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Income tax Reference No, 11 of 1959, decided on 15th June 1962.

Business expenditure

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----- Capital expenditure Agreement with ruler of Native State for monopoly rights, tax concessions and immunity from labour and industrial laws for a term of years Percentage of annual profits paid to ruler under agreement Capital expenditure-Non resident Income Receipt by cheque Remand by appellate Tribunal to provide opportunity to let in evidence regarding mode of sending cheques and request of assessee--Whether proper Income tax Act, 1922, Ss. 4(1) (a), 10 (xv),& 33.

For the purpose of introducing new industries in the Native State of Bhor, the assessee, a private company incorporated in that State, entered into an agreement with the Diwan of that State on February 18, 1943. By that agreement the State agreed (i) to give the assessee, the sole monopoly for starting and working factories for proofing of cloth ; (ii) not to increase land tax (except by way of general increase on all landholders) or impose additional tax on lands of the assessee; (iii) not to charge income tax and taxes on profits of any kind, and (iv) to exclude the application of industrial acid labour laws to the assessee, all for a period of ten years. In consideration of these benefits the assessee agreed to pay the State every year by way of royalty 6 per cent. of its profits for the first ten years and 12 per cent. of its profits for the next five years the profits being ascertained after making provision for payment of 25 per cent. of the profits for the use of patents and provision for depreciation in accordance with the Indian Income tax Act. In pursuance of this agreement the assessee paid to the Bhor State a sum of Rs. 34,630 in the account year relevant for the assessment year 1946-47 :

Held, that the agreement was entered into with a view to start a business and the liabilities under the agreement were incurred in order to secure the benefits which would ensure certain set of circumstances for its business at its commencement or during its early stages. Payments on such account could not be said to be made to get rid of an onerous liability of a business which was chargeable to revenue. No business liability existed when the liability was incurred under the agreement. It was incurred to ensure that no liability would arise. Nor was the payment expenditure laid out for the running of the business. The expenditure was not chargeable to revenue but was capital expenditure.

The assessee, which carried on the business of dyeing, printing and bleaching cloth in the Bhor State, outside British India, did work for three British Indian companies. In payment thereof the three companies sent cheques drawn on banks in British India. The assessee's local banker, acting as its agent for collection, presented the cheques at the office of the British Indian banks for encashment. The Income tax Officer held that the monies had been received in British India and that the assessee was liable to be taxed on those receipts under section 4(1) (a) of the Indian Income tax Act, 1922. The assessee appealed to the Appellate Assistant Commissioner. By the time the appeal was heard the decision of the Supreme Court in the case of Ogale Glass Works Ltd, (1954) 25 I T R 529 was available. Relying on the decision the Appellate Assistant Commissioner held that the monies were received in the Bhor State. On further appeal, the Appellate Tribunal remanded the case with a direction to give the parties an opportunity to lead evidence to ascertain whether the cheques were sent by post or by hand and whether the cheques, if sent by post, were sent on the request of the assessee, either express or implied, on the ground that these aspects were not before the Income tax Officer when the matter was before him :

Held, that the Tribunal bad not acted arbitrarily or capriciously in remanding the matter for a further enquiry even though the department had not asked for an inquiry into those facts or stated that it had any further evidence to lead. The Tribunal did not misdirect itself in making the order of remand.

Abdul Kayoom v. Commissioner of Income tax (1962) 44 I T R 689 (S C) ; Anglo Persian Oil Company Limited v. Dale (1931) 16 Tax Cas. 253 ; Asssm Bengal. Cement Co. Ltd. v. Commissioner of Income tax (1955) 27 1 T R 34 ; (1955) 1 S C R 972 ; In re: Benarsidas Jagannath (1947) 15 I T R 185 ; Commissioner of Income tax v. New Jehangir Vakil Mills Ltd. (1956) 30 I T R 664 ; Commissioner of Income tax v Ogale Glass Works Ltd. (1954)25 IT R 529 ; 24 Comp. Cas. 520 ; (1955) l S C R 185 ; Green v. Cravens Railway Carriage & Wagon Co. Ltd (1951) 32 Tax Cas. 359 ; Hancock v. General Reversionary and Investment Company Limited (1918) 7 Tax Cas. 358 ; New Jehangir Vakil Mills Ltd v. Commissioner of Income tax (1959) 37 I T R 11 ; (1960) 1 S C R 249 ; Pingle Industries Ltd. v. Commissioner of Income tax (1960) 40 I T R 67 ; (1960) 3 S C R 681 and Wilson v. Nicholson Sons & Daniels Ltd. (1943) 25 Tax Cas. 473 ref.

STATEMENT OF CASE

By these two reference applications, which are consolidated and disposed of by a common order as the questions are common in both the references except that there is a fifth question in R. A. No. 389, the assessee company requires the Appellate Tribunal to state a case to the High Court on questions of law which are said to arise out of the Tribunal's orders in I. T. As. Nos, 8639 and 8198 of 1956 57. In our opinion only one question of law arises and that is as to whether the sum of Rs. 34,650 paid to Bhor State is a permissible deduction under section 10(2) (xv) of the Act. We, therefore, hereby draw up a statement of the case and refer it to the High Court of Judicature at Bombay under section 66(1) of the Indian Income-tax Act.

2. The facts briefly are that the assessee is a private limited company incorporated in the former Indian State of Bhor with its registered office at Bhor. Before the commencement of the business in the Bhor State an agreement was entered into between the assessee and the Diwan of Bhor State on b. half of the Bhor Durbar, whereby certain monopolistic and other concessions were sought and granted to the assessee. For the relevant assessment year 1946-47 the assessee was assessed as a non-resident company.

3. The assessee's business consists, inter alia, of dyeing, printing and bleaching cloth. The entire dyeing, printing and bleaching work at Bhor was done for four allied companies belonging to the Thackersey group, three of whom had their registered offices in the then British India, whereas the fourth company had its registered office at Bhor. It was common ground that these three companies sent their grey cloth to the assessee company for bleaching, dyeing and processing at Bhor. It was also common ground that the dyes and chemicals for bleaching were purchased in British India.

4. The Income-tax Officer, by invoking section 42(1) read with section 42(3) of the Act, estimated the profit on such purchasing operations at f0 % of the total profit of the printing department which amounted to Rs. 4,35,012. The Appellate Assistant Commissioner, on appeal, considered that 20 % would be a more appropriate estimate than 50 % and therefore arrived at the figure of such profit at Rs. 87,002. The assessee came on appeal to the Tribunal in I. T. A. No. 8198 of 1956 57; urging that the estimate of profit by the Appellate Assistant Commissioner at 20 % was excessive and this should have been taken at 2% only. The only other ground of appeal was that the sum of Rs.: 34,650 paid to the Bhor Durbar should have been allowed as an expenditure. wholly laid out for the purposes of the assessee's business.

5. The Income-tax Officer had also taken the view that the amount received from the aforesaid three companies of the Thackersey, group were received, in the taxable territories because the cheques were drawn on British Indian banks and as such there was thus a receipt of monies in British India leading to the receipt of profits under section 4(l)(a)". Against this finding of the Income tax Officer the assessee, had also appealed to the Appellate Assistant Commissioner urging that the Income tax Officer, had erred in holding that the receipts were in the taxable territories because the cheques were drawn on British Indian Banks. Reliance was placed on the case of Ogale Glass Works Ltd, ((1951) 25 I T R 529): Relying on the first part of this judgment the Appellate Assistant Commissioner held that the entire printing, dyeing and bleaching receipts of Rs. 4,0,220 had accrued or arisen in the State of Bhor and only 20 % thereof, i.e. Rs 87,002, should be held, as taxable in the then British Indian territories under section 42(1) read with section 42(3) of the Act. The assessee thus received a relief of Rs. 3,16,218 as a result of the Appellate Assistant Commissioner's order. Against this finding the Department came up on appeal to the Tribunal in I. T. A. No. 8639 of 1956-57.

6. The assessee's appeal, I. T. A. No. 8198 of 1956-57, was dismissed by the Tribunal. The Tribunal, upon considering all the materials on record and the attendant circumstances of the case, saw no reason to differ from the estimate made by the Appellate Assistant Commissioner at 20% of the profit which could reasonably be attributed to the purchase operations in British India. This finding of the Tribunal is obviously a finding of fact and no question can be spelt therefrom.

7. As regards the departmental appeal, I. T. A. No. 8639 of 1956-57, the Tribunal came to the conclusion that Ogale's case had not been properly understood by the Appellate Assistant Commissioner who had merely relied upon the first part of that judgment and had lost sight of the material point whereby Ogale Glassworks had lost the appeal before the Supreme Court. The Tribunal also found that the assessment order in the instant case was passed on March 22, 1951, before the Supreme Court decision was reported or received and, therefore, the Income tax Officer could not possibly have known the correct approach to the question at issue. The Tribunal also found that by the time the Appellate Assistant Commissioner came to decide the appeal which was on December 14, 1956, the aforesaid Supreme Court's decision was before him. No one however was present on behalf of the Department. The Appellate Assistant Commissioner had very properly taken into consideration the aforesaid decision but unfortunately not the whole of it. He merely rests content with disposing of the Income tax Officer's main objection in these words ;

"3. It is contended on behalf of the appellant company that no portion of the appellant's profit from the dyeing, printing and bleaching department can be, assessed to tax under the Indian "Income tax Act. It is conceded that most of the purchases were made in the taxable territories. But Mr. Mulla argues that 'the profit on the purchases is negligible and at any rate it cannot exceed 2 % which the assessee would have had to pay to commission agents if he had preferred to purchase through the commission agents. As regards the sales it is contended that all the sales were made a1 Bhor and, therefore, no part of the profit accrues or arises in the taxable territories. It is stated that goods were handed over to the appellant at Bhor and the appellant after processing them had handed them over to the representative of the resident companies. The Incometax Officer's view that the receipts were in the taxable territories because the cheques were passed on the British Indian banks is disputed. My attention is drawn by Mr. Mulla to the decision of the Supreme Court in Ogale Glass Works Ltd. (1954) 25 I T R 529: In that case the Supreme Court decided that as the cheques were not dishonoured, there was an implied agreement under which the cheques were accepted unconditionally as payment and that even if the cheques were taken conditionally, the cheques not having been dishonoured but having been cashed the payment related back 'to the dates of the receipt of the cheques and in law the dates of payments were the dates of the delivery of the cheques. Mr. Mulla contended that considering the close relationship that the appellantcompany had with the three other companies there was no danger whatsoever of dishonouring the cheque and that, therefore, the appellant had accepted the cheques as unconditional discharge of the liabilities of the resident companies. Mr. Mulla, therefore, argues that no part of the income of the appellant from the dyeing, printing and bleaching department can be assessed under the Indian Income-tax Act. As regards the profit from leather cloth proofing department, Mr. Mulla's argument was that the profit on the purchases is negligible and since the appellant does not deal in raw materials, no profit can be attributed to purchases. As regards the sale of dosuti and packing materials, Mr. Mulla does not press this contention that no part of the profit from this department should be assessed to tax under the Indian Income-tax Act. But Mr. Mulla argues that only the profit that could be attributed to the selling operations can be taxed.

Mr. Mulla has two other contentions and these are (1) that the Income tax Officer should have allowed the royalty paid to the Maharaja of Bhor as per the agreement dated February 18, 1943, and (2) that the appellant should not have been charge penal interest.

4. I find that there is considerable force in these arguments of Mr. Mulla that no part of the profit of the appellant can be taxed under section 4(1)(a). Mr. Mulla is correct in arguing that the receipts were in the State of Bhor. The decision of the Supreme Court in Ogale Glass Works Ltd. relied upon by Mr. Mulla supports his argument inasmuch as the Supreme Court had held that the receipt of cheque, unless circumstance warrant, should be taken as an unconditional discharge of the liability and that even if it is taken as a conditional discharge, the payment related back to the date of receipt of the cheque, and that, in law, the dates of payments are the dates of delivery of the cheques. It is not denied that the payments were received at Bhor. Thus the appellant received these amounts at Bhor. Moreover, there is no evidence to show that the cheques were posted on a request from the appellant company either express or implied. On the contrary a letter written by a director of one of the resident companies to the appellant company on December 6, 1944, confirming the arrangements between the two companies, clearly indicates that the payment should be made at Bhor. Thus no part of the appellant's income can be taxed under section 4(1)(a)."

The Tribunal held :

"The decision of the Supreme Court relied upon by Mr. Mulla supports his argument inasmuch as the Supreme Court had held that the receipt of cheque should be taken as an unconditional discharge of the liability and that even if it is taken as a conditional discharge the payment related back to the dates of receipt of the cheques and that in law the dates of payments are the dates of the delivery of the cheques. It is not denied that payments were received in Bhor. Thus the assessee received these amounts in Bhor. Moreover, there is no evidence to show that the cheques were posted on a request from the assessee company either express or implied. This clearly indicates that the Appellate Assistant Commissioner completely lost sight of the real point on which the assessee Ogale Glass Works lost its case before the Supreme Court. The Supreme Court accepted the alternative contention of the department that "the posting of the cheques at Delhi operated as a payment in British India". As the assessee had asked for the cheques to be remitted, the Supreme Court held that the posting of the cheques in Delhi by Government amounted to payment in Delhi and, therefore, income, profits and gains in respect of the sales made were received in British India within the meaning of section 4(1)(a) of the Act and the decision of the Bombay High Court was reversed. This aspect as to remittance and place of posting of the cheque became of vital importance after the receipt of the Supreme Court decision.

It was the duty of the Appellate Assistant Commissioner to have given the assessee and the Income tax Officer a specific opportunity of proving whether the cheques were received by hand or were posted and if so at whose request."

As this aspect of the question had not been considered at all by the Appellate Assistant Commissioner, the Tribunal, fully realising that such an enquiry would result in hardship to the assessee but as revenues were involved and a case directly in point having been brought to its notice by the Departmental Representative, in the interest of justice, set aside the said order of the Appellate Assistant Commissioner in this respect only and restored the appeal to his file with the direction that he should give both the parties an opportunity of leading evidence and to ascertain whether the cheques were sent by post or by hand and whether the cheques were sent on the request of the seller either express or implied and the post office if any at which the cheques were posted and the quantum thereof and thereafter to dispose of the appeal in accordance with law.

8. The direct authority of the Bombay High Court was the case of New Jehangir Vakil Mills Ltd. ((1956) 30 I T R 664, 670) where their Lordships observed :

"But we cannot shut out the necessary inquiry which even from our own point of view is necessary to be made in order that we should satisfactorily answer the question raised in this reference .we cannot overlook the fact that if tax is legitimately due to the revenue, the revenue should not be deprived of that tax even though the Department may not have been as vigilant in prosecuting its claim as we should have desired."

The aforesaid order passed by the Tribunal under section 33(4) and limiting the fresh inquiry to the specific point at issue, which was before it in the departmental appeal, is one which was passed judicially in the exercise of the discretion vested, and not arbitrarily or capriciously and as such cannot give rise to any, question of law. The assessee's right of appeal and reference from the further order of the Appellate Assistant Commissioner remains intact and preserved. The assessee according to Mr. Mulla would have had no objection if the entire order of the Appellate Assistant Commissioner was set aside but as only the specific point which arose in the appeal filed by the Department as been referred back, the assessee objects. The objection is without any substance. The provisions of section 33(4) are clear and no question of law can be spelt from part of the Tribunal's order.

9. The facts pertaining to the only question of law which arises out of the order of the Tribunal are as follows

"Before the commencement of the business at Bhor on ..the

assessee had already entered into an agreement dated 18th February 1943 (annexed hereto as Annexure "A" and forming part of the case). The assessee had asked for certain monopolistic rights and concessions from the Bhor Durbar. The relevant concessions agreed to be allowed under the agreement were :

(1) That the assessee would have the sole monopoly for starting and working a factory or factories for proofing of cloth of various types and that the State will not grant any, licence or permit nor will it allow any other person, firm or company or other association to manufacture articles similar to the articles manufactured y the party of the second part. for a period of at least ten years from the date of the starting of the industry.

(2) No tax in addition to the existing tax that, may be payable by the landlord to the State to be charged on any land or other immovable property purchased by the assessee.

(3) The assessee shall not be charged any income tax, super tax or any other tax on the profit of any kind whatsoever for a period of ten years whether such taxes are in existence at present or introduced hereafter save and except the toll.

(4) The assessee was to be exempted from the application of the Indian Factories Act for a period of ten years.

(5) In consideration of the benefits granted' to the party of the second part as hereinabove mentioned, the party of the second part agrees to pay to the State every year by way of Royalty for the first five years since the starting of the industry an amount equivalent to 6 (six and quarter) per cent. and for the next five years an amount equivalent to 12 (twelve and half) per cent. of the profits of the company ......

Under the said agreement the assessee paid to the Bhor State a sum of Rs. 34,650 in the relevant year of account. It claimed this as a deduction under section 10(2)(xv). The Tribunal upholding the orders of the departmental officers held :

" ....that the payment was made in 'order to acquire, before the business even commenced, freedom from all competitions, levy of taxes existing or in the future and immunity from the Indian Factories Act. An expenditure to buy off competition is normally a capital expense for it brings into existence an asset of an enduring nature, particularly so, when the payment is agreed to be made even before the business is commenced Assam Bengal Cement Co. Ltd. v. Commissioner of Income tax (1955) 27 I T R 34. Income tax is not deductible as a business expense from the business profits and, therefore, .the securing of an immunity from taxation would also bring into existence an advantage of an enduring nature. In these circumstances it must be held that the expenditure has not been laid out wholly for the purposes of the business and, the disallowance has properly been made:"

10. The question of law that therefore arises is

"Whether on the facts and circumstances of the case the sum of Rs. 34,650 paid to the Bhor State under the agreement is a permissible allowance under section 10(2)(xv) of the Act "

11. Both parties agree that the facts relevant to the question have all been correctly stated. At the request of the assessee the Appellate Assistant Commissioner's order is Annexed hereto as Annexure "B".

UPPLEMENTARY STATEMENT OF CASE

In compliance with the requisition of the High Court of judicature at Bombay under section 66(2) dated 29th August 1961, in I. T. R. No. 11 of 1959, in the case of Bhor Industries Ltd. v. Commissioner of Income tax (Central), Bombay, we hereby draw up an agreed statement of the case and refer it to the High Court of Judicatur6 at Bombay under section 66(2) of the Indian Income tax Act, 1922. The question of law on which the Tribunal has been directed to state the case is

"Whether on the facts :of the case, the Tribunal misdirected itself in making the order of remand, which it made on 9th May 1958, in Income tax Appeal No. 8639 of 1956 57 " .

2. The assessee is a private limited company incorporated in the former Indian State of Bhor, with its registered office at Bhor, and non-resident company. The assessee's business consists, inter alia, of dyeing, printing and bleaching cloth in its factories at Bhor. The entire dyeing, printing and bleaching work at Bhor was done for four allied companies, all of which belonged to the same Thackersey group as the assessee, three of whom had their registered offices in the then British India, whereas the fourth company, the Bhor Trading Co. Ltd., has its registered office at Bhor. It is common ground that these companies sent their grey cloth to the assessee company at Bhor for bleaching, dyeing and processing. It is also common ground that the dyes and chemicals for bleaching were purchased in the then British India.

3. For the aforesaid bleaching, the assessee company had agreements with the parties concerned as recorded in the letter dated December 6, 1944, from Messrs Thackersey Mooljee & Co. to the applicant. A copy of the said letter dated December 6, 1944, is Annexure "A" and forms part of the case. One of the conditions of this agreement is that payment was to be made at Bhor.

4. The aforesaid three British Indian Companies sent cheques on British Indian banks to the assessee at Bhor. These were collected through the Swastik Bank, Bhor, and got its account with it credited for the net proceeds deducting commission. During the previous year for the assessment year 1946-47, the assessee company so received Rs. 3,59,625 out of its total receipts of Rs. 4,68,514. It collected the bank charges deducted by the bank from the three constituents on the above cheques only in 1947.

5. The following are some trading data of the printing department useful for this reference taken out of its annual accounts for the year in question which form part of the case. These are not printed but copies thereof are directed to be produced before their Lordships at the time of hearing :

Rs.

Receipts through British Indian banks cheques 3,59,625

Other receipts 1,08,889

Total receipts 4,68,514

Net profits computed 4,35,012

6. The Income tax Officer invoked section 4 (1)(a) and section 42 for the following reasons

"Dyeing, Printing & Bleaching

A (i) It may be stated in the beginning in this respect that a major portion of stores required for the manufacture have been purchased by the manager personally in British India. Thus, to the extent of this operation, profits can be deemed to accrue or arise in British India. The principal operations in a manufacturing concern are as under :

(i) Purchase of raw material.

(ii) Manufacture.

(iii) Sale.

In this case, manufacture has taken place at Bhor. Purchase of raw material was made in British India. Regarding sale, it may be stated that the company did the work for three Bombay mills and Bhor Trading Co. Ltd., Bhor. In respect of the three mills, the conditions of sale, delivery and amount to be charged were all secured by a contract. Hence nothing was required to be done thereafter. Work of Bhor Trading Co. Ltd , Bhor, eras done in the same manner. The directors of the assessee-company have a controlling interest in the mill companies. and Bhor Trading Co. Ltd. Hence nothing was required to be' done in respect of its selling operations. The only two effective business operations are purchases of raw material and manufacture. Since a major operation of the raw material has been purchased in British India 50 % of the profits can be deemed to accrue in British India under section 42(3) of the Act.

(ii) Major portion of receipts under this head are by cheques drawn on British Indian banks: Mr. N. R. Mulla argues that as per agreement with the mill companies the right to receive money was at Bhor. It was only as a matter of convenience that the cheques on Indian banks were received. The assessee company recovered the bank charges from the mill companies. The bank charges were recovered in 1947. We are not concerned where the right to receive exists. The recovery of bank charges does not change the nature of the receipts. It is admitted that cheques were drawn on British Indian Banks and that the Swastik Bank, Bhor, acted as the assessee's agents for collection. The transfer is actually in British India where Swastik Bank presents the cheques at British Indian offices. Since the transfer took place in British India it follows that the payments by buyers to the sellers through their respective banks took place in British India and that there was thus a receipt of monies in British India leading to the receipt of profits under section 4(1)(a). In view of this material evidence which goes to prove that profits were received and are as such liable to assessment under section 4(1)(a) of the Act, the mere fact that manufacture and sales were at Bhor is immaterial in determining the correct legal position as to the assessee's liability to British Indian assessment. In such cases, since the entire profits are assessable under section 4(1)(a), it i, not necessary to determine the profits liable to assessment under section 42(3) although the liability to such assessment arises in view of the fact that major portion of the material required for the manufacture are purchased in British India and though such profits have been estimated at 50 % as discussed in the proceeding paragraph."

7. He computed the assessment of this section at Rs. 4,03,220 as follows :

Rs

Proportionate profits on British Indian

receipts (section 4 (1)(a) ). 2,09,995

Half profits relating to receipts in Bhor

on account of such operations in

India (section 42) 31,791

Entire receipts through British Indian

bank (first receipt (section 4(1)(a) ). 1,61,434

4,03,220

A copy of this order dated March 22, 1951, is Annexure "B" and forms part of the case.

8. The assessee appealed to the Appellate Assistant Commissioner. In that appeal it relied on the decision of the Supreme Court in the case of Ogale Glass Works Ltd., In re: the judgment in which was delivered on April 19, 1951, after the Income tax Officer's order. The Appellate Assistant Commissioner reduced the assessment to Rs. 87,002 only writing in paragraphs 3 and 4 of his order dated December 16, 1956, as follows :

3. It is contended on behalf of the appellant-company that no portion of the appellant's profit from the dyeing, printing and bleaching department can be assessed to tax under the Indian Income tax Act. It is conceded that most of the purchases were made in the taxable territories. But Mr. Mulla argues that the profit on the purchases is negligible and at any rate it cannot exceed 2 % which the assessee would have had to pay to commission agents if he had preferred to purchase through the commission agents. As regards the sales it is contended that all the sales were made at Bhor and therefore no part of the profit accrues or arises in the taxable territories.

It is stated that goods were handed over to the appellant at Bhor and the appellant after processing them had handed them over to the representative of the resident companies. The Income tax Officer's view that the receipts were in the taxable territories because the cheques were passed on the British Indian banks is disputed. My attention is drawn by Mr. Mulla to the decision of the Supreme Court in Ogale Glass Works Ltd. (1954) 25 I T R 529. In that case the Supreme Court decided that as the cheques were not dishonoured, there was an implied agreement under which the cheques were accepted unconditionally as payment and that even if the cheques were taken conditionally, the cheques not having been dishonoured but having been cashed, the payment related back to the dates of the receipt of the cheques and in law the dates of payments were the dates of the delivery of the cheques. Mr. Mulla contended that considering the close relationship that the appellant company had with the three other companies, there was no danger whatsoever of dishonouring the cheques and, that, therefore, the appellant had accepted the cheque, as unconditional discharge of the liabilities of the resident companies. Mr. Mulla. therefore, argues that no part of the income of the appellant from the dyeing, printing and bleaching department can be assessed under the Indian Income tax Act. As regards the profit from leather cloth proofing department, Mr. Mulla's argument was that the profit on the purchases is negligible and since the appellant does not deal in raw materials, no profit can be attributed to purchases. As regards the sale of dosuti and packing materials, Mr. Mulla does not press this contention that no part of the profit from this Department should be assessed to tax render the Indian Income tar Act. But Mr. Mulla argues that only the profit that could be attributed to the selling operations can be taxed. Mr. Mulla has two other contentions and these are : (1) that the Income tax Officer should have allowed the royalty paid to the Maharaja of Bhor as per the agreement dated February 18, 1943, and (2) that the appellant should not have been charged penal interest.

4. I find that there is considerable force in these agreements of Mr. Mulla that no part of the profit of the appellant can be taxed under section 4(1)(a). Mr. Mulla is correct in arguing that the receipts were in the State of Bhor. The decision of the Supreme Court in Ogale Glass Works, Ltd. (1954) 25 I T R 529 relied upon by Mr. Mulla supports his argument inasmuch as the Supreme Court had held that the receipt of cheque, unless circumstances warrant, should be taken as an unconditional discharge of the liability and that even if it is taken as a conditional discharge, the payment related back to the dates of receipt of the cheque and that in law the dates of payments are the dates of delivery of the cheques. It is not denied that the payments were received at Bhor. Thus, the appellant received these amounts at Bhor. Moreover, there is no evidence to show that the cheques were posted on a request from the appellant company either express or implied. On the contrary a letter written by a director of one of the resident companies to the appellant company on December 6, 1944, confirming the arrangements between the two companies, clearly indicates that the payment should be made in Bhor. Thus no part of the appellant's income can be taxed under section 4(1)(a). Now coming to the question whether the income can be taxed under section 4(1)(c), I hold that the Income tax Officer was correct in stating that there are three distinct operations, viz., purchasing, processing and selling. The appellant, as mentioned earlier, has conceded that most of the purchases were made in the taxable territories. I do not agree with the appellant that no profit can be attributed to the purchase operations, nor do I agree with the appellant that if at all there is some profit that profit cannot be in excess of 2 %. First of all 2 % is less than the normal commission that will have to be paid to commission agents. Secondly, the commission to be paid to the agent will be on the total value of goods purchased and not on the profit. On profit the percentage will work out at a higher figure. I would consider that 20 % of the profit can be reasonably attributed to the purchase operations. The total profit in the printing department amounts to Rs.4,35,012. 20 % will work out at Rs. 87,002. I, therefore, take Rs. 87,002 as the profit that can be attributed to the purchase operations. Coming now to the sale operations, I do not find any reason to hold that the sales took place in the taxable territories. The appellant is able to produce evidence to show that the resident mill companies had stationed one Mr. Joglekar as their representative at Bhor. There is no evidence to show that the designs, etc. for printing were not chosen by this person. I have gone through the correspondence file and find that most of the goods were despatched to the representative and were received from the representative after processing. Moreover, the expenses for transporting the goods at Bhor and from Bhor were met by the mill companies. Thus the evidence available goes to show that the sales have taken place at Bhor. Hence it is not correct to hold that any part of the profit of the appellant company accrued in the taxable territories as a result of the sales. The result is that only the amount of Rs. 87,202 can be held as taxable in the taxable territories as against Rs. 4,03,220 assessed by the Income tax Officer. The appellant thus gets a reduction of Rs. 3,16,218."

9. Against the aforesaid order both the assessee and the Department appealed to the Tribunal. The Tribunal dismissed the assessee's appeal and by its separate order in the departmental appeal, for the reasons stated therein, directed as follows :

"We would therefore in the interest of justice set aside the Appellate Assistant Commissioner's order in this respect, restore the appeal to his file and direct him to give the parties an opportunity of leading evidence and to ascertain whether the cheques were sent by post or by hand as was contended for by Mr. Mulla on instructions at the time of the hearing ; further whether the cheques were sent on the request of the seller either express or implied and the post office if any at which the cheques were posted and the quantum thereof, and thereafter to dispose of the appeal in accordance with law."

10. Against the aforesaid direction the assessee filed n reference application raising the following questions

"(1) Whether it was competent to the Tribunal to pass two orders in the two appeals (one by the department and the other by the assessee) by one of which they confirmed the Appellate Assistant Commissioner's order and by the other they set aside the Appellate Assistant Commissioner's order and restored the appeal on his file.

(2) Whether as a result of the two inconsistent orders, the Tribunal's order setting aside the Appellate Assistant Commissioner's order is bad in law, or whether the Tribunal's other order dismissing assesssee's appeal and confirming the Appellate Assistant Commissioner's order is bad in law.

(3) Whether on the facts of the case the Tribunal erred in law in setting aside the Appellate Assistant Commissioner's order merely because the Department had not led any evidence to show that the sum of Rs. 3,16,218 was income actually received in India, despite the fact that at the time when the Appellate Assistant Commissioner heard the appeal the relevant law was well established and well known to the Department and further despite the fact that in the grounds of appeal or at the hearing before the Tribunal it was not the Department's case that the Income tax Officer had not a reasonable opportunity of being heard or of substantiating his case before the Appellate Assistant Commissioner.

(4) Whether on the facts of the case the Tribunal misdirected itself in law in setting aside the Appellate Assistant Commissioner's order instead the Department's appeal when the onus of proof was on the Department to show that income had actually been received in British India and the Department had completely failed to discharge that onus either at the stage of the assessment or even at the stage of the hearing of the appeal before the Appellate Assistant Commissioner."

11. The Tribunal refused to state a case for the following reasons :

"7. As this aspect of the question had not been considered at all by the Appellate Assistant Commissioner, the Tribunal, fully realising that such an enquiry would result in hardship to the assessee but as revenues were involved and a case directly in point having beers brought to its notice by the Departmental Representative, in the interest of justice, it set, Aside the said order of the Appellate Assistant Commissioner in this respect only and restored the appeal to his file with the direction that he should give both the parties an opportunity of leading evidence and to ascertain whether the cheques were sent by post or by hand and whether the cheques of the seller either express or implied and the post office if any at which the cheques were posted and the quantum thereof and thereafter to dispose of the appeal in accordance with law.

8. The direct authority of the Bombay High Court was the case of New Jehangir Vakil Mills Ltd. (1956) 30 I T R 664, 670 where their Lordships observed :

'But we cannot shut out the necessary inquiry which even from our own point of view is necessary to be made in order that we should satisfactorily answer the question raised in this reference . . . . . we cannot overlook the fact that if tax is legitimately due to the revenue, the revenue should not be deprived of that tax even though the Department may not have been as vigilant in prosecuting its clam as we should have desired.'

The aforesaid order passed by the Tribunal under section 33(4) and limiting the fresh enquiry to the specific point at issue, which was before it in the departmental appeal, is one which was passed judicially in the exercise of the discretion vested, and not arbitrarily or capriciously and as such cannot give rise to any question of law. The assessee's right of appeal and reference from the further order of the Appellate Assistant Commissioner remains intact and preserved. The assessee according to Mr. Mulla would have had no objection if the entire order of the Appellate Assistant Commissioner was set aside but as only the specific point which arose in the appeal filed by the Department has been referred back, the assessee objects ......

12. As directed by their Lordships we refer the question set out in paragraph I supra.

N. A. Palkhivala with Miss N. F. Damania for the Assessee.

G. N. Joshi with R. J. Joshi for the Commissioner.

JUDGMENT

TAMBE, J.

In this reference two questions have been referred to us by the Tribunal one under section 66(1) of the Indian Income tax Act and the other in compliance with the requisition of this Court under section 66(2) of the Act.

The assessee, Bhor Industries Limited, is a private limited company incorporated in the former Indian State of Bhor. The assessee was desirous of introducing new industries in the Bhor State and for the said purpose an agreement was entered into between the assessee on the one hand and the Diwan of the Bhor State, representing the Bhor Darbar on the other, on lath February 1943. The material terms of that agreement are in the following terms :

"(I). The State agrees to give to the party of the second part (the assessee) or to any other companies that may be formed by the party of the second part, the sole monopoly for starting and working a factory or factories for proofing of cloth of, various types and that the State will not grant any licence or permit nor will it allow any other person, firm or company or, other association, to manufacture articles similar to the articles manufactured by the party of the second part for a period of at least ten years from the date of the starting of the industry.

(2) The State hereby agrees that in respect of any land or other immovable property purchased by the party of the second part which is in any way connected with the industry, no tax in addition to the existing tax that may be payable by the landlord to the State shall be levied on the party of the second part to the intent that save and except the existing landlord's burdens in respect of immovable properties, the party of the second part shall not be bound to pay any other tax of any other kind whatsoever (excepting non agricultural cess that may be levied in accordance with the Land Revenue Code of the State and applied to other subjects of the State) that may be levied by the State in respect of any property whether for residential or business purposes and that the party of the second part shall also not be bound to pay any increased tax in respect of landlord's burdens except in the event of there being a general increase of such taxation for all landlords in the State.

3. The party of the second part shall not be liable and the State shall not charge the party of the second part with any income tax, super tax, excess profits tax or any other tax on profits of any kind whatsoever for a period of ten years from the date hereof whether such taxes are in existence at present or introduced hereafter save and except the toll.

(4)..................................

(5) ....................................

(6) The State agrees that if at any time in future any legislation similar to the Indian Factories Act relating to industry or labour is introduced in the State, the party of the second part shall be exempt from its application for a period of ten years from the date of the starting of the industry.

(7) In consideration of the benefits granted to the party of the second part as hereinabove mentioned, the party of the second part agrees to pay to the State every year by way of royalty for the first ten years since the starting of the industry an amount equivalent to 6 (six and a quarter) per cent. and for the next five years an amount equivalent to 12 (twelve and a half) per cent. of the profits of the company as ascertained by the registered accountants after making provision for payment of 25 (twenty five) per cent. of the profits for use of the patent or commission equivalent to that amount also for depreciation at the rates at present in force for depreciation under the Indian Income tax Act and the amount shall be paid within three months of the accounts being audited and certified by the auditors appointed as hereinabove mentioned."

In the relevant assessment year 1946 the assessee was assessed as a non-resident company. The business of the assessee Inter alia, consisted of dyeing, printing and bleaching cloth. The entire dyeing, printing and bleaching work at Bhor was done for four allied companies belonging to the Tackersey group, three of them had their registered offices in the then British India and the fourth company had its registered office at Bhor. The three companies having their registered offices in the then British India had sent their cloth to the assessee company for bleaching, dyeing and processing at Bhor. The dyes and chemicals for bleaching were purchased in British India. The said three companies of the Thackersey group made payments for the work done by the assessee company by cheques. The cheques were drawn on British Indian banks. In the relevant assessment year the assessee company paid a sum of Rs. 34,650 to the Bhor Darbar in pursuance of the aforesaid seventh clause of the agreement of date 18th February 1943. We are here concerned with the claim of the assessee that the amount of Rs. 34,650 was allowable as a deduction, it being a revenue expenditure and the claim of the revenue that the payment made to the assessee company by the three companies of the Thakersey group by cheques was income received by the assessee in British India. The Income tax Officer had rejected the claim of the assessee to the deduction of the said amount of Rs. 34,650 and had upheld the claim of the Revenue that the said amount received by cheque by the assessee-company was income received by the assessee company in British India within the meaning of section 4(1)(a) of the Indian Income tax Act. It may be stated that at the time the case was pending before the Income tax officer, the decision of the Supreme Court in Ogale. Glass Works Ltd. ((1954) 25 I T R 529) was not available, but by the time the case came up before the Appellate Assistant Commissioner it was placing reliance on this decision the Appellate Assistant Commissioner disallowed the claim of the Revenue that the amount received by cheques from the three companies of the Thackersey group was income received by the assessee in British India. The Appellate Assistant Commissioner, however, rejected the claim of the assessee in respect of the said amount of Rs. 34,650. Both the assessee as well as the Revenue filed appeals before the Tribunal, the assessee challenging the inclusion of the said amount of Rs. 34,650 in his income and the Revenue challenging the exclusion of the said amount in the income of the assessee. The Tribunal rejected the claim of the assessee for the exclusion of the said amount from the income of the assessee. It, however, partly allowed the appeal of the department : in the sense that it remanded the case to the Appellate Assistant Commissioner with a direction to him to give the parties an opportunity of leading evidence and to ascertain whether the cheques were sent by post or by hand as was contended for by Mr. Mulla on instructions at the time of the hearing and further whether the cheques were sent on request of the seller either express or implied and the Post Office, if any, at which the cheques were posted and the quantum thereof, and thereafter to dispose of the appeal in accordance with law.

On an application made by the assessee, the Tribunal drew by a statement of the case and referred the following question to this Court under subsection (1) of section 66 of the Act:

"Whether on the facts and circumstances of the case the sum of Rs. 34,650 paid to the Bhor State under the agreement is a permissible allowance under section 10(2)(xv) of the Act "

The Tribunal, however, rejected the application of the assessee so far as it related to the request of the assessee for referring the other questions to this Court. The assessee, therefore, moved this Court under subsection (2) of section 66 of the Act and on a requisition made by this Court the Tribunal has also drawn up a supplemental statement of case and has referred to us the follow ing question :

"Whether on the facts of the case the Tribunal misdirected itself in making the order of remand, which it made on 9th May 1958, in Income‑tax Appeal No. 8639 of 1956‑57 "

We will number as No. 1 the first question, referred to us under section 66(1) and the other question as No. 2.

We will first deal with the first question. We may at the outset state that though before the Income‑tax Authorities and the Tribunal the assessee had been claiming that the entire expenditure of Rs.34,650 was a revenue expenditure, Mr. Palkhivala has conceded before us that a portion thereof as may be attributable to the obtaining of concession in the matter of payment of income‑tax cannot be claimed as revenue expenditure, the payment of tax not being a revenue expenditure. He, however, contended that excluding that sum the remaining balance is allowable as a revenue expenditure, and therefore, should have been deducted from the profits. Payment made by the assessee under the agree ment is made in consideration of four items, viz., the concession granted under clause (1) of the agreement, i.e. the grant of sole monopoly of starting and working a factory in the Bhor State for a period of ten years ; secondly, for the concession granted in the matter of exemption from payment of property tax at a rate higher than that prevailing at the date of the agreement ; thirdly, for the concession granted in the matter of payment of income‑tax and fourthly, for the concession granted in the matter of exemption from the application of the provisions of the Factories Act to the factory of the assessee. The claim of the assessee that the amount paid was a revenue expenditure has been negatived by the Tribunal on the ground that it was a capital expenditure. The Tribunal observed :

"It is manifest that the payment was made in order to acquire, before the business even commenced, freedom from all competitions, levy of taxes existing or in the future and immunity from the Indian Factories Act. An expenditure to buy of competition is normally a capital expense for it brings into existence an asset of an enduring nature, particularly so when the payment is agreed to be made even before the business is commenced (see Assam Bengal Cement Co. Ltd. v. Commissioner of Income‑tax (1955) 27 I T R 34, Income‑tax is not deductible as a business expense from the business profits and, therefore, the securing of an immunity from taxation would also bring into existence an advantage of an enduring nature. In these circumstances it must be held that the expenditure has not been laid out wholly for the purposes of business‑and the disallowance had properly been made."

It is the argument of Mr. Palkhivala that apart from the pay ment relating to exemption from income‑tax, the reasoning of the Tribunal is erroneous. According to him under the agreement the assessee is required to make the payments from its yearly revenue income. The payment attributable to the acquisition of monopoly rights is therefore, a revenue expenditure ; the decision in Assam Bengal Cement Co. Ltd. v. Commissioner of Income‑tax ((1955) 27 I T R 34) is distinguishable and has no application to the facts of the present case. He distinguished the decision on the ground that the pay ment, which has to be made, is a conditional one, i.e. only when there are profits, and contended that having regard to the nature of the funds out of which the payment is to be made and the nature of the payment, it cannot be said that it is a capital expenditure.

As regards the payments attributable to obtaining concessions in the matter of payment of enhanced property tax and immunity from the application of the Factories Act, his contention is that the payments made to workers and the expenditure required to be incurred for payment of property tax is a revenue expenditure and, therefore, any amounts paid in obtaining concession in those respects is also revenue expenditure. He, therefore, submits that we should direct the Tribunal that the amounts attributable to obtaining concession in the matter of monopoly rights, of exemption from payment of property tax and the exemption from the application of the Factories Act should be apportioned out of the said sum of Rs. 34,650 and be allowed as a deduction on the ground of it being a revenue expenditure.

We find it difficult to accept this contention of Mr. Palkhivala. It is indeed true that there is no precise definition as to what is capital expenditure and what is revenue expenditure and the line of demarcation between the two is a thin one. After examining various relevant authorities, certain principles have been laid down by their Lordships of the Supreme Court in this regard and in the light of those principles the facts of the present case will have to be approached. The facts in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax on which reliance has been placed by the Tribunal, are as follows The assessee‑company in that case acquired from the Government of Assam, for the purpose of carrying on the manufacturer of cement, a lease of certain limestone quarries for a period of twenty years for certain half yearly rents and royalties. In addition to the rents and royalties the assessee‑company also agreed to pay annually a sum of Rs. 5,000 during the whole period of the lease as a protection fee and in consideration of that payment the State agreed not to grant to any person any lease, permit or prospecting licence for limestone in a group of quarries without a condition that no limestone should be used for the manufacture of cement. The assessee also agreed to pay Rs. 35,000 annually for five years as a further protection fee and the State in consideration of that payment gave similar under taking in respect of the whole district. The question that fell for consideration was whither in computing the profits of the assessee the sums of Rs. 5,000 and Rs. 35,000 paid to the State by the assessee could be deducted under section 10(2)(xv) of the Indian Income‑tax Act. The Supreme Court held that payment of the said amount of Rs. 40,000 was a capital expenditure and had, therefore, been rightly disallowed. After examining various English decisions their Lordships of the Supreme Court referred to the decision of a Full Bench of the Lahore High Court in In re : Benarsidas Jagannath ((1947) 15 I T R 185) and have in extenso reproduced at page 44 of the report the principles deduced in that case. At page 45 their Lordships observed :

"This synthesis attempted by the Full Bench of the Lahore High Court truly enunciates the principles which emerge from the authorities. In cases where the expenditure is made for the initial ontlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A capital asset of the busi ness is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital or the income of the concern is certainly in the nature of capital expenditure. The question however arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is property attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expendi ture whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the fixed capital of the business it would be of the nature of capital expenditure and if it was part of its circulating capital it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts of each particular case in tilt manner above indicated. It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down a test which would apply to all situations, One has, therefore, got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure ...."

The tests have also been affirmed by their Lordships of the Supreme Court in their later decisions, Pingle Industries Ltd. v. Commissioner of Income‑tax ((1960) 40 I T R 67) and Abdul Kayoom v. Commissioner of Income‑tax ((1962) 44 I T R 689 (S C)). Applying these tests to the facts of the Assam Bengal Cement Company's case their Lordships held that the expenditure incurred for obtaining monopoly rights was an advantage of enduring nature, which endured for the benefit of the whole business and was, therefore, a capital expenditure. At page 47 of the report it has been observed :

"The asset which the company had acquired in consideration of this recurring payment was in the nature of a capital asset, the right to carry on its business unfettered by any competition from outsiders within the area. It was a protection acquired by the company for its business as a whole. It was not a part of the working of the business but went to appreciate the whole of the capital asset and make it more profit yielding. The expendi ture made by the company in acquiring this advantage which was certainly an enduring advantage was thus of the nature of capital expenditure and was not an allowable deduction under section 10 (2)(xv) of the Income‑tax Act."

The facts of the present case so far as the contention of the assessee relating to the expenditure attributable to the acquisition of monopoly rights are concerned, are similar and, therefore, in our judgment they fall within the rule laid down by their Lord ships of the Supreme Court. The contention of the assessee in this respect is, therefore, overruled.

And this brings us to the contentions of the assessee relating to the other two items, viz., expenditure incurred for acquiring exemption in the matter of payment of additional property tax and in the matter of immunity from the application of the provi sions of the Factories Act. Mr. Palkhivala contends that the payment of property tax by the assessee would be a revenue expenditure. Instead of paying additional property tax as and when levied, by this arrangement the company had secured a ceiling in respect of its liability in the payment of additional property tax. The expenditure, therefore, is of revenue nature. As regards the immunity secured from the operation of the factories Act, Mr. Palkhivala argues that had the Factories Act been made applicable to the assessee‑company, the hours of work of labour would have been controlled under its provisions and for the overtime work the assessee would have been required to pay enhanced wages to its labour. Wages paid to the labour is a revenue expenditure. By this arrangement the assessee has got rid of the liability, which is revenue in nature and has secured a ceiling in respect of that liability. The expenditure attributable to securing exemption from the operation of the Factories Act, therefore, also is a revenue expenditure.

It is not in dispute before us that the expenditure incurred in paying property tax and in paying wages to labour would be of revenue nature. It is also not in dispute before us that payment made to get rid of a liability chargeable to revenue is a revenue expenditure. The question, however, which has to be considered is whether the expenditure incurred by the assessee is a payment made by it to get rid of a liability chargeable to revenue. Accord ing to the principles laid down by their Lordships, the aim and object of the expenditure would determine the character of the expenditure whether it is capital expenditure or revenue expendi ture, and it is to be seen with what object in view the agreement has been entered into by the assessee with the Bhor Darbar on 18th February 1943, under which this liability has been incurred. As already stated this agreement was not entered into after the business had commenced, but on the other hand it was entered into with a view to start the business. For the purpose of starting the business the assessee was desirous of obtaining certain conces sions from the Bhor Darbar and with that view the agreement had been entered into by the assessee. The concessions secured by the assessee are four‑fold : monopoly in the matter of doing the business in that area, exemption during the period of the agreement from liability to pay income‑tax under the provisions of the Income‑tax Act even if levied during that period, exemption from liability to pay enhanced property tax even if it is enhanced and exemption from the application of the Factories Act to the business of the assessee even if it is made applicable to the area. In consideration of obtaining these four concessions, the assessee had agreed to pay a sum equivalent to certain percentage of its profits as provided in the agreement. It is clear that the liability incurred was to secure concessions, which would ensure certain set of circumstances for its business presumably with a view that its business calculations do not mis-carryon account of levy of any additional burden on the industry at its commencement or during its early stages. Payments made on such account cannot, in our opinion, be said to be made to get rid of an onerous liability of a business which is chargeable to revenue. In fact no liability existed when the liability was incurred. It was incurred not to get rid o .f any liability but to ensure that no liability would arise. Nor can it be said that it is an expenditure laid out for running the business. In our opinion, therefore, the Tribunal was right in holding that by making these payments the assessee has secured an advantage for the enduring benefit of the business. The expenditure, therefore, in our judgment, is not chargeable to revenue but is a capital expenditure. In this connection Mr. Palkhivala has referred us to certain decisions in Green v. Cravens Railway Carriage & Wagon Co. Ltd. ((1951) 32 Tax Cas. 359) ; Wilson v. Nicholson Sons and Daniels Ltd. ((1943) 25 Tax Cas. 473) ; Honcock v. General Rever sionary Interest & Investment Co. Ltd. ((1918) 7 Tax Cas. 358) and Anglo‑Persian Oil Co. Ltd. v. Dale ((1931) 16 Tax Cas. 253). In our opinion none of these decisions is of any assistance to the assessee and they have no applications to the facts of the present case. The facts in Green v. Cravens Railway Carriage & Wagon Co. Ltd., were that the assessee company in 1944 had introduced a staff assurance scheme based upon a single assurance policy, the annual premiums on which were paid wholly by the company. In order that the number of employees of the long service should benefit fully, the assessee -company undertook to pay certain additional annual premiums. In 1946 the company paid a lump sum in commutation of these additional premiums. In these circumstances it was held that the expenditure incurred in paying a lump sum in commutation of the additional premiums was revenue in nature.

In Wilson v. Nicholson Sons and Daniels Ltd. it was held that the expenditure incurred in commuting the future pay of the director of a company was revenue in nature. In Hancock v. General Reversionary Interest & Investment Co. Ltd. it was held that a part of the lump sum paid for the purchase of annuity was revenue in nature and in Anglo Persian Oil Co. Ltd. v. Dale it was held that the lump sum payment to get rid of a commission agent was revenue in nature. It would be seen that in all these cases expenditure was incurred while the business was a running concern and the liabilities which were commuted were chargeable to revenue. In these circumstances it had been held that the expenditure incurred in commutation of those liabilities accruing in future was revenue in nature. Such is, however, not the case here. The liabilities, as already stated, were undertaken before the business had started and had been undertaken not for the running of the business but for the purpose of securing certain advantages to the business or certain set of favourable circum stances in order to launch the business.

For reasons stated above, in our opinion, the answer to the first question should be in the negative.

In view of our answer it is not necessary to deal with Mr. Palkhivala's argument that it is open to the Court to appor tion the amount of Rs. 34,650 between capital and revenue expenditure.

Turning to the next question, it would be convenient to state a few facts in order to appreciate the contentions raised by the parties. As already stated, the assessee's business is at Bhor, a place in the then Native State in India. The business gas of dyeing, printing and bleaching. In the assessment year during the course of the business the assessee, inter alia, did work for three out of four companies of the Thackersey group. These three companies had their places of business in British, India and, in payment for the work done by the assessee, the companies had sent cheques drawn on banks in British India. The Swastik Bank at Bhor acted as the assessee's agent for collection. Swastik Bank presented the cheques at the office of the British Indian banks and consequently, the cheques were cashed at the office of the British‑Indian Banks. On these facts the contention of the Department was that these monies had been received in British India and, therefore, the assessee was liable to be taxed on these receipts. While, on the other hand, the contention of the assessee was that the agreement with the mill‑companies was that the assessee had a right to receive monies in Bhor and it was only by way of convenience that cheques on British banks were received. The Income‑tax Officer held that, since the transfer took place in British India, it followed that the payment by the buyers to the sellers through their respective banks took place in British India. The assessee appealed to the Appellate Assistant Commissioner against this decision of the Income‑tax Officer. At the time the appeal was heard by the Appellate Assistant Commissioner, the decision in Commissioner of Income- tax v. Ogale Glass Works Ltd. ((1954) 25 I T R 529) was available. It was in that case held that the place where a cheque is' received unconditionally would be the place of receipt of the amount. If, however, cheques are sent by post at the express or implied request of the assessee, the place where the cheques are posted would be the place where the cheques are received, the post office acting as the agent of the assessee. The Appellate Assis tant Commissioner, relying on the decision of the Supreme Court, held that, as the cheques had not been dishonoured, the place of receipt of the amount would be Bhor. The Appellate Assistant Commissioner in his order observed that there was no evidence on record to show that the cheques were posted in British India on the request of the assessee- company, either express or implied. He further observed that there was a letter on record dated December 6, 1954, by which one of the three companies had confirmed the agreement be tween the parties that payment should be made at Bhor. In this view of the matter, the Appellate Assistant Commissioner allowed the assessee's appeal. It may be stated that, at the time of hearing the appeal before the Appellate Assistant Commissioner, no representative of the Department had appeared before him. Against this decision of the Appellate Assistant Commissioner, a second appeal was taken by the department to the Tribunal. The Tribunal took the view that in view of the Supreme Court decision in Ogale Glass Works Ltd. the manner in which the cheques were sent, i e., whether they were sent by post or by hand, and whether the cheques, if sent by post, were so sent on the express or implied request of the assessee were relevant questions for the determination of the issue involved. These aspects were not before the Income‑tax Officer when the case was tried before him. The Tribunal further held that in view of the Supreme Court decision it was the duty of the Appellate Assistant Commissioner to have given the assessee and the Income‑tax Officer a specific opportunity of proving whether the cheques were received by hand or were posted and if so at whose request. Reliance was placed on the following observations made by this Court in Commissioner of Income‑tax v. New Jehangir Vakil Mills Ltd. ((1956) 30 I T R 664, 670)

"But we cannot shut out the necessary inquiry which even from our own point of view is necessary to be made in order that we should satisfactorily answer the question raised in this reference . . . . . We cannot overlook the fact that if tax is legitimately due to the revenue, the revenue should riot be deprived of that tax even though the department may not have been as vigilant in prosecuting its claim as we should have desired."

The Tribunal, therefore, set aside the order of the Appellate Assistant Commissioner and remanded the case to him with a direction to give both the parties an opportunity of leading evidence and to ascertain whether the cheques were sent by past or by hand and whether the cheques, if sent by post, were sent on the request of the seller either express or implied and the post office, if any, at which the cheques were posted and the quantum thereof and thereafter to dispose of the appeal in accordance with law: The question that falls for consideration is whether, on these facts of the case, the Tribunal has misdirected itself in making the order of remand. The power of the Tribunal in disposing of the, appeal before it is very wide under section 33(4) of the Act. That sub section provides :

"The Appellate Tribunal may, after giving both parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit, and shall communicate any such orders to the assessee and to the Commissioner."

It would thus be seen that it is open to the Tribunal to pass such orders as it thinks tit, the only limitation being that it must give an opportunity to the parties of being heard before an order is made. Indeed Mr. Palkhivala does not question the power of the Tribunal to remand the case. All what he has argued is that the Tribunal has arbitrarily exercised its powers. According to him, the department had notice of the appeal before the Appellate Assistant Commissioner and could have appeared before the Appellate Assistant Commissioner. That its representative did not appear before the Appellate Assistant Commissioner cannot be of any additional advantage to the department. Even in the memo of appeal, the department had not raised a ground that the case should be remanded. Even before the Tribunal the department had not said that it had any evidence to lead in the case. In these circumstances, the Tribunal acted arbitrarily and capriciously in making the order of remand and it would be so because the assessee had been placed at great disadvantage in leading evidence after a lapse of so many years. It was also argued that the decision in New Jehangir Vakil Mills Limited, the observations wherein have been relied on, have now been overruled by the Supreme Court and, therefore, the very basis of the order of remand has disappeared.

We find it difficult to accept these arguments. It is true that the decision in New Jehangir Vakil mill's case, of this Court has been overruled by their Lordships of the Supreme Court in New Jehangir Vakil Mills Ltd. v. Commissioner of Income‑tax ((1959) 37 I T R 11), but that cannot have the effect of taking away ‑the force of the observations made by this Court so far as its application goes in exercise of its power by the Tribunal under subsection (4) of section 33 of the Act. This Court had held that if the Court in its view finds it necessary that certain further inquiries be made in the case in order to enable it to satis factorily decide the case in a taxation matter, it would, in the interest of justice, be open to the Court to direct that further inquiries be made in the matter. What has been held by the Supreme Court is that the power cannot be so widely exercised by the High Court acting in exercise of its power under subsection (4) of section 66 of the Act, its powers being limited to the questions arming from the order of the Tribunal. But that does not mean that the principle cannot be called in aid by the Tribunal in exercise of its power, which are of widest amplitude. It cannot be disputed that prior to the decision of their Lordships of the Supreme Court in Ogale Glass Works case importance was not attached to the fact as to whether the cheques by which payment was made were sent by post or were delivered by hand. No importance was also attached whether the cheques were sent at the request of the assessee express or implied. These questions became of vital importance after the said decision of the Supreme Court. The decision of the Supreme Court was not available to the Income‑tax Officer at the trial stage. Naturally, there fore, due attention was not paid for ascertaining these relevant facts. In these circumstances, it cannot be said that the Tri bunal had acted arbitrarily or capriciously in remanding the matter for further inquiry even though the department had not asked for an inquiry into those facts or stated that it bad any further evidence to lead. It is indeed true that the assessee may find it difficult to lead evidence after a lapse of such time, but that would be a matter, which will have to be taken into con sideration in assessing and weighing the evidence. In out opinion it can hardly be a ground for saying that no inquiry be made into these relevant questions. For aught we know the relevant evidence may still be available to the assessee. In our opinion, therefore, it is not possible to say that the Tribunal has misdirected itself in making the order of remand.

In the result, both the questions are answered in the negative. The assessee shall pay the costs of the department.

Questions answered in the negative.

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