the General Clauses Act, 1897, which is rendered applicable through Article 367 for the interpretation of the Constitution to mean "any act or omission made punishable by any law for the time being in force".
 61. Indian Penal Code.--The word "offence" is denned by Section 40 of the Indian Penal Code, among other things, to denote a thing made punishable by the Indian Penal Code. In the second paragraph of that section, we find the word "offence" being described to denote a thing punishable under the Code or under any special or local law as hereinafter defined. In the last paragraph of that section, we find the word being defined as having the same meaning when the thing punishable under the special or local law is punishable under such law with imprisonment for a term of six months or upwards, whether with or without fine.
 62. Section 41 defines "special law" as law applicable to a particular subject and Section 42 defines "local law" as law applicable only to a particular part of India.
 63. Section 53 deals with punishments and provides thus :
 "53. Punishments.--The punishments to which offenders are liable under the provisions of this Code are,--
 Firstly,--Death;
 Secondly,--Imprisonment for life;
 Thirdly--(Repealed by Act XVII of 1949);
 Fourthly,--Imprisonment, which is of two descriptions, namely :--
 (1) Rigorous, that is, with hard labour ;
 (2) Simple;
 Fifthly,--Forfeiture of property; Sixthly,--Fine."


Fifthly,--Forfeiture of property; Sixthly,--Fine."
 Criminal Procedure Code.--Section 4(o) of the Code of Criminal Procedure, 1898, defines the expression "offence" to mean" any act or omission made punishable by any law for the time being in force ; ...... "
 Section 5 deals with "Trial of offences under Penal Code and against other laws" and reads thus :
 "5. (1) All offences under the Indian Penal Code shall be investigated, inquired into, tried and otherwise dealt with according to the provisions hereinafter contained.
 (2) All offences under any other law shall be investigated, inquired into, tried and otherwise dealt with according to the same provisions, but subject to any enactment for the time being in force regulating the manner or place of investigating, inquiring into, trying or otherwise dealing with such offences."
 Sections 28 and 29 deal with the powers of the Code with respect to offences both under the Penal Code as well as under the other laws, and they read as follows:
 "28. Offences under Penal Code.--Subject to the other provisions of this Code any offence under the Indian Penal Code may be tried-
 (a) by the High Court, or


(b) by the court of session, or


(c) by any other court by which such offence is shown in the eighth column of the Second Schedule to be triable.
 29. Offences under other laws.--(1) Subject to the other provisions of the Code any offence under any other law shall, when any court is mentioned in this behalf in such law, be tried by such court.
 (2) When no court is so mentioned it may be tried by the High Court or subject as aforesaid by any court constituted under this Code by which such offence is shown in the eighth column of the Second Schedule to be triable."
 The distinction is thus maintained under the Code between offences under the Indian Penal Code and offences under other laws, as mentioned in the Second Schedule appended to the Code.
 64. There are provisions in the Code of Criminal Procedure, 1973, corresponding to those that were mentioned above.
 65. Income-tax Act: Offences.--So far as the Income-tax Act, 1961, is concerned, we find Chapter XXII being devoted to the subject-matter of "offences and prosecutions". Contraventions of provisions of the Act mentioned in the various sections under that Chapter were rendered punishable with rigorous imprisonment extending from six months to two years with a further liability to fine also. So far as failure to furnish return of income under Sub-section (1) of Section 139 is concerned, Section 276C says that, if a person wilfully fails to furnish in due time the return of income which he is required to furnish under Sub-section (1) of Section 139 ...... he shall be punishable with rigorous imprisonment for a term which may extend to one year or with fine equal to a sum calculated at a rate which shall not be less than four rupees or more than ten rupees for every day during which the default continues, or with both. (The proviso is not relevant).


66. Section 279 deals with the subject-matter of prosecution to be at the instance of the Commissioner and provides that a person shall not be proceeded against for an offence among other things under Section 276C except at the instance of the Commissioner. Sub-section (2) provides for a compounding of any offence by the Commissioner either before or after the institution of the proceedings.
 67. Section 292 of the Act deals with cognisance of offences and provides that no court inferior to that of a presidency magistrate or a magistrate of the first class shall try any offence under this Act.
 Income-tax Act: Penalties:--
 Chapter XXI of the Income-tax Act deals with penalties imposable wherein Section 271 occurs. It has already been noticed that under Section 271(1)(a), the Income-tax Officer or the Appellate Assistant Com missioner has power subject to the fulfilment of the conditions mentioned therein to direct any person to pay by way of penalty for failure to furnish, among other things, the return of total income under Sub-section (1) of Section 139. Sub-section (4A) of that section empowers the Commissioner to reduce or waive the amount of minimum penalty imposable on a person under Clause (i) of Sub-section (1) for failure, without reasonable cause, to furnish the return of total income which such person was required to furnish under Sub-section (1) of Section 139. Section 274 provides for the procedure to be adopted for passing an order imposing a penalty under Chapter XXI according to which no order imposing a penalty under that Chapter shall be made unless the assessee has been heard or has been given a reasonable opportunity of being heard.
 I(b). Income-tax Act--Object and policy : Taxation--Directive principles of State policy:
 "(c) Redistributive techniques--taxation and social services.


"(c) Redistributive techniques--taxation and social services.
 Taxation is no longer just a way of raising revenue. Since the end of the nineteenth century, it has become in conjunction with the social services an increasingly important way of redistributing income according to need." (Social Principles and the Democratic State by S. I. Benn and R. S. Peters at page 153).
 Robert Murray Haig in a brilliant article in Encyclopaedia of the Social Sciences referring to the views of Wagner, said at page 533 of Volume XIV thus :
 "In all his writing in the field of taxation Wagner gave great weight to 'socio-political principles'. He considered it a primary function of Government to regulate the distribution of wealth and urged the use of taxation as a means not only of raising sufficient revenue to meet the fiscal needs of the State but of consciously levelling the inequalities of distribution brought about by the workings of the market. Indeed even in defining taxation he stresses this function 'of regulating and correcting the distribution and use of private property '. "
 Julius Stone in his classic work Social Dimensions of Law and Justice (1966) observed at page 324 thus :
 "Taxation as the source of the public revenue is, of course, a foundation of all political institutions. The 'public interest of substance', therefore, is really but one aspect of the social interest in political institutions. The greater revenue required for modern expanded State functions has extended and intensified the need for protection of the public purse. Taxes, more than ever, are the life blood of government.......
 Peacetime taxation is increasingly directed to social welfare and services, and countering economic cyclical movements or conjectures as distinct' from the rudimentary functions of law, order, external defence or serving the monarch's pleasure of the seventeenth century'.


Taxation is one of the most important weapons by which the State can mitigate the two objectionable aspects of unrestricted private property: first, the inequalities of wealth, and secondly, the power to use property for private profit, and without regard to community purpose. In popular consciousness the first aim still predominates. By graded taxation and surtax on high incomes, gross inequalities of wealth are evened out more easily than by the equalisation of incomes or the abolition of private property. But the second aspect of taxation policy is becoming increasingly more important. On the one hand, taxation is a cheap means by which the State finances its costly social service scheme. Under the British National Health Service Act, 1946, medical services are free for all. The cost of medical services is no longer met by millions of contributions of varying magnitude from private pockets, but out of public revenue. This means that income and property taxes largely pay for the medical services of the poorer classes. To the extent that the State contributes to the cost of national insurance (National Insurance Act, 1946) the same applies." (Law in a Changing Society by W. Friedmann at page 85).
 My learned brother is also of the view that the taxation statutes are intended not only to collect revenue for the State but also for bringing about social justice and to enable the State to implement social welfare schemes undertaken by it.


68. Directive principles--Fundamentality, Enforceability and Judicial process.--This device of taxation policy in raising revenues both for the extended and expanded functions of the modern welfare State as well as for securing the redistribution of wealth, was utilised by the founding-fathers of the Constitution through making provision for the enactment of taxation laws by formulating the same as one of the Directive Principles of State Policy, as is manifest from Article 39 of the Constitution, particularly from Clauses (b) and (c) thereof, registering thus the shift of emphasis in the conception of State from what it was--"an instrument of power"--to what it has come to be "an agency of service" and further emphasising the factum of the movement in the society away from individualism towards collectivism.
 69. Part IV deals with Directive Principles of State Policy. The framers of the Constitution visualised a welfare State. The State, including Parliament, shall have to strive to promote the welfare of the people by securing and protecting, as effectively as it may, a social order in which justice, social, economic and political, shall have to inform all the institutions of the national life (Article 38).
 70. The responsibility for the ushering in of such a welfare State is committed to the care of Parliament. Parliament is required to accomplish that objective through the process of law. While making law, Parliament is required to apply the principles laid down in Part IV. Those principles are declared to be fundamental in the governance of the country though the provisions containing those principles in that Part are rendered unenforceable by any court (Article 37).


71. Certain principles of policy comprehending tax policy as well, to enumerate only a few, to be followed by the State are then mentioned in Article 39, as per which the State shall have to, "in particular, direct its policy towards securing that the ownership and control of the material resources of the community are so distributed as best to subserve the common good and that the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment".
 72. Note the constitutional mandate in Article 37 :
 "It shall be the duty of the State to apply these principles in making laws", principles declared to be fundamental in the governance of the country.
 The process of the governance of this country as per Article 37 of the Constitution is to be carried on by law-making instrumentalities by applying the Directive Principles of State Policy as laid down in Part IV, while making laws and by law applying and enforcing instrumentalities, by interpreting and construing such laws embodying such principles. There is a duty cast on the courts to interpret the Constitution and the laws to further the Directive Principles. While interpreting the laws, the courts shall have to make a functional and pragmatic approach to the problems in terms of utility and social consequences. That is the sociological approach. It is only through this approach, that the aspirations of the people, enshrined in the Preamble and embodied in Part IV of the Constitution, can be realised.


73. It is a mistake to suppose that the Directive Principles in Part IV are subordinate to the rights conferred by Part III because of articles like 32 and 226 providing for the enforceability of rights and of Article 37 providing for the unenforceability of provisions contained in Part IV. In the first place, there is nothing in common between rights and principles to be compared and contrasted. In the second place, the distinction between the provisions contained in Part IV rendered unenforceable by any court and the principles laid down therein with a constitutional declaration that they are fundamental in the governance of the country with a duty cast upon Parliament to apply those principles in making laws is too vital and too fundamental to be lost sight of.
 74. The provisions contained in Part IV are as much unenforceable by any court, as any other provision contained in any other part of the Constitution, say like those contained in Part XI, in the sense that they cannot be enforced. At best it is only a neutral circumstance. But that is not to say that the principles contained in law made by Parliament are unenforceable. There is no warrant to project the inhibition of unenforceability of provisions into the principles contained in laws made by Parliament.
 75. Directive Principles, the founding-fathers of the Constitution declared through Article 37 in Part IV as fundamental, but no such constitutional reckoning is accorded through any of the articles contained in the Constitution to the rights conferred by Part III. These rights, as a matter of fact, are referred to even in Articles 32 and 226 not as fundamental rights but merely as rights conferred by Part III. The rights are also not absolute. The principles in Part IV, therefore, are fundamental but not the rights in Part III. The fundamentality of the principles shall have to be maintained by courts through interpretative process.


76. That is the nature, subject-matter, object and policy of the Income-tax Act, 1961. That takes us to the next aspect of the matter as regards the nature of judicial approach towards this legislation.
 II.    COMMON LAW TRADITION OF JUDICIAL APPROACH  TOWARDS MODERN LEGISLATION :


The emphasis of the common law was on freedom of property, freedom of contract and freedom of the person. Interference with these freedoms was not to be countenanced.


77. The common law antedates Parliament and the legislative process. It did not and could not by its own process of development meet all the challenges of changing society. The remedy had to be found in the legislature which evolves the legislative process passing into law its own statutes. Certain rules of common law and equity we find in their statutorised form in England in Acts like the Bills of Exchange Act, 1882, Sale of Goods Act, 1893, and Law of Property Act, 1925. There are other statutes containing welfare legislation adding new dimensions to the law, creating rights and obligations where before there were none. The common law is treated as a private law system, concerned essentially with the person, the property, and the reputation of the individual. Its primary concern has been to defend private property and to distribute justice between individuals in disputes with each other. The business of the courts has thus been distributive justice, the interest of the State being to do justice between man and man. From that outlook and approach, there has arisen the common law's lack of concern with public law which is concerned with the rights and obligations of the State in the setting of municipal law. The welfare State is challenging the relevance, or at least the adequacy of the common law's concepts and classifications and rules and principles. (See Sir Leslie Scarman English Law--The New Dimension).
 "A body of law which will satisfy the demands of the society of today cannot be made of the ultra-individualist materials of eighteenth century jurisprudence and nineteenth century common law based thereon..." (The Spirit of Common Law by Roscoe Pound at page 190).


"Indeed fundamental changes have been taking place in our legal system almost unnoticed, and a shifting was in progress in our case law from the individualist justice of the nineteenth century which has passed so significantly by the name of legal justice, to the social justice of today even before the change in our legislative policy becomes so marked." (The Spirit of Common Law by Roscoe Pound at page 185).
 Lord Wright said in Rose v. Ford [1937] AC 826 (HL):
 "I venture respectfully to think that the view of the Court of Appeal illustrates a tendency common in construing an Act which changes the law, that is, to minimise or neutralise its operation by introducing notions taken from or inspired by the old law which the words of the Act were intended to abrogate and did abrogate."
 G.W. Paton in his A text book of Jurisprudence, third edition, at page 218, said:
 "When an individualist common law is modified by collectivist legislation, we sometimes see an unsympathetic construction. Thus, the real basis of housing legislation is a sacrifice of private rights of ownership in order to make possible a planned attack on the problem of the provision of suitable accommodation--hence an over-emphasis on the presumption against interference with the private rights of the landowner sometimes in the past lead to a defeat of the real purpose of an Act. Pennsylvania has attempted to overcome rigid interpretation by a Statutory Construction Act which abolishes the rule that statutes in derogation of the common law are to be strictly construed."
 "The common lawyer is at his worst when confronted with a legislative text ". (Roscoe Pound, Future of Common Law, page 18).
 Julius Stone, in his Legal System and Lawyers' Reasonings, said at page 348 thus:


"It is certainly clear that there has long been a canon of construction requiring, within vague limits, that statutes 'in derogation of' the common law shall be strictly construed. The effects of such canon today when legislation is a major (perhaps the major) source of law, must obviously be serious. It has been well said that English courts have often inhibited themselves from 'seizing the spirit of institutions and situations which are in substance the creatures of modern legislation'. These effects have been the subject of critical comment in connection with many major fields of legislation, for instance public health, the emancipation of married women, and the related matter of family life insurance policies, road traffic legislation, workmen's compensation legislation, industrial safety legislation, industrial reorganisation legislation, trade union legislation, criminal law, sale of goods legislation, housing legislation, town planning legislation, legislation on the adoption and custody of infants, and many others......"
 "The antithetical relationship between the common law and statute law, the law deposited and preserved in the hearts of the judges and law propounded by Parliament" is admirably brought out in a brilliant essay written as early as in the year 1908 and published in 21 Harvard Law Review at page 383 by Roscoe Pound under the heading" Common Law and Legislation" :
 "Four ways may be conceived of in which courts in such a legal system as ours might deal with a legislative innovation :
 (1) They might receive it fully into the body of the law as affording not only a rule to be applied but a principle from which to reason, and hold it, as a later and more direct expression of the general will, of superior authority to judge-made rules on the same general subject; and so reason from it by analogy in preference to them.


(2) They might receive it fully into the body of the law to be reasoned from it by analogy the same as any other rule of law, regarding it, however, as of equal or co-ordinate authority in this respect with judge-made rules upon the same general subject.
 (3) They might refuse to receive it fully into the body of the law and give effect to it directly only ; refusing to reason from it by analogy but giving it, nevertheless, a liberal interpretation to cover the whole field it was intended to cover.
 (4) They might not only refuse to reason from it by analogy and apply it directly only, but also give to it a strict and narrow interpretation, holding it down rigidly to those cases which it covers expressly.
 The fourth hypothesis represents the orthodox common law attitude towards legislative innovations. Probably the third hypothesis, however, represents more nearly the attitude towards which we are tending. The second and first hypothesis doubtless appeal to the common law lawyer as absurd. He can hardly conceive that a rule of statutory origin may be treated as a permanent part of the general body of the law. But it is submitted that the course of legal development upon which we have entered already must lead us to adopt the method of the second and eventually the method of the first hypothesis."
 According to Morris Cohen, "the meaning of a statute consists in the system of social consequences to which it leads or the solutions to all the possible social questions that can arise under it. In essence, then, statutory interpretation involves a choice between uncertainties, and sociological jurisprudence suggests that the choice should be made in the light of the social consequences of decision, rather than in terms of judicial like or dislike of the particular statute or statutes generally."


Roscoe Pound finds no justification whatever for the maxim that statutes in derogation of the common law are to be strictly construed, and says that the rule has survived because of judicial jealousy of the reform movement. The judge should not substitute his will for that of the legislature, said Hand, even though he might have more wisdom, because statutes embody the will of the elected representative of the people. Sociological jurisprudence insists, as a matter of value, that the social advantage of the rule is its major test, since the welfare of society is the general aim of the law. (From Society and the Law).
 78. The joint report of the two Law Commissions, i.e., Law Commission and Scottish Law Commission Report on the Interpretation of Statutes of 1969 says that "the rule in Heydon's case [1584] 3 Co Rep 7a, while not without merits, is somewhat outdated, because it assumes that statute is subsidiary or supplemental to the common law, whereas in modern conditions many statutes mark a fresh point of departure rather than a mere addition to, and qualification of the principles of common law." (From Introduction to Jurisprudence by Lord Lloyd of Hampstead, third edition, at page 741).
 79. One of the rules deduced by Sri L. Scarman from the speech of Lord Herschell in Vagliano v. Bank of England [1891] AC 107, 145 (HL) is " The law is to be deduced from an examination of the language of the statute. It is improper to try to make the language comply with the old law."


80. Doctrine of mens rea: One of the cardinal principles of English criminal law is expressed in the maxim actus non facit reum nisi mens sit rea, i.e., that "a person cannot be convicted and punished in a proceeding of a criminal nature unless it can be shewn that he had a guilty mind" [Chisholm v. Doulton [1889] 22 QBD 736, 739 (QB)].
 "At common law, mens rea was an essential element of every crime and there would seem to be no case in which Parliament in giving statutory form to an old common law crime has dispensed with the need for mens rea. Nevertheless there is a long line of authorities which hold that Parliament has intended in one particular field or another to penalise persons, whether or not it can be said that they had mens rea for the particular offence. Offences of this kind are known as offences of strict or absolute liability, and in such cases it has been held that the belief, intention or state of mind of the accused person is immaterial and irrelevant if he has in fact done the actus reus. which constitutes the offence......
 The reason for the creation of offences of strict liability is an obvious one. Where mens rea is constitutent of an offence, the burden of proving it is upon the prosecution ; and while the proof of the actus reus is generally effected by merely calling witness to the facts, the burden of proving mens rea is often a difficult and onerous one." (From Harris's Criminal Law at pages 40 & 41).
 The maxim actus non facit reum nisi mens sit rea is not of general application to modern statutes, though it is a maxim generally applicable to offences at common law and possibly also to offences under the earlier statutes which are to be treated on the same basis as offences under the common law.


81. Wills J. in R. v. Tolson [1889] 23 QBD 168 (QB) suggested at pages 172 to 177 that "an element in determining whether or not mens rea is required is the nature and extent of the penalty attached to the offence, and that it will normally be required in construing a statute constituting an offence entailing severe and degrading punishment."
 82. W.T.S. Stallybrass in his article The Eclipse of Mens Rea in (1936) The Law Quarterly Review at page 66 referring to the maxim actus non facit reum nisi mens sit rea held the view that "In the case of modern statutory offences the maxim has no general application and the statutes are to be regarded as themselves prescribing the mental element which is a prerequisite to a conviction". The learned author suggests that much of the confusion can be avoided if reference to mens rea in modern statutory offences is avoided.
83. In Hobbs v. Winchester Corporation [1910] 2 KB 471, 483 (CA) Kennedy L.J. said that : "There is a clear balance of authority that in construing a modern statute this presumption as to mens rea does not exist."
 84. Donovan J. in R. v. St. Margaret's Trust Ltd. [1958] 1 WLR 522, 527 (C Cr App) said that " modern statutes create offences where knowledge on the part of an offender is not essential, and that accordingly there is no universal prior presumption of mens rea ".
 85. In Urn Chin Aik v. R. [1963] AC 160, 174 (PC) Lord Evershed said about the strict liability with respect to statutory functions thus :


"Where the subject-matter of the statute is the regulation for the public welfare of a particular activity--statutes regulating the sale of food and drink are to be found among the earliest examples--it can be and frequently has been inferred that the legislature intended that such activities should be carried out under conditions of strict liability."
 Among the exceptions to the rule underlying the doctrine of mens rea, revenue legislation is one, as observed by Wright J. in Sherras v. De Rutzen [1895] 1 QB 918. 921, 922 (QB) :


"...the principal classes of exceptions may perhaps be reduced to three. One is a class of acts which, in the language of Lush J. in Davies v. Harvey [1874] LR 9 QBD 433 (QB) are not criminal in any real sense, but are acts which in the public interest are prohibited under a penalty. Several such instances are to be found in the decisions on the Revenue Statutes, e.g., Attorney-General v. Lockwood [1842] 9 M&W 378, where the innocent possession of liquorice by a beer retailer was held an offence. So under the Adulteration Acts, Reg v. Woodrow 15 M & W 404 as to innocent possession of adulterated tobacco; Fitzpatrick v. Kelly [1873] LR 8 QBD 337 (QB) and Roberts v. Egerton [1874] LR 9 QBD 494 (QB) as to the sale of adulterated food. So under the Game Acts, as to the innocent possession of game by a carrier: Rex v. Marsh [1824] 2 B & C 717. So, as to the liability of a guardian of the poor, whose partner, unknown to him, supplied goods for the poor: Davies v. Harvey [1874] LR 9 QBD 433 (QB). To the same head may be referred Reg v. Bishop [1880] 5 QBD 259 (QB), where a person was held rightly convicted of receiving lunatics in an unlicensed house, although the jury found that he honestly and on reasonable grounds believed that they were not lunatics. Another class comprehends some, and perhaps all, public nuisances : Reg v. Stephens [1866] LR 1 QB 702 (QB) where the employer was held liable on indictment for a nuisance caused by workmen without his knowledge and contrary to his orders; and so in Rex


for a nuisance caused by workmen without his knowledge and contrary to his orders; and so in Rex v. Medley [1834] 6 C&P 292 and Barnes v. Akroyd [1872] LR 7 QB 474 (QB). Lastly, there may be cases in which, although the proceeding is criminal in form, it is really only a summary mode of enforcing a civil right: See per Williams and Willes JJ. in Morden v. Porter [1860] 7 CB (NS) 641 as to unintentional trespass in pursuit of game; Lee v. Simpson [1847] 3 CB 871 as to unconscious dramatic piracy; and Hargreaves v. Diddams [1875] LR 10 QB 582 (QB) as to a bona fide belief in a legally impossible right to fish."


The doctrine of mens rea may be the foundation of liability in criminal law but need not necessarily be under statutory law.
 86. Speaking about the offences of absolute liability, J.C. Smith in his article "The Guilty Mind in the Criminal Law" [I960] 76 Law Quarterly Review says at page 78 and at page 97, thus:
 "Not only are these offences a departure from the principle discussed above in that they do not require mens rea, but it is not even necessary to prove negligence, the usual criterion of liability in the civil law. A person may be convicted of one of these even though he was taking all reasonable care. All that the prosecution have to do is to prove that D (defendant) caused the actus reus by a voluntary act..."
 R.M. Jackson in his article "Absolute Prohibition in Statutory Offences" published in [1936] VI Cambridge Law Journal, at page 83, said :
 "In all common law crimes, other than common nuisance, it appears that some culpable mental element or mens rea is required. The mental element is 'culpable' in the sense that the actus is only criminal when it is coupled with a realization of the probable consequence of the act or omission. In statutory offences this rule does not hold good; the actus may be prohibited in such language that a person may be liable for doing an act whether or not he did, or could, have foreseen the consequences. Such offences create what is commonly called Absolute Liability ...... The statutory offences of absolute liability depend on the particular wording of the statutes by which they are created ; the elements of each offence must be ascertained by construing the statute."


"The conclusion to be drawn is that in statutory offences nothing more, and nothing less, is required than that the statute should be carefully read and the rules of construction properly applied in each case." (at page 92).
 Brett J. in R. v. Prince [1875] LR 2 CCR 154 at page 163 said that the doctrine of mens rea is not applicable to revenue statutes.
 87. A Division Bench of the Calcutta High Court in Legal Remembrancer v. Ambika Charan Dalai [1946] ILR 2 Cal 127 observed at page 129 regarding the applicability of mens rea doctrine of common law to India, as follows:
 "The maxim does undoubtedly embody a fundamental principle of English common law ; and the common law, modified and supplemented by statute, is still the law in England. But the English common law is not the criminal law in force in India. Every offence, of which the Indian courts take cognizance, is clearly denned by statute. The Indian legislature has embodied many of the principles of English common law modified to suit Indian conditions in the criminal law of India. But instead of enacting a general principle such as nemo est reus nisi mens sit rea, the Indian legislature has included in the definition of each offence a clear statement of the mental condition necessary to constitute the offence. If, in any case, the Indian legislature has omitted to prescribe a particular mental condition, the presumption is that the omission is intentional.


Where an Indian statute is ambiguous or its meaning obscure, it is proper to refer to the principles of English common law to resolve the ambiguity or to elucidate the meaning ; but where the statute is free from ambiguity and the meaning is clear, the courts are not justified, in my opinion, in importing words into the statute, or refusing to give effect to the clear meaning of the statute, or giving a forced or unnatural meaning to the words of the statute in order to make it conform with the principles of the common law."
 M.C. Setalvad in The Hamlyn Lectures on The Common Law in India, summed up very neatly the position as regards the applicability of the maxim actus non facit reum nisi mens sit rea to statutory offences in India thus at pages 139 to 141 :


"Unlike in England all offences in India, excepting contempts of the courts of record like the Supreme Court and the High Courts, are statutory. The offences defined in the Penal Code and also in various other statutes incorporate in the definition of the offence itself the guilty mind needed in order that the crime may be committed. Under the English common law mens rea may vary from crime to crime. So does it vary in the Indian statutory definitions of crime (page 139). What the Indian Code seems to have done is to incorporate into the common law crime the mens rea needed for that particular crime so that the guilty intention is generally to be gathered not from the common law but from the statute itself. This may be regarded as a modification of the common law worked into the Code of Macaulay and his colleagues to make it suit Indian conditions. By adopting this course they have also avoided the doubt and obscurity which has not infrequently arisen in regard to the mens rea required for certain common law crimes like homicide, assault and false imprisonment. It has been pointed out that the English system, in which changes in the law are made gradually by judicial decisions, has often created a situation in which old and new doctrines have been employed in the course of the same period, according as the judges are inclined one way or the other, giving rise to conflicting principles with puzzling results. Such uncertainty cannot exist in India as the necessary guilty mind is indicated in the statutory definition of the crime.


In a sense, therefore, it may be said that the maxim actus non facit reum nisi wens sit rea has, as a maxim, no application to offences under the code. By specifying the varying guilty intention for each offence the code has in effect built the maxim into each of its definitions and given it statutory effect. Where the code omits to indicate a particular guilty intent, the presumption, having regard to the general frame of the definitions, would be that the omission must be intentional (page 140). In such cases it would perhaps not be permissible to import the maxim in arriving at a conclusion whether the person charged with that particular offence has been guilty." (page 141).


What flows or follows from the foregoing discussion is that the Income-tax Act of 1961 is a self contained one. It contained within itself the provision for its enforcement. Chapter 21 deals with penalties imposable under Section 271. The Income-tax Officer or the Appellate Assistant Commissioner, in the course of any proceeding under the Act, if satisfied that any person has without reasonable cause failed to furnish the return of total income as required under Section 139(1) of the Act within the time stipulated therein, he may direct that such person shall pay penalty. Failure to furnish return within time is the occasion for the levy of penalty and the authorities concerned, if satisfied that the failure of the assessee is attributable to unreasonable cause, may levy the penalty. There is a procedure prescribed for the levy of penalty under Section 274. There are also further provisions contained in the same Chapter either to reduce or waive the amount of penalty imposable. That Chapter is self-contained as regards the occasion for the levy of penalty as well as with respect to the procedure for the imposition of the same with a remedy to have the said penalty reduced or waived. When the framers of the Act have defined all the ingredients of the penalty, there is absolutely no need to import into this something which is not there. The doctrine of mens rea is, therefore, not applicable to the situation contemplated under Section 271 of the Act. The infringement of the law cannot be considered to be a crime or an offence in the nature of a crime as to attract the applicability of the doctrine of mens rea.


88. The next Chapter XXII provides for offences and prosecutions. Even there, the ingredients of the offence have been defined statutorily. The punishment is indicated. They are rendered compoundable too. The person at whose instance and the court before whom proceedings shall have to be initiated were indicated therein. The contravention of provisions of the Act mentioned in various sections under that Chapter were rendered punishable with rigorous imprisonment ranging from six months to two years with further liability to fine also. Having regard to the definition of offence, as contained in the General Clauses Act, 1897, in the Indian Penal Code and the Code of Criminal Procedure the offences in Chapter XXII are offences under any other law as envisaged by Sub-section (2) of Section 5 of the Code of Criminal Procedure to be investigated, inquired into, tried and otherwise dealt with according to the provisions of law contained in the Income-tax Act. The contravention of the provisions of the Act were rendered punishable and the expression 'punishment' described in Section 53 of the Indian Penal Code takes within its ambit imprisonment and fine. The framers of the enactment utilised the machinery envisaged in the Code of Criminal Procedure subject to what is contained in the Income-tax Act for securing the implementation of the provisions of the Act through the sanctions recognised under the criminal law. The principles of common law applicable to common law crimes and offences are, therefore, to be taken to have been not applied as offences under the Act are clearly defined and, therefore, the extent to which the nature and ambit of the offence under the Act was defined, to that extent the applicability of the common law presumptions must be taken to have been excluded.


89. If the doctrine of mens rea is to be applied to the penalties imposable under Chapter XXI of the Income-tax Act, 1961, there will be cast a heavy burden upon the department to prove the mens rea and the importation of that doctrine. Under those circumstances, far from furthering the object of the Act, it would certainly defeat it and any such construction which has the effect of not effectuating the purpose of the Act should not be indulged in.
 To sum up : (1) The Income-tax Act, 1961, was enacted by Parliament, with a view to securing the implementation of the Directive Principles of State Policy, particularly those embodied in Clauses (b) and (c) of Article 39 of the Constitution, providing among other things, for the redistribution of wealth, and providing further for the raising of revenue for the extended and expanded functions of the welfare State visualised by the Constitution.
 (2) Unlike in the United Kingdom, we have a written Constitution. Unlike in the United States of America, we have the Directive Principles of State Policy Chapter in our Constitution. Unlike in both those countries, we have "social justice" proclaimed in the preamble and transformed into Directive Principles of State Policy. The process of governance of this country is to be carried on by law-making instrumentalities by applying the Directive Principles of State Policy, while making laws and by law applying and enforcing instrumentalities by interpreting and construing such laws enforcing those principles embodied therein.


(3) Individualism and collectivism: The key note of the nineteenth century thought was individualism. The emphasis of common law was on freedom of property, freedom of contract and freedom of the person. Interference with those freedoms was not to be countenanced. That concept was carried into the American Constitution. This reflects the philosophy underlying Part III of our Constitution. With the changes in the purpose and function of Government from its traditional role which is negative to the modern role which is positive, laissez faire died with the dawn of the 20th century and today the State has to concern itself with the welfare of its members. This reflects the philosophy underlying Part IV of the Constitution.
 (4) Legislative innovation and judicial approach: The judiciary shall have to receive the legislative innovations into the body of the law as affording not only a rule to be applied but a principle from which to reason and hold it as a later and more direct expression of the general will of superior authority to judge made rules on the same general subject and so reasons from it by analogy in preference to them.
 (5) It is archaic and anachronistic to apply the principles of common law with its individualist outlook to the interpretation or construction of modern welfare legislation with its collectivist outlook. Such an approach far from furthering the object of legislation frustrates the same. The welfare State is challenging the relevance or at least the adequacy of the common law concepts and classifications and principles. The meaning of a statute consists in the system of social consequences to which it leads, and sociological jurisprudence insists as a matter of value that the social advantage of the rule is its major test since the welfare of society is the general aim of the law.


(6) The Income-tax Act, 1961, is sufficiently self-sufficient as not to need any supplementing or supplanting from the principles of common law for its interpretation, construction or application. It provides both for the imposition of penalties by Chapter XXI and infliction of punishment by way of imprisonment and fine by Chapter XXII. The doctrine of "mens rea" is of common law origin developed by judge-made law. It has no place in the legislator's law where offences are defined with sufficient accuracy. There is involved no element of infliction of punishment by way of imprisonment or fine or loss of liberty in the imposition of penalty under Chapter XXI, even to answer the description of "offence" as defined under the General Clauses Act, 1897, or under the Indian Penal Code or the Code of Criminal Procedure.
 (7) The presence of Chapter XXII dealing with "Offences and prosecutions" immediately after Chapter XXI dealing with "Penalties imposable", indubitably establishes the intention of the framers of the Act that "penalties" are not intended to be dealt with as offences to which provisions of the Criminal Procedure Code can be applied.
 (8) Even otherwise, there is no universal prior presumption of mens rea. Every statute is to be considered according to its own terms. The law of the land does not allow creation of offences through judicial construction or interpretation. Reading the requirement of mens rea into Section 271 either as an ingredient of the concept of offence or as a presumption of law, results in imposing heavy and impossible burden on the revenue to, be discharged resulting in the practical nullification of this taxing statute which has for its object the implementation of Directive Principles of State Policy as embodied in Article 39(b) and (c). The status of fundamentality secured constitutionally to the Directive Principles could be impaired if not imperilled if such a construction of Section 271 is permitted.


There is absolutely no justification, judged by whatever canon of construction it be, to read into Section 271 qualifying the failure to furnish a return with expressions like "contumacious", "dishonest", "in deliberate defiance of law", etc.,


90. For the aforesaid reasons, I hold, agreeing with my learned brother, that there is no occasion to introduce the doctrine of mens rea into Section 271(1) of the Income-tax Act, 1961, and that these appeals should be allowed.


Commissioner Of Income-Tax, ... vs Superintending Engineer, Upper ... on 2 March, 1984

JUDGMENT Anjaneyulu, J.
 1. At the instance of the Commissioner of Income-tax these reference were made by the Income-tax Appellate Tribunal under s. 256(1) of the I.T. Act, 1961. The question referred in all the three cases is identical and it will be convenient to deal with the same in this common judgment.
 2.The Andhra Pradesh State Electricity Board (for short, "the Electricity Board"), the respondent in these reference made certain payments to non-residents against the purchase of machinery and equipment and also against the work executed by the non-residents in India of erecting and commissioning the machinery and equipment. The question arose whether the Electricity Board was under an obligation to deduct tax at source from these payments under s. 195 of the I.T. Act, 1961 (for short "the Act"). The payments were made by the Electricity Board without deduction of tax at source. The ITO held that the Electricity Board was under an obligation to deduct tax at source under s. 195. Owing to the failure of the Electricity Board to deduct such tax, the Electricity Board was deemed to be an assessee in default in respect of the tax deductible at source under s. 195. Consequently, the ITO passed orders determining the tax, which according to him, was deductible at source under s. 195 and required the Electricity Board to pay such amounts. These facts briefly constitute the origin for the subsequent appeals to the AAC and the Income-tax Appellate Tribunal and the present reference before this court.


3. R.C.No. 203 of 1978 relates to the payment made by the Electricity Board to M/s. Charmilles Engineering Works Ltd., Geneva, Switzerland. Two separate agreements were entered into with the above non-resident. One was for the purchase of Nos. 95,000 BHP Francis Turbines. Another was for the purchase of 2 Nos. Butterfly Valves. This equipment was for the Upper Sileru Hydro-Electric Scheme, Visakhapatnam District. There were also two more contracts with the same non-resident for the assembly erection and testing and commissioning of the above equipment at Sileru. It appears under the contracts for erection and commissioning above referred to, the Electricity Board paid the following sums to the nonresident company :
 Financial Year                               Amount paid
                                                Rs.
1966-67                                      3,65,237
1967-68                                      8,01,079
1968-69                                      1,63,602
1969-70                                        38,832
1970-71                                        51,001
1971-72                                         7,700
1972-73                                        45,000
                                           --------------
                                            14,72,451
                                           --------------


4. On the ground that, under these contracts the amounts were payable to the non-resident free of income-tax the ITO grossed up the net payments. He seems to have arrived at the corresponding gross amounts which, after payment of tax by the non-resident under the provisions of the Act, would yield the net amount paid and treated the difference between the gross amount and the net amount paid as tax deductible at source under s. 195. The difference between the gross amount and the net amount is held to be the tax deductible at source as apparently the Finance Act for the relevant assessment year authorises such deduction. For instance, in the financial year 1966-67, the net amount paid was Rs. 3,65,237. The ITO arrived at the corresponding gross amount at Rs. 18,25,805. He observed that under the Finance Act, 1966, the tax deductible at source under s. 195 was 30% income-tax and 3% surcharge. Even so, the tax deductible on the gross amount of Rs. 18,25,805 was not determined at the aggregate amount of 33% prescribed by the Finance Act, 1966, but was determined at the difference between the gross amount of Rs. 18,25,805 less the net amount paid viz., Rs. 3,65,237. By this process, the ITO held that the Electricity Board was under an obligation to deduct tax of Rs. 14,60,568. For the failure to deduct and pay the tax to the Central Government the ITO had also charged interest under s. 201(1A) from the date on which such tax was deductible. For instance the corresponding amount of interest payable on the tax of Rs. 14,60,568 held to be deductible under s. 195 is Rs. 12,77,996. The result has been that in respect of a net


is Rs. 12,77,996. The result has been that in respect of a net amount of Rs. 3,65,237 paid, the ITO determined the tax deductible at source together with interest thereon at the aggregate figure of Rs. 27,38,564. A very curious result indeed. The ITO determined the tax deductible at source as well as the interest for the subsequent financial years 1967-68 to 1972-73 (both inclusive) in the same manner. It is not necessary to set out the details. It is sufficient to state that in respect of net payments aggregating to Rs. 14,72,451 made by the Electricity Board during the financial years 1967-68 to 1972-73 (both inclusive), the ITO determined the tax deductible at source under s. 195 at Rs. 58,32,260 and the corresponding interest thereon under s. 201(1A) at Rs. 46,30,034 aggregating to Rs. 1,04,62,294.


5. We shall now briefly refer to the facts in R.C. No. 205 of 1978 as the orders of the ITO in R.C. Nos. 203 and 205 of 1978 follow the same pattern. The Electricity Board entered into an agreement with Oerliken Engineering Co., Zurich, Switzerland for the purchase of 2 Nos. 60 MW generators and Indoor Switchgear for the Sileru Hydro Electric Scheme. Another contract was also entered into with the non-resident for the assembly, erection and testing and commissioning of the above equipment at Sileru. It appears that under the erection contract, the Electricity Board paid the following sums to the non-resident company :
 Financial year                           Amount paid
              Rs.
1966-67                                    1,95,877
1967-68                                   13,70,529
1968-69                                    1,34,378
                                            ---------------
                               Total      17,00,784
                                            ---------------


6. On the same basis followed in respect of payments made to Charmilles Engineering Works Ltd. in R.C. No. 203 of 1978, the ITO held that the Electricity Board was under an obligation to deduct tax from the payments made to Oerliken Engineering Company. On the ground that the payments in this case were also made by the Electricity Board free of income-tax the ITO grossed up the net payments to arrive at the corresponding gross amounts. He accordingly arrived at the corresponding gross payments which aggregated to Rs. 89,02,338. Deducting therefrom, the aggregate amount of net payments of Rs. 17,00,784 made, the ITO arrived at the tax deductible at source under s. 195 at Rs. 72,01,554. He also determined the interest payable under s. 201(1A) at Rs. 58,55,747. The tax deductible and the interest payable thus amounted in all to Rs. 1,30,57,301. The ITO required the Electricity Board to pay the above amount pursuant to his order dated September 24, 1975 under s. 201. It is only necessary to state that the ITO followed the same pattern for determination of tax deductible at source in R.C. Nos. 203 and 205 of 1978.


7. R.C. No. 204 of 1978 relates to payments made by the Electricity Board to M/s. Sacheron Works Ltd., Geneva, Switzweland. It appears, a contract was entered into with the above said non-resident for the purchase and erection of 7 Nos. power transformers for the Sileru Hydro Electric Scheme. Under the contract for the purchase of power transformers, the Electricity Board paid to the non-resident in the financial year 1966-67 a sum of Rs. 27,57,736. Under the contract for erection charges the Electricity Board paid to the non-resident the amounts of Rs. 1,19.279 Rs. 48,591 and Rs. 474, respectively, in the financial years 1967-68 1968-69 and 1969-70. The ITO held that in respect of payments made towards the price of transformers, net profit to the non-resident could be estimated at 5% of the sale price; he also estimated the net profit in respect of payments made to the non-resident on account of erection charges at 25%. The ITO accordingly determined the income forming part of the sums paid to the non-resident as above mentioned. The ITO determined the tax deductible at source under s. 195 at Rs. 2,99,111 in respect of the above payments. The ITO's order does not show whether the net payments were grossed up as was done in R.C. Nos. 203 and 205 of 1978; it does not also show where the tax deductible at source was determined at Rs. 2,99,111 with reference to such gross figure. It may be mentioned that the order under s. 201 in respect of the payments made to this non-resident was passed by the ITO on May 10, 1976.


8. Against the ITO's orders dated September 22, 1975 and September 24, 1975, respectively in R.C. Nos. 203 and 205 of 1978, the assessee filed appeals before the AAC of Income-tax and urged that the ITO's orders were illegal. A number of contentions were raised before the AAC challenging the correctness of the orders passed by the ITO. It is not necessary to refer to all these contentions. It may, however be mentioned that the AAC rejected the various contentions raised by the assessee challenging the correctness of the orders passed, but cancelled the orders accepting one basic contention. That contention was to the effect that the provisions of S. 195 of the Act are applicable in cases where the sums paid were "pure income profits", that is to say, the sums paid represented wholly income. It was urged that the provisions of s. 195 of not come into operation in a case where the non-resident was paid under contracts sums of money, a part of which only may represent income chargeable under the I.T. Act. The above contention appealed to the AAC. Accepting the above contention, the AAC held that the words "Any other sum........... chargeable under the provisions of this Act" occurring in s. 195 of the Act do not contemplate inclusion of trading receipts in their ambit. The AAC was of the view that in terms section 195 applies only to cases where the sums paid are "pure income profits". Holding the above view the AAC cancelled the orders passed by the ITO, under s. 201 of the Act, which are the subject-matter of consideration in R.C. Nos. 203 and 205 of 1978. The ITO did not accept the decision of the AAC cancelling the above-mentioned orders on the above ground and filed appeals before the Income-tax Appellate Tribunal.


9. After the AAC cancelled the orders passed by the ITO dated September 22, 1975, and September 24, 1975 in R.C. Nos. 203 and 205 of 1978 and while the appeals filed by the ITO against the cancellation by the AAC of such orders were pending before the Income-tax Appellate Tribunal the ITO passed the third order date May 10, 1976, under s. 201 in R.C. No. 204 of 1978. After passing this order the ITO seems to have pressed for the payment of tax determined whereupon the Electricity Board filed a writ petition in this court for say of the tax. While disposing of the writ petition filed by the Electricity Board, this court directed the AAC to dispose of the appeals within two months from the date of the order of this court and, consequently, the AAC disposed of the appeal against the ITO's order dated May 10, 1976, in R.C. No. 204 of 1978, by his order daed August 16,1976. Although the ITO followed a different pattern for determining the tax deductible at source, the AAC proceeded on the basis that his earler decion cancelling the orders of the dated September 22, 1975, and September 24, 1975, in R.C. Nos. 203 and 205 of 1978, holds good even in respect ofs the order dated May 10,1976, in R.C. No. 204 of 1978, and accordingly cancelled the order of the ITO. The ITO once again filed an appeal to the Income-tax Appellate Tribunal against the order of the AAC.


The Income-tax Appellate Tribunal disposed of the three appeals filed by the ITO by its order dated September 30, 1977. Before the Tribunal, the assessee supported the order of the AAC not only on the ground, which appealed to the AAC, but also on the carious grounds which were negatived by the AAC. The Tribunal negatived the various contentions urged by the assessee, but upheld the order of the AAC on the same ground on which the AAC cancelled the three orders. Thus, the Income-tax Appellate Tribunal affirmed the order of the AAC concelling the three orders of the ITO on the ground that the provisions of s. 195 of the Act are not applicable to payment of sums to a non-resident, which are not "pure income profits". The Tribunal held that there was no sanction to deduct tax from out of gross sums of money, a moiety of which alone represents the income chargeable under the I.T. Act. In the above view, the Tribunal dismissed all the three appeals filed by the ITO against the order of the AAC. Thereupon the Commissioner of Income-tax filed reference applications under s. 256(1) of the Act requiring the Tribunal to refer the cases to this court for its opinion. That is how the Tribunal made the three references under consideration. it may perhaps be relevant to refer at this stage to the question of law referred in each reference for the opinion of this court under s. 256(1) of the Act.
 10. R.C. No. 203 of 1978 :
 "Whether, on the facts and in the circumstances of the case, the Superintending Engineer Civil, Circle, Upper Sileru, is liable to deduct income-tax under section 195 of the Income-tax Act, 1961 on the payments made to the non-resident company ?"


11. R.C. No. 204 of 1978 :
 "Whether, on the facts and in the circumstances of the case, the Superintending Engineer, Civil Services Circle, Upper Sileru is liable to deduct income-tax under section 195 of the Income-tax Act, 1961 on the payments made to the non-resident company for the assessment years 1966-67, 1967-68 and 1968-69 ?"
 12. R.C. No. 205 of 1978 :
 "Whether, on the facts and in the circumstances of the case the Superintending Engineer, Civil Circle Upper Sileru, is liable to deduct income-tax under section 195 of the Income-tax Act, 1961 on the payments made to the non-resident company for the assessment years 1966-67, 1967-68, 1968-69 and 1969-70 ?"


13. Learned standing counsel for the Revenue Sri M. Suryanarayana Murthy, contended that the Tribunal was in error in holding that the provisions of s. 195 of the I.T. Act were not applicable to cases where sums of money were paid to non-residents, the entirety of which does not represent the income chargeable under the I.T. Act. The learned standing counsel points out that the language of s. 195 does not lend support to the Tribunal's view that s. 195, either expressly or by necessary implication referred only to sums which are "purely income profits". According to the learned standing counsel, s. 195 is applicable even in respect of sums paid during the course of trading operations to a non-resident. It is stated that s. 195 does not contain any limitations on its application. Learned counsel also referred to s. 195(2) of the Act which enables the person responsible for paying the sums to the ITO to determine the appropriate proportion of the sum chargeable to income-tax in respect of which only income-tax at source is deductible clearly supports the view that s. 195 is applicable to sums paid in the course of trading operations subjects only to one condition that where the entire sum paid is not income chargeable under the I.T. Act, it is open to the assessee to require the ITO to determine the relevant proportion of the sum paid which is not income chargeable under the I.T. Act, it is open to the assessee to require the ITO to determine the relevant proportion of the sum paid which is chargeable under the Act and deduct tax only in respect of that portion. Learned standing counsel urged that the Electricity Board failed to make an application under s. 195(2) to the ITO to determine the proportion of the sum chargeable in respect of sums paid to M/s. Charmilles Engineering Works Ltd., in R.C. No. 203 of


paid to M/s. Charmilles Engineering Works Ltd., in R.C. No. 203 of 1978 and M/s. Oerliken Engineering Co, in R.C. No. 205 of 1978. In the absence of any application from the Electricity Board the learned standing counsel contends the ITO had no option but to enforce deduction of tax at source with reference to the entirety of the sums paid. According to the learned standing counsel, the ITO cannot exercise power to determine the relevant proportion of the sum chargeable unless an application is made by the person responsible for making the payment. If the person responsible for making the payment does not file an application under s. 195(2), the ITO can enforce deduction of tax at source in respect of the entire sum paid to the non-resident and that is what happened in respect of the payments made by the Electricity Board to the above-referred two companies. The learned standing counsel, therefore supported the orders passed by the ITO in respect of the payments made to the above-mentioned two concerns. The learned standing counsel also pointed out that in respect of payments made by the Electricity Board to M/s. Sacheron Works Ltd., in R.C. No 204 of 1978, the Electricity Board made an application under s. 195(2) of the Act and consequently in exercise of his power the ITO determined only 5% of the price paid for the transformers and 25% of the sum paid in respect of the erection contract as the sum chargeable under the Act. The ITO enforced deduction of tax at source only in respect of that portion of the sum determinated by him as chargeable under the Act for purposes of deducting tax at source under s. 195. The learned standing counsel complained that the AAC as well as the Income-tax Appellate Tribunal failed to notice that, in so far as it concerns the payments made to M/s. Sacheron Works


notice that, in so far as it concerns the payments made to M/s. Sacheron Works Ltd., in R.C. 204 of 1978, the ITO followed, a pattern of enforcing tax deduction at source only with reference to that moiety of the sum chargeable under the Act. the learned standing counsel contended that the AAC as well as the Tribunal failed to notice the clear difference in the pattern followed by the ITO in respect of payments made to M/s. Sacheron Works Ltd. and proceeded on a mistaken view, that in respect of payments made to M/s. Sacheron Work Ltd. also, the ITO enforce tax deduction at source in respect of the entirety of the sums paid to the non-resident as was done in the case of payments made to M/s. Charmiles Engineering Works Ltd., in R.C. No. 203 of 1978 and to M/s. Oerliken Engineering Company in R.C. No. 205 of 1978. The learned standing counsel pointed out that there can be no grievance on the part of the assessee at least in so far as the ITO's order in respect of payment made to M/s. Sacheron Works Ltd., in R.C. No. 204 of 1978 is concerned.


14. Learned counsel for the Revenue relied on the decisions of the Calcutta High Court in Anglo-Indian Jute Mills Co. Ltd. v. S. K. Dutt [1956] 30 ITR 525, P. C. Ray and Co. (India) Private Ltd. v. A. C. Mukherjee, ITO [1959] 36 ITR 365. He also relied on the decision of the Bombay High Court in CIT v. Bhaidas Cursondas & Co. [1963] 50 ITR 429, and on the decision of the Allahabad High Court in Raza Textiles Ltd. v. ITO [1962] 46 ITR 466. Reliance was placed on these decisions by the learned standiang counsel in support of his proposition that : (a) provisions of s. 195 of the I.T. Act are applicable even in respect of sums paid to a non-resident during the course of trading operation, and (b) the sums paid to the non-resident need not represent wholly pure income profits and only a part of such sums paid may represent income chargeable under the Act.


15. Sri M. Chandrasekhara Rao, learned standing counsel for the Electricity Board, reiterated the submissions made before the lower authorities. It is urged that taking the entire scheme of the Act into account, the provisions of s. 195 apply only to cases where the sums paid to cases where the sums paid to a non-resident represented pure income profits, that is to say, where the entirely of the sum paid represented income. Accordings to the learned counsel s. 195 can have no application in respect of sums paid during the normal course of trading operations such as payment of purchases price of materials. Learned counsel urged that it is impossible to predicate whether the sum paid consisted of even a small moiety chargeable under the Act because a trading tansaction does not always result in income or profit. Learned counsel, therefore, urged that because of the inherent difficulty in determining whether any particular sum paid during the course of trading operations to the non-resident consisted of income chargeable under the I.T. Act the provisions of s. 195 render themselves inapplicable to cases where sums are paid to the non-resident in the regular course of trading operations. According to the learned counsel, s. 195(2) is not a pointer to support that the sum paid to the non-resident need not wholly represent pure income profit. It is urged that the power to determine the proportion of income chargeable under the Act arises only where the sum paid to the non-resident bears income character and is not wholly chargeable under the provisions of the Act, but only a portion of which is chargeable. In such cases, it will be open to the ITO to determine the proportion of the sum chargeable. Learned counsel submits that, in order to apply s. 195(2) for purposes of apportionment, the sum paid to the non-resident must basically represent pure income profit and not a trading receipt, a part of which only may be income


must basically represent pure income profit and not a trading receipt, a part of which only may be income chargeable. The learned counsel accourdingly suported the orders of the Income-tax Appellate Tribunal cancelling the order passed by the ITO in all these references. Without prejudice to the basic contention that s. 195 of the Act is not at all applicable in respect in respect of trading receipts learned counsel further submitted that in any event the ITO was under an obligation to ascertain the portion of income chargeable under the Act forming part of the trading receipts and enforce deduction of tax at source under s. 195 only in respect of such portion chargeable to income-tax. The action of the ITO in R.C. Nos. 203 and 205 of 1978, the learned counsel contended, in enforcing deduction of tax at source on the entirety of the trading receipts is unsupportable.


16. We have perused the records and considered the submission of the learned counsel on either side. Two fundamental question arise for consideration and they are : (a) whether the provisions of s. 195 of the Act are applicable to cases where the sum paid to the non-resident does not wholly represent income : and (b) if s. 195 is applicable to such cases, whether the ITO could enforce deduction of tax at source on the gross amount of trading receipts or only in respect of that portion of the trading receipts which may be chargeable as income under the Act. The question referred to us deals with only the first aspect mentioned above. The second aspect is an integral part of the first aspect and it is necessary to reframe the question in order to bring the real controversy between the parties, which we shall do, before furnishing the require answers. We shall examine both the aspects as they are the subject-matter of consideration by all the authorities below and the counsel for both sides addressed elaborate arguments on these two aspects.


17. Part B of Chapter XVII of the Act enumerates the provisions relating to deductions of tax at source. Section 192 deals with the obligation of the person responsible for paying income chargeable under the head "Salaries" to deduct tax from the salary. Section 193 deals with the obligation to deduct tax of the person responsible for paying income chargeable under the head "Interest on securities". Section 194 deals with the obligation of the principal officer of a company to deduct tax at source from "dividends" paid. Section 194A deals with the obligation to deduct tax of any person responsible for paying to any person "interest". Section 194B deals with the obligation to deduct tax of the person responsible for paying to any person income by way of "winnings from any lottery or crossword puzzles". There is no doubt that the salary, interest on securities, dividend, interest other than interest on securities and winnings from any lottery or crossword puzzles above referred to constitute wholly income for purposes of the Act. It is relevant to examine in this context the provisions contained in s. 194C of the Act. Under these provisions any person responsible for paying any sum to any resident contractor and sub-contractor is under an obligation to deduct tax at 2% of the sums so payable to the contractor or sub-contractors. It will not at once be seen that obligation to deduct tax under s. 194C is in respect of the sums paid to the contractors and sub-contractors which decided on not wholly represent income. The rate at which the tax has to be deducted from out of such sums paid to the contractors and sub-contractors is mentioned in s. 194C itself. We are referring to this provision for the purpose of pointing out that the scheme of tax deduction at source applies not only to sums like salaries, dividends, interest on securities interest other than interest on securities and winnings from any lottery or crossword puzzles, which wholly represent income but also


other than interest on securities and winnings from any lottery or crossword puzzles, which wholly represent income but also gross sums paid to persons. Section 194C bring in this clear intention of the Legislature to enforce tax deduction at source even in respect of gross sums, the whole of which do not represent income chargeable under the Act. Then again, the provisions of s. 194D lay an obligation to deduct tax on the person responsible for paying "insurance commission", the whole of which does not represent income. It must be borne in mind that for the purpose of earning insurance commission, a person may incur expenditure and therefore the entire gross commission may not be chargeable. Even so the provisions of s. 194D oblige the person responsible for paying the insurance commission to deduct tax at source from the gross sum of insurance commission. We shall now examine the provisions of s. 195 of the Act which fall for consideration in these references. Sub-section (1) of s. 195, to the extent it is relevant lays an obligation on any person on securities or any other sum not being dividends chargeable under the provisions of the Act, to deduct tax at source at the rates in force. Sub-section (2) of s. 195 provides that where the person responsible for paying any such sum chargeable under the Act to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the ITO to determine by general or special order, the appropriate proportion of such sum so chargeable and upon such determination, tax shall be deducted under sub-s. 195 as they are not relevant for our purpose. We are unable to find in the language of s. 195 any support for the argument that the expression "any other sum" occurring in the section refers necessarily to sums which represent wholly income or profits. As we have already pointed out the scheme of tax deduction at source applies not only to amounts


profits. As we have already pointed out the scheme of tax deduction at source applies not only to amounts paid which wholly bear "income" character but also to gross sums, the whole of which is not income or profits to the recipient such as payments to contractors and sub-contraction under s. 194D. That being so it is not possible to accept the contention of the learned counsel for the Electricity Board that there is not sanction to deduct tax at source from sums which do not represent wholly income or profit or other sums, which may not so represent. In our opinion, the provisions of s. 195(2) make the intendment of the Legislature very clear that what was required to be considered for purposes of tax deduction at source under s. 195(1) is not wholly income or profit. We are not impressed with the argument that s. 195 expressly refers to "any other sum chargeable under the provisions of the Act" and consequently the whole of such sum must be chargeable as income under the Act. In other words, what is contended is that where the sum paid to any person is not wholly chargeable under the provisions of the Act, then the application of s. 195 is ousted. If this contention is to be accepted, s. 195(2) will be rendered otiose because if the obligation to deduct tax in respect of "any other sum" attaches only to sums which are wholly chargeable under the Act, then the necessity for the person responsible for paying such sums making an application to the ITO under sub-s. (2) to determine the appropriate proportion of such sum so chargeable does not arise. If the entirety of the sum as contended by the learned counsel for the Electricity Board, should be taxable for s. 195 coming into operation than sub-s. (2) of s. 195 becomes entirely ineffective. We cannot accept an argument which renders a legislative provisions a dead letter. If, on


entirely ineffective. We cannot accept an argument which renders a legislative provisions a dead letter. If, on a harmonious construction of the relevant provisions, it is possible to make effective all the provisions contained in a statute, courts must always lean in favour of such interpretation. This is an established rule of interpretation. Taking note of the scheme of tax deduction at source, which we have already mentioned above, it would be entirely consistent if the expression "any other sum" occuring in s. 195(1) is interpreted as referable not only to a sum which is wholly income chargeable under the Act, but also to a sum which is not wholly income so chargeable. Then the provisions of sub-s. (2) of s. 195 will become fully effective. For the aforesaid reasons, we must prefer the interpretation which renders s. 195(2) effective without making it a dead letter. We do not also find anything inconsistent in the scheme of the Act or in the exigencies requiring deduction of tax at source to protect the interests of the Revenue from out of the sums consisting of only a small moiety of income. The safeguard provided in sub s. (2) of s. 195 protects the interests of the person receiving such sums because an application can always be made to the ITO to determine the appropriate proportion of the sum chargeable under the Act, so that tax deduction at source can be confined only to such appropriate proportion and not to the gross amount. It should also be borne in mind that whatever tax is deducted at source under s. 195 from out of the gross sum is to irretrievably lost to the recipient. It is only a provisional payment which will be made to the Central Government to the credit of the recipient. is a resident or non-resident to file a return of income in the regular course and prove to the satisfaction of the ITO the income chargeable under the Act. After such determination if the tax provisional deducted


of the ITO the income chargeable under the Act. After such determination if the tax provisional deducted at source under any of the provisions contained in Part B of Chapter XVII is in excess of what is required to be paid, the ITO is bound to grant refund of the excess tax deducted at source with interest to the recipient. Thus, the interest of the recipient are fully protected under the scheme of the Act. We do not see any ground for the person responsible for making the payment to object to the deduction of tax at source provisionally either from sums which represent wholly income or from sums which represent only a part of the income chargeable under the provisions of the Act, so long as the recipient is clearly told that the tax deducted at source from out of the sums paid are liable to be refunded by the Income-tax Department to the recipient if by any chance the tax deducted at source is more than the tax properly chargeable on the total income of the recipient. We, therefore, uphold the contention of the Revenue that the provisions contained in s. 195 of the Act take in their sweep any sums paid to a non-resident which do not wholly represent income or profits chargeable under the Act but a portion of which only so represents.


18. It is next contended that the obligation to deduct tax at source under s. 195 cannot be held to extend to sums paid to non-residents during the course of regular trading operations, that is to say, where the sums paid to the non-residents represented value or cost of goods, purchased in the course of regular trade. It is urged that, if the provisions contained in s. 195 should be interpreted as sanctioning the deduction of tax of source from out of gross sums paid to non-resident by way of cost of goods it would lead to serious hardships in the course of international trade. While we agree that some amount of inconvenience and hardship is bound to be felt by the non-resident by reason of deduction of tax at source from sums referable to trading operations that cannot be a ground for arriving at an interpretation of the provisions of s. 195 to exclude sums paid to non-resident during trading operations. The language of the section is very clear and unambiguous and effect must be given to the clear provisions of law irrespective of hardships and inconveniences. We are conscious of the fact that the process of making regular assessments on non-residents, after deduction of tax at source under s. 195 may taken time and the non-residents may not be able to get back refund of excess tax deducted at source if any till the regular assessment is completed determining the tax payable by the non-resident on the total income chargeable under the provisions of the Act. We an only express the hope that the Central Board of Direct Taxes given instructions to all the ITOs to expedite regular assessments on non-resident from whom tax is deducted at source, giving top priority and facilitate smooth course of international trade involving a large magnitude of trading operations. The tax authorities will do well to make an accelerated assessment on non-residents under s. 194 of the Act, should circumstances require such a course in order to ensure that the non-resident get back


the Act, should circumstances require such a course in order to ensure that the non-resident get back expeditiously excess amounts of tax if any deducted at source under s. 195.


19. We may refer to the decision of the Calcutta High Court in Anglo-Indian Jute Mills co. Ltd. v. Dutt [1956] 30 ITR 252. Referring to s. 18(3B) of the 1922 Act, which is analogous to s. 195 of the 1961 Act, the Calcutta High Court observed that a sum of money paid to a non-resident as the price of the shares was "a sum chargeable under the provisions of the Act" within the meaning of s. 18(3B) even though the whole of the price paid was not chargeable to tax and only the profit made by the transaction was so chargeable. There is yet another decision of the Calcutta High Court in Ray and Co. (India) Private Limited v. Mukherjee, ITO [1959] 36 ITR 365, which has reiterated the same view. Dealing with s. 18(3B) of the 1922 Act, again the Calcutta High Court held that it contemplated not merely amounts, the whole of which was taxable with out deduction but amounts of a mixed composition a part so which only might turn out to be taxable income as well; and the disbursements, which were of the nature of gross revenue receipts were yet sums chargeable under the provisions of the I.T. Act, and the disbursements which were of the nature of gross revenue receipts were yet sums chargeable under the provisions of the I.T. Act and came within the ambit of s. 18(3B) of the Act. We are in respectful agreement with the view expressed by the Calcutta High Court in the above cases. No other decision taking a contrary view has been brought to our notice. The learned counsel for the Revenue drew our attention to the decision of the Allahabad High Court in Raza Textiles Ltd.


Revenue drew our attention to the decision of the Allahabad High Court in Raza Textiles Ltd. v. ITO [1962] 46 ITR 466. Having perused this decision, we do not think this decision deals with the point under consideration. In that case, the court was concerned with the obligation to deducted tax from out of commission payable, the whole of which is income chargeable under the Act. This case is, therefore, not relevant. The learned counsel for the Revenue also relied on the decision of the Bombay High Court in CIT v. Bhaidas Cursondas & Co. [1963] 50 ITR 429. In our opinion, this again is a case where the obligation to deduct tax was in respect of a sum of Rs. 1,40,000 the whole of which presented income. There is a clear finding in the above case that the amount paid to the non-resident represented the profit made on the sale of cotton. This case also does not consider the point with which we are concerned in the present references.


20. For the reasons aforesaid, we are clearly of the opinion that the provisions of s. 195 relating to the deduction of tax at source come into operation in respect of sums paid to non-resident, whether or not such sums represent wholly income or profits and even if such are paid to then non-resident during the course of regular trading operations.


21. We now turn to the second aspect of the matter, viz., whether s. 195 requires a person responsible for paying any sum to the non-resident chargeable under the I.T. Act to deduct tax on the gross sum of money. The answer is clearly found in the language of s. 195 itself. The obligation to deduct tax relates only to the appropriate portion of the gross sum, which would be chargeable as income in the hands of the recipient. We have already referred to the provisions of s. 195(2) of the Act, which affirm the above legal position. We have also noticed earlier that in the orders passed concerning the payment of sums to M/s. Charmilles Engineering works in R.C. 203 and to M/s. Oerlikon Engineering Company in R.C. 205, the ITO required the company to pay tax on the gross sum of money. The reason was simple. The assessee did not make an application requiring the ITO to determine the appropriate proportion of the sum paid to the non-resident, which is chargeable under the I.T. Act. The learned counsel for the Revenue contends that, in the absence of any such application, it is not open to the ITO to himself make an apportionment and, consequently, the ITO was helpless and had to call upon the assessee to pay tax in respect of the entire gross sum. The learned counsel relied on the decision of the Calcutta High Court in Czechoslovak Ocean Shipping International Joint Stock Company v. ITO , in support of the above proposition. We have also observed earlier that in the order passed by the ITO concerning the payments made to M/s. Sacheron Works Ltd., in R.C. No. 204, the ITO proceeded to determine the tax deductible with reference only to the appropriate portion of the gross sum which, in his opinion, is chargeable under the Act. The ITO held that


gross sum which, in his opinion, is chargeable under the Act. The ITO held that in respect of the amount of cost price paid for the power transformers, the profit could be estimated only at 5% of the gross sum and in respect of the erection charges paid, the profit could be estimated at 25%. There is thus a clear acceptance by the ITO himself that the obligation of the assessee to deduct tax is only in respect of that proportion of the gross sum which is chargeable as income under the Act and does not extend to the entirely of the gross sum. We are unable to accept the contention of the learned counsel for the Revenue that, because the assessee did not file an application under s. 195(2), the ITO is empowered to call upon the assessee to pay tax under s. 195 in respect of the entirety of the gross sum. It should be borne in mind that a person may be honestly under the impression that no part of the gross sum payable to the non-resident is chargeable to tax as income under the Act and, hence, he does not find it necessary to make an application under the Act and hence he does not find it necessary to make an application under s. 195(2). The ITO, on the other hand may be again honestly under the impression that the gross sum of money includes some portion chargeable under the I.T. Act. Could it be said that, under such circumstances, the person responsible for making the payment could be punished or penalised by requiring him to pay the tax deductible on the entirety of the gross sum ? The answer is clearly in the negative. We cannot acced to the contention of the learned counsel for the Revenue that the ITO is entitled to call upon the learned counsel for the Revenue that the ITO is entitled to call upon the Electricity Board to pay tax deductible under s. 195 in respect of the entirety of the payments made to M/s.


tax deductible under s. 195 in respect of the entirety of the payments made to M/s. Oerlikon Engineering Company in R.C. 203 and to M/s. Oerlikon Engineering Company in R.C. 205. It must be remembered that the order was passed under s. 201 of the Act. For the purpose of determining the tax in respect of which the person responsible for making the payment could be deemed to be in default the ITO must determine the tax only on the appropriate proportion of income chargeable under the Act. There is no prohibition in s. 201 of the Act against the ITO so determining the tax. Indeed, the power to determine the appropriate amount of tax deductible at source under s. 195 is implicit in s. 201 of the Act. In the face of the ITO's own acquiescence that in respect of erection charges paid to the other companies, the net profit could not exceed 25% it is not possible to uphold the ITO' action in determining the tax with reference to the gross sums of money in R.C. 203 and R.C. 205. As already mentioned the power to determine the appropriate amount of tax is referable to s. 201 of the Act and the fact that the assessee did not file an application under s. 201 of the Act and the fact that the assessee did not file an application under s. 195(2) for determination of such appropriate proportion is not relevant for the purpose. In any event this is the only way the provisions contained in s. 195 and s. 201 can be harmoniously interpreted. We, therefore, hold that the power of the ITO under s. 201 of the Act to deem the person responsible for paying any sum to the non-resident under s. 195 as being in default extends only to the proportion of income chargeable under the Act and forming part of the gross sum of


extends only to the proportion of income chargeable under the Act and forming part of the gross sum of money.


22. We have perused the judgment of the Calcutta High Court in Czechoslovak Ocean Shipping International Joint Stock Company v. ITO [1971] 81 ITR 162 relied on by the learned counsel for the Revenue and we do not find in that judgment any support for the view that, in the absence of an application under s. 195(2), the ITO is empowered to enforce deduction of tax from the gross sum of money. That is a case where the person responsible for making the payment required the ITO to furnish a "no objection certificate" required by the Reserve Bank of India for remitting certain sums of money to a non-resident. The ITO to furnish a "no objection certificate" required by the Reserve Bank of India for remitting certain sums of money to a non-resident. The ITO treated the application filed for "no objection certificate" as an application under s. 195(2) and proceed to determine the appropriate proportion of income chargeable under the Act included in the gross sum. The High court found fault with the order of the ITO on the simple ground that the application filed for a "no objection certificate" could not be treated as an application under s. 195(2) and, consequently, quashed the order passed by the ITO. That case is quite different on facts.


23. All that now remains to be said is that, in respect of the order passed by the ITO concerning the payments made to M/s. Sacheron Works Ltd. in R.C. No. 204, the learned counsel for the revenue is right in his contention that both the AAC and the Income-tax Appellate Tribunal feel into the error of thinking that the ITO's order in this case also followed the same pattern as in the case of M/s. Charmilles Engineering Works Ltd. and M/s. Oerlikon engineering Company in R.C. No. 203 and R.C. No. 205, respectively. We have already shown that, pursuant to an application made by the Electricity Board, the ITO determined the appropriate proportion of income chargeable in the payments made to M/s. Sacheron Works Ltd. and required the Electricity Board to pay tax only in respect of that appropriate portion. Obviously, the ITO's order is in accordance with the provisions of s. 195 and the AAC and the Income-tax Appellate Tribunal were in error in cancelling the order of the ITO.


24. A word about the grossing-up made by the ITO for purpose of determining the final amount of tax deductible at source under s. 195. The ITO observed that, in all these cases, the Electricity Board agreed to pay all the tax liabilities to the non-resident companies arising on account of the supply of materials and the execution of the erection and the commissioning of the equipment of Sileru. The ITO, therefore, held that the net payments made had to be grossed up to determine the tax following the decision of the Mysore High Court in Tokyo Shibaura Electric Co. Ltd. v. CIT [1964] 52 ITR 283. The assessee has questioned the correctness of the grossing-up in principle and the AAC as well as the Income-tax Appellate Tribunal upheld the view that the payments made to be grossed up. We have perused the orders in all the three cases to find out on what basis the grossing-up has been made. There is no guidance in the orders of the ITO as to how the figure was arrived at. It is not known whether the ITO adopted the system of grossing-up by working out tax on tax until he arrived at a "O" figure. If that was the basis followed, we do not think it is proper. The decision of the Orissa High Court in CIT v. American Consulting Corporation [1980] 123 ITR 513, sets out correct principal on which grossing-up should be done in cases like this. The Orissa High Court held that, in a case where, under the contract, the tax that would be leviable on the profit in the hands of the non-resident was to be paid by the Indian company, the arrangement entered into between the non-resident and the Indian company did not admit of a system of tax on tax. What was available to be added under the contract was addition of that benefit which the


tax on tax. What was available to be added under the contract was addition of that benefit which the non-resident had enjoyed by being free from the liability to income-tax. In other words, the value of the benefit or perquisite, which arose to the non-resident by way of its tax liability having been met by the Indian company, had to be limited to the amount of actual tax due and the gross figure determined accordingly. In the present case, the ITO himself clearly observed that, as per clause 13 of the agreement entered into with the non-resident and the tax deductible at source determined with reference to the gross figure arrived at as above. While passing an order conformably to our judgment in R.Cs. Nos. 203 and 205, the Tribunal will look into this question and determine the figures appropriately.


25. We have earlier stated that the question of law referred to in all these three references does not bring out the real controversy and the question has to be reframed. We, accordingly, reframe the question common to all the three references to bring out the real controversy as under :
 "Whether, on the facts and in the circumstances of the case, the Superintending Engineer, Civil Circle, Upper Sileru, is liable to deduct income-tax Act under section 195 of the Income-tax Act, 1961, in respect of payment made to non-residents, viz., M/s Charmilles Engineering Works Ltd., M/s. Sacheron Works Ltd. and M/s. Oerlikon Engineering Company and, if so, whether the tax deductible is liable to be determined on the gross sum of money paid to the non-residents ?"
26. Having reframed the question as above, we answer the same to the following effect :
 (1) The respondent-assessee, who made the payments to the three non-residents above referred, was under an obligation to deduct tax at source under s. 195 of the Act in respect of the sums paid to them under the contracts entered into.
(2) The obligation of the respondent-assessee to deduct tax under s. 195 is limited only to the appropriate proportion of the income chargeable under the Act forming part of the gross sums of money paid to the three non-residents above referred.


(3) While the ITO was correct in the determination of tax under s. 195 in respect of the payments made to M/s. Sacheron Works Ltd. in R.C. No. 204, he was in error in determining the tax deductible under s. 195 in respect of the gross sums of money paid to M/s. Charmilles Engineering Works Ltd., in R.C. No. 203 and M/s. Oerlikon Engineering Company in R.C. No. 205.
 27. Based on our above answers, we hold that the Income-tax Appellate Tribunal was in error in cancelling the orders passed by the ITO under s. 201 of the Act. While the order of the ITO passed in R.C. No. 204 concerning the payments made to M/s. Sacheron Works Ltd., should be upheld in toto, the orders passed by the ITO in respect of payments made to M/s. Charmilles engineering Works Ltd. (R.C. No. 203) and M/s. Oerlikon Engineering Company (R.C. No. 205) have to be modified in the light of our above findings and the Tribunal shall do necessary modification while passing orders conformably to our judgment under s. 260(1) of the Act.
 28. We, accordingly, answer the three references. In the facts and circumstances of the case, we direct the parties to bear their own costs. Advocate's fee Rs. 500 in each of the references.


Bakelite Hylam Ltd. vs Commissioner Of Income-Tax on 16 June, 1992

JUDGMENT S. Parvatha Rao, J.
 1. The sole question in this referred case referred for the decision of this court under sub-section (1) of section 256 of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), at the instance of the assessee, i.e., Messrs. Bakelite Hylam Ltd., Hyderabad, is :
 "Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that the assessee was not entitled to interest under section 214 of the Income-tax Act, 1961, on Rs. 4,29,219 which was the excess amount of tax paid in the financial year 1971-72 (relevant to the assessment year 1972-73) over the tax determined on regular assessment for the assessment year 1972-73 ?"
 2. It is covered by the decision of a Division Bench of this court in Kangundi Industrial Works (P.) Ltd. v. ITO against the assessee. However, when this referred case came up for final disposal on March 10, 1988, before G. Ramanujulu Naidu and Y. V. Anjaneyulu JJ., learned counsel for the assessee represented that.... the said decision of this court required reconsideration as the High Courts of Bombay, Madhya Pradesh, Kerala and Gujarat dissented from the view of this court. The learned Judges felt that, in view of the importance of the matter, it was desirable to refer the matter to a Full Bench and that is how this referred case is before us.