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PETITIONER: INDIA MACHINERY STORES (P) LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, BIHAR

DATE OF JUDGMENT: 06/05/1970

BENCH: SHAH, J.C. BENCH: SHAH, J.C. HEGDE, K.S. GROVER, A.N.

CITATION:  1970 AIR 1563            1971 SCR  (1) 539  1970 SCC  (2) 168  CITATOR INFO :  R          1980 SC 226  (19)

ACT: Income-tax  Act, 1922, s. 66A(2)--Certificate of fitness  to appeal  to  Supreme Court-High Court must  mention  grounds- Certificate justified only when question of great public  or private importance is at issue.

HEADNOTE: The  appellant  was a private limited  company  incorporated with  the object of taking over the business carried  on  by another company.  By an agreement dated August 2, 1956,  the appellant company agreed to purchase all the assets goodwill etc.  of  the  vendors.  By cl. 4 of the  agreement  it  was provided that all assets of the vendors in respect of  their business "shall be taken over at the book value standing  in the books of accounts of the vendors" as on August 1,  1956. The  Income-tax  Officer in proceedings for  the  assessment year  1958-59  found that in the books of  the  vendors  the ’value  of stock’ as on August 1, 1956 was Rs. 1,77,285  but in  the  books of the appellant company  the  opening  stock taken  one was valued on the same day at Rs. 2,10,225.   The latter  valuation also appeared in the Schedule  annexed  to the deed of transfer.  The Income-tax Officer observed  that the valuation by the appellant company of the opening  stock was in "clear violation of the agreement between the vendors and  the  Company".   He  accordingly added  a  sum  of  Rs. 33,000/-  representing the difference between the  value  of the closing stock in the books of account of the vendors and the  opening stock in the books of account of  the  Company. The order was confirmed in appeal by the Appellate Assistant Commissioner  and by the Income-tax Appellate Tribunal.   In reference  the High Court of Patna upheld the view taken  by these  authorities.   A  Division Bench of  the  High  Court certified the case under s. 66A(2) of the Indian  Income-tax Act,  1922,  observing  that  the  case  fulfilled  all  the requirements  of  the said section and was a  fit  case  for appeal to the Supreme Court.  The Revenue contended in  this Court  that the certificate was incompetent as the  question of  law  which  had to- be decided was not set  out  and  no

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question of public or private importance had been disclosed. HELD : (i) In granting the certificate the High Court merely observed  that is was ’a fit case for appeal to the  Supreme Court’  : they did not indicate the grounds which  persuaded them  to  hold  that it was a fit case for  appeal  to  this Court.   It would be conducive to better  administration  of justice  if  in  certifying a case under s.  66A(2)  of  the Indian  Income-tax  Act as a fit case for appeal,  the  High Court  sets out the question of law which they regard as  of public  or private importance which falls to be  decided  by this Court. [543 G] (ii) It  is true that under s. 66(1) and (2) of  the  Indian Income-tax Act, 1922 only a question of law may be  referred to  the  High Court for opinion, but the right to  obtain  a certificate under s. 66A(2) arises only when in the proposed appeal  a  question of great public and  private  importance arises.   It cannot be held that because a question  of  law alone  may be referred to the High Court under s. 66 of  the Indian Income-tax Act. in the proposed appeal a question  of law  of  great  public  or  private  importance  necessarily arises.   Any  other view, would make every opinion  of  the High  Court  in a reference under s. 66 appealable  to  this Court. [544 B-C] 540 The  practice followed in some of the High court of  issuing certificates  under s. 66A(2) without recording  reasons  or grounds  for  certifying  the  case  would  not  justify   a departure  in the present case from the practice laid  down, many years ago by decision of the Judicial Committee of  the Privy  Council  according to which a  certificate  under  s. 66A(2) which does not set out precisely the grounds or raise a  question of great public or private importance  does  not comply with the requirements of the Act.[544 E] Commissioner  of Income-tax, Central Provinces of  Berar  v. Sir S. M. Chitnavis, L.R. 59 I.A. 290, followed. Delhi  Cloth  and General Mills Company Ltd.  v.  Income-tax Commissioner,  Delhi, L.R. 54 I.A. 421, Banarsi  Parshad  v. Kashi  Krishna Narain & Anr., L.R. 28 I.A. II, Radha  Krishn Das  v. Rai Krishn Chand, L.R. 48 I.A. 31  and  Radhakrishna Ayyar v. Swaminatha Ayyar, L.R. 48 I.A. 31, applied. (iii)The   appellant   made  no  attempt  to   explain   the discrepancy in the valuation of the stock transferred.   The Income-tax  Officer  was of the view that  the  company  had inflated  the  opening stock so as to  reduce  the  ultimate profits.  That view was confirmed by the Appellate Assistant Commissioner and by the Tribunal.  No question of law  arose out of the order of the Tribunal.  The reference itself  was incompetent. [545 A-B]

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 376 of 1967. Appeal  from the judgment and decree dated December 8,  1965 of  the Patna High Court in Misc.  Judicial Case No.  38  of 1962. M. C. Chagla and R. C. Prasad, for the appellant. Jagadish  Swarup,  Solicitor-General, G. C.  Sharma,  R.  N. Sachthey and B. D. Sharma, for the respondent. The Judgment of the Court was delivered by Shah,  J. This appeal is filed with certificate granted  by- the  High  Court  of Patna under s.  66A(2)  of  the  Indian Income-tax Act, 1922. The  India  Machinery Stores (P) Ltd. is a  private  company incorporated  with  the object of taking over  the  business

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carried    on   by   the   India   Machinery    and    Mills Stores--hereinafter  called ’the vendors’.  By an  agreement dated August 2, 1956, the Company agreed to purchase all the assets  of  the vendors, goodwill and  the  "book-debts  and other liabilities and claims against the Company" as on  the date of transfer in consideration of allotment of 260  fully paid-up  shares of the Company of the nominal value  of  Rs. 2,60,000/-.  It was provided by cl. 4 of the agreement               "That all assets of the vendors in respect  of               all  its business shall be taken over  at  the               book  value standing in the books of  accounts               of  the  vendors  as on  the  1st  August  One               Thousand Nine Hundred Fifty-six." 541 In  a  proceeding  for assessment to tax  for  1958-59,  the Income-tax  Officer found that in the books of  the  vendors the  "value of stock" as on August 1, 1956 was  Rs  1,77,285 while  in the books of the Company the opening  stock  taken over  by  the  Company was valued on the  same  day  at  Rs. 2,10,285.  The Income-tax Officer held that the valuation by the Company, of the opening stock was in "clear violation of the terms of agreement between the vendors and the  Company" and  added a sum of Rs. 33,000 representing  the  difference between  the  value  of the closing stock in  the  books  of account of the vendors and the opening stock in the books of account  of the Company.  The order was confirmed in  appeal by  the Appellate Assistant Commissioner and by the  Income- tax Appellate Tribunal. The  High  Court  of  Patna recorded  their  answer  in  the affirmative  on  the  following  question  referred  by  the Tribunal               "Whether on the facts and circumstances of the               case and upon a construction of the  agreement               of   2nd  August,  1956,  the   Tribunal   was               justified  in  holding  that the  sum  of  Rs.               33,000 forms part of the assessable profits of               the assessee Company ?" A Division Bench of the High Court certified the case under S.   66A(2)  of  the Act as fit for appeal  to  this  Court, observing               "That the case fulfils all the requirements of               s. 66A(2) of the Indian Income-tax Act,  1922,               and,  is a fit case for appeal to the  Supreme               Court." At  the hearing of the appeal on behalf of the  Commissioner of   Income-tax,  it  is  contended  that  the   appeal   is incompetent, since the High Court in certifying the case  as fit for appeal to this Court did not set out the question of law  which this Court has to decide.  It was urged that  the certificate  or the order certifying the case must  disclose that   some  substantial  question  of  public  or   private importance arises in the case, and on that account the  case is  certified  to be fit for appeal.  In our  judgment,  the contention must be accepted. Section  66A of the Indian Income-tax, Act, 1922, which  was added by the Indian Income-tax (Amendment) Act 24 of 1926 by sub-s. (2) provides               "An appeal shall lie to the Supreme Court from               any judgment of the High Court delivered on  a               reference  made under section 66 in  any  case               which the High Court certifies to be a fit one               for appeal to the Supreme Court.,, 542 The  phraseology of sub-s. (2) of s. 66A of  the  Income-tax Act  is substantially the same as used in S. 109 (c) of  the

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Code  of  Civil Procedure, 1908, Art. 133 (1) (c)  and  Art. 134(1)  (c) of the Constitution.  The Judicial Committee  in Delhi  Cloth  and General Mills Company Ltd.  v.  Income-tax Commissioner, Delhi(1), observed               "......  it  will be noticed that  the  appeal               thereby  given  is by sub-s. 2 confined  to  a               case  which the High Court certifies "to be  a               fit one for appeal to His Majesty in Council".               These  words  are textually the  same  as  the               concluding words of S. 109(c), of the Code  of               Civil   Procedure,   and  coupled   with   the               carefully  limited  referential words  to  the               Code of Civil Procedure in sub-s. 3,  suffice,               in their Lordships’ judgment, to exclude  from               any  right of appeal cases which  fall  within               the requirements of S. 1 1 0 of the Code,  and               are  operative to confine that right to  cases               which  are certified to be otherwise  fit  for               appeal to His Majesty in Council." In Banarsi Parshad v.. Kashi Krishna Narain & Ant-. (2)  the Judicial Committee explained that the expression  "certifies to  be a fit one for appeal" in the Code of Civil  Procedure is clearly intended to meet special cases-such, for example, as those in which the point in dispute is not measurable  by money,  though  it  may  be  of  great  public  or   private importance.  To certify that a case is of that kind,  though it  is  left entirely in the discretion of the Court,  is  a judicial  process  which  could  not  be  performed  without special  exercise of that discretion, evinced by  a  fitting certificate. In Radha Krishn Das v. Rai Krishn, Chand(3) a Division Bench of the Allahabad High Court had issued a certificate stating that "though the valuation of the case was below Rs.  10,000 yet as regards the value and nature of the case it fulfilled the requirements of S. 596 of Act No. XIV of 18 82 (Code  of Civil  Procedure)".  In that case the value of the  subject- matter  was less than Rs. 10,000 and the Judicial  Committee observed  that even though S. 596 was referred to there  was nothing  to  show  that  the  Judges  who  had  issued   the certificate  "had exercised their judicial  discretion  upon the  matter in deciding whether, in order to comply with  s. 595 (c) and s. 600 the case was a fit one for appeal to  Her Majesty in Council." On that ground the appeal was dismissed as incompetent. (1) L.R. 54 1. A. 421.           (2) L.R.28 I.A.11. (3)  I.  R. 28 1. A. 1821. 543; In Radhakrishna Ayyar v. Swaminatha Ayyar(1) the High, Court granted ’a certificate in a case in which the claim was, Rs. 4,560 due as rent.  The certificate recited :               "It  is hereby certified that, as regards  the               value of the subject matter and the nature  of               the  question involved, the case  fulfils  the               requirements of ss. 109 and 1 1 0 of the  Code               of  Civil Procedure, and: that the case  is  a               fit one for appeal to His Majesty in Council." The  Judicial Committee observed that where any  certificate is’  granted  certifying  a  case,  it  is  of  the   utmost importance  that  the certificate should show  clearly  upon which  ground  it is granted.  Indealing with  the  argument that the case was covered by s. 109 (c) of the Code of Civil Procedure, 1908, their Lordships observed               "There is no indication in the certificate  of               what the nature of the question is that it  is               thought  was involved in the hearing  of  this

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             appeal, nor is there anything to show that the               discretion conferred by S. 109(c) was  invoked               or  was exercised.  Their Lordships  think....               that   these   certificates   are   of   great               consequences,  that they seriously affect  the               rights  of  litigant parties,  and  that  they               ought  to be given in such a form that  it  is               impossible to mistake their meaning upon their               face." Again,  the Judicial Committee observed in  Commissioner  of Income-tax,   Central  Provinces  &  Berar  v.  Sir  S.   M. Chitnavis(2) that when a certificate is granted under s. 66A of the Income-tax Act it must be on a question affecting not only a particular assessee ,and depending upon the state  of the evidence in a particular case,, but a question of  great public   importance   affecting  assessees   generally   and depending upon general principles. In  granting the certificate the High Court merely  observed that  it was "a fit case for appeal to the Supreme Court"  : they  did not indicate the grounds which persuaded  them  to hold  that it was a. fit case for appeal to this Court.   It would be conducive to better administration of justice if in certifying  a case under s. 66A(2) of the Indian  Income-tax Act  as a fit case; for appeal, the High Court sets out  the question  of  law which they regard as of  great  public  or private importance which falls to be decided by this Court. Mr.  Chagla  contended  that  the rules  laid  down  by  the Judicial Committee applicable to a certificate issued  under s. 109(c) of the Code of Civil Procedure, 1908, and under s. 596  of  the  Code of 1882, in regard to  appeals  in  civil matters  have  no bearing in determining the meaning  of  s. 66A(2), for the High Court (1) L. R. 48 1. A. 31.                   (2) L. R. 59 I. A. 290. -544 exercises advisory jurisdiction on a reference on  questions of law and on that account even if the question of law which in  the view of the High Court arises is not stated  in  the certificate,  it  may be presumed when the  High  Court  has certified  a case to be fit for appeal, that  a  substantial question of law is involved, and the technical defect in the certificate  may be. ignored.  We are unable to accept  that argument.   It  is  true that under S. 66(1) &  (2)  of  the Indian  Income-tax Act, 1922, only a question of law may  be referred  to  the High Court for opinion, but the  right  to obtain a certificate under s. 66A(2) arises only when in the proposed  appeal  a  question of  great  public  or  private importance  arises.   It  cannot  be  held  that  because  a question  of  law alone may be referred ,to the  High  Court under  S. 66 of the Indian Income-tax Act, in  the  proposed appeal  a  question  of  law  of  great  public  or  private importance  necessarily arises.  Any other view, would  make every ,opinion of the High Court in a reference under s.  66 appealable  to  this Court.  In our  view,  the  certificate granted by the High Court was defective. It  was also urged that a practice is fairly common in  some of the High Courts to certify a case under S. 66A(2) without recording  any  reasons or the grounds  for  certifying  the case,  and  we  may not penalize the  Company  when  we  are enunciating  the  true  rule for the first  time.   But  the practice,  in our judgment, was laid down many years ago  by the decisions of the Judicial-Committee that a  ,certificate under s. 66A(2) which does not set out precisely the grounds or  raise a question of great public or  private  importance does  not  comply  with the requirements of  the  Act.   The

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jurisdiction  of this Court to entertain an appeal from  the opinion recorded under the Indian Income-tax Act arises only when  a certificate is properly issued by the High Court  or when  this Court grants special leave under Art. 136 of  the Constitution. In our judgment, there is again no merit in the appeal.   By cl.  4  of  the  agreement dated  August  2,  1956,  it  was expressly provided               "That all assets of the vendors in respect  of               all  its business shall be taken over  at  the               book  value standing in the books of  accounts               of  the  vendors  as on  the  1st  August  One               Thousand Nine Hundred Fifty-six." It is undisputed that the stock-in-trade was entered in  the books  of account of the vendors on the date of transfer  of the  undertaking at Rs. 1,77,285 and the Company valued  the stock-in-trade at Rs. 2,10,285.  It is true-that to the deed of  transfer  is  annexed  a  Schedule  of  the  assets  and liabilities  taken over by the Company and in  the  Schedule the value of stocks at Patna, Muzaffarpur and 545 Purnea  is shown at Rs. 2,10,285.87. No attempt was made  to explain  the discrepancy between the operative part  of  the agreement  and  the valuation shown in  the  Schedule.   The Income-tax  Officer  was of the view that  the  Company  had inflated  the  opening stock so as to  reduce  the  ultimate profits.  That view was confirmed by the Appellate Assistant Commissioner and by the Tribunal.  No question of law  arose out of the order of the Tribunal.  The reference itself  was incompetent. The appeal fails and is dismissed with costs. G.C.                                                  Appeal dismissed. 13 Sup.  Cl./70-6 546