Executors of The Estate of J.K. Dubash
Vs. Commissioner of Income Tax, Bombay City [1950] INSC 43 (21 December 1950)
KANIA, HIRALAL J. (CJ) SASTRI, M. PATANJALI
DAS, SUDHI RANJAN
CITATION: 1951 AIR 111 1950 SCR 969
CITATOR INFO :
R 1958 SC 269 (10) RF 1986 SC 376 (21)
ACT:
Indian Income-tax Act (XI of 1922), s. 25
Death of person carrying on business--Executors carrying on business as going
concern for selling it under terms of will--Whether "succeed in such
capacity "to testator--Date of succession.
HEADNOTE:
A person who carried on a business on which
tax had been levied under the Income-tax Act of 1918 died on the 9th of April,
1942, leaving a will by which he authorised his executors to carry on his
business as a going concern, as if they were absolute owners but without being
responsible for loss, for a period not exceed in 12 months during which if any
of his nephews wanted to purchase the business, they might sell it to him or
them. The business was sold to one of the nephews on the let January, 1993. The
question being whether for the purposes of s. 25 (4) of the Incometax Act of
1922 is amended in 1939 the succession to the business took place on the 9th
April, 1942, when the testator died or on the 1st January, 1943, when the
business was sold:
Held, affirming the decision of the Bombay
High Court, that inasmuch as the business got vested in the executors on the
death of the testator and the executors carried on the business within the
meaning of es. 3 and 10 of the Act, and as such became personally liable as
assessees and there was thus a change in the assessee, a succession to the
testator "in such capacity" took place on the date of the death of
the assessee, even though the executors carried on the business as a going
concern under the terms of the will and the business was also being carried on
not lot the benefit of the executors but for the benefit of the estate of the
testator.
Per PATANJALI SASTRI J.--The expression
"succeeded by another person" in s. 26 (2) and s. 25 (4) of the Act
includes not only cases of succession inter vivos but also cases of succession
on death.
While it is true that a transfer of ownership
is ordinarily involved in cases of succession falling within s. 26 (2) and s.
25 (4), it is not an essential element of succession within the meaning those
provisions.
The words "in such capacity" in
8.26 (2) and s. 25 (4) mean nothing more than the capacity of a person who
carries on the business as the predecessor was carrying it on, that is, with
liability to be taxed on its profits and gains.
970 Commissioner of Income-tax, Bombay v.P.
E, Polson (L.R. 7 I.A. 196) referred to.
Jupuli Kesava Ra, o v. Commissioner of Income-tax,
Madras (59 Mad. 377) explained.
APPEAL (Civil Appeal No. CV of 1949) from a
Judgment of the Bombay High Court (Chagla C.J. and Tendolkar J.) dated March
19, 1948, in a reference made by the Income-tax Appellate Tribunal under
section 66 (1) of the Indian Income-tax Act (Income* tax Reference No. 26 of
1947).
Sir N.P. Engineer (R. J. Kolah, with him) for
the appellant.
M.C. Setalvad, Attorney General for India,
(G. N. Joshi, with him) for the respondent.
1950. December 21. The Court delivered
Judgment as follows:
KANIA C.J. -This is an appeal from a judgment
of the High Court at Bombay delivered on a reference by the Income-tax
Appellate Tribunal under the Indian Income-tax Act. The material facts are
these. The assessees (appellants) are the executors of the will of Mr. J.K.
Dubash who died on the 9th of April, 1942, having made his last will on the 8th
of April, 1942. Probate of the will was issued to the executors on the 10th of
August, 1942. During his lifetime, the testator carried on the business of
shipping agents. Clause 13 of the will contains directions about carrying on
this business of the testator till its disposal.
It directs the executors to carry on the
business as a going concern after his death with power to make fresh contracts
and discharge the existing and future liabilities and all other usual-and
necessary powers, unless special circumstances arose which, in the opinion of
the executors, made it expedient to sell the business earlier. This business
was to be carried on for a period not exceeding twelve months during which time
the executors were to ascertain whether or not any of his nephews was willing
to purchase the said undertaking. For this purpose and generally for sale purposes,
he directed that the executors shall, as soon as possible, 971 after his death,
have a valuation made of the said undertaking. The undertaking was to be sold
so as to include all his interest in the premises, the goodwill, the stock-in trade,
plant, furniture etc. but excluding securities for money and cash in the bank
to the credit of the account of that undertaking. If the executors were
satisfied before the expiration of one year from the testator's death that the
said undertaking would not be sold to his nephews because none was willing or
able to purchase it or if it remained unsold, at the end of a year, to any of
the nephews then (whichever event first happened) the executors were directed
to sell the undertaking to such third person on such terms and at such price as
they thought proper. The clause ended with the following words:-.-"I expressly
declare that in carrying on the said undertaking my trustees shall, in addition
to all powers, discretion and authorities vested in them by law, have power to
carry on or discontinue any part of the said undertaking or to augment or
diminish the capital employed and generally to act as absolute owners without
being responsible for any loss." The business was, so1d to one of the
nephews on the 1st of January, 1943. The appellants contended that within the
meaning of section 25 (4) of the Indian Income-tax Act the succession to the
business took place on the 1st of January, 1943, while the taxing authorities
contended that the succession was on the 9th of April, 1942, when the testator
died. The first question submitted for the High Court's opinion related to this
dispute.
The second question referred to the High
Court for its opinion was in respect of an amount paid by the executors to the
widow of the testator. That question was answered against the appellants by the
High Court. Learned counsel appearing for the appellants initiated that he did
not want to contest the High Court's decision on the point. The appeal
therefore is limited to the first question only.
Section 25 of the Indian Income-tax Act,
1939, gives certain concessions in respect of a business where tax had been
paid by the person carrying the business 972 under the provisions of the Indian
Income tax Act, 1918.
The material part of sub-clause 4 of section
25 is in these terms :-"Where the person who was at the commencement of
the Indian Income-tax (Amendment) Act, 1939 (VII of 1939), carrying on any
business, profession or vocation on which tax was at any time charged under the
provisions of the Indian Income tax Act, 1918, is succeeded in such capacity by
another person............ " The scheme of section 25 read with the
provisions of section 26 (2) appears to be to give relief, inter alia, to
persons who were carrying on business in 1921 and had been taxed on their
income under the Income-tax Act of 1918. By a change effected by the Income tax
Amendment Act of 1922 they were subjected to taxation twice on' the income of
1921-22. The relief is intended against this levy of tax twice over.
The rival contentions urged on behalf of the
parties are these. The assessee contends that on the death of the testator
under clause 13 of the will of the deceased, the executors were carrying on the
business of the deceased only for the purpose of winding it up, and there was
no succession to the business on the death of the deceased within the meaning
of section 25 (4) of the Income-tax Act. It is argued that the clause provides
for nothing else than a direction to carry on the business with a view either
(a) to sell it within a year to one of the nephews, or (b) to sell it to
someone else at the end of the year as a going concern. it was pointed out that
all directions in the clause permitting contracts to be made etc. were for the
purpose of keeping the business alive and not allowing it to die so that the
business which was a valuable asset of the deceased could be sold as a going
concern with its goodwill. It was therefore argued that the succession to the
business took place only on the 1st of January, 1943, when the business was
sold by the executors to one of the nephews in terms of clause 13 of the will.
In actual money, the contest is whether the executors 973 are entitled to get
the benefit of the exemption from income-tax in respect of the profits earned
only for the nine days between the 1st of April and the 9th of April, 1942, or
between the 1st of April, 1942, and 1st of January, 1943, under section 25 (4)
of the Indian Income-tax Act. The High Court has answered the question against
the assessee.
In our opinion, the conclusion of the High
Court is correct. It cannot be disputed that in the event of a sale or gift of
the business by the original owner the succession within the meaning of section
25 (4) will take place only on the date of such sale or gift and the exemption
from liability to tax will be for a period terminating on. that day.
It cannot again be seriously disputed that if
the testator settled' his business on trust under a deed of settlement there
will be a succession to the business by another person on the day of the
settlement. Similarly in the event of his death intestate his heir-at-law will
succeed to the business on the date of his death. The argument advanced on
behalf of the appellants that in the present case having regard to the terms of
clause 13 of the will there has been "no succession in such capacity to
another person" because the executors were carrying on the business only
with a view to sell it as a going concern, cannot be accepted because on the
day of the death of the deceased the estate including the business got vested
in the executors and the executors carried on the business within the meaning
of section 3 read with section 10 of the Act and as such became personally
liable as assessee. Thus there came about a change in the assessee and
therefore "a succession in such capacity" took place within the
meaning of section 25 (4) of the Income-tax Act. It seems clear that if the
testator had transferred the business to a trustee, although the trustees will
not be the beneficial owners, in law there will be a succession of the business
to another person within the meaning of. section 25 (4) of the Indian Income tax
Act. If in such a case that result follows there appears no reason why when the
legal estate is transferred by operation of law to an executor 974 there should
not be considered a succession to the estate by another person within the
meaning of the same section 25 (4). The words "in such capacity" in
that clause further make the position clear. It makes the distinction of legal
and beneficial ownership irrelevant. The contention that the business was to be
carried on by the executors as such, as a going concern or that it was being
carried on for the benefit or loss of the testator's estate is not relevant for
the present discussion. The only relevant question under section 25 (4) of the
Indian Income-tax Act is whether in respect of the business there is a
succession to another person. This is a provision to give relief and the scope
of the relief must be governed by the words used in the Act.
In our opinion the answer to this question,
on the facts of the present case, must be in the affirmative and the. date of
such succession must be considered to be the death of the testator, which was
on the 9th of April, 1942. The result is that the appeal fails and is dismissed
with costs.
PATANJALI SASTRI J.--I agree that this appeal
should be rejected.
The material facts have been set out in the
judgment which has just been delivered. The only question now remaining for
decision is on what date was the testator, who was carrying on the business of
shipping agent and land contractor "succeeded in such capacity by another
person" within the meaning of section 25 (4) of the Act--on the 9th April,
1942, when the testator died and the appellants as the executors took over the
business and carried it on or on the 1st January, 1943, when the business was
sold by them as a going concern ? The business being admittedly one which was
charged to tax under the Income-tax Act, 1918, if there was no succession
within the meaning of section 25 (4) until the sale took place, as the
appellants contend, the profits and gains of the period from 1st April, 1942,
to 1st January, 1943, would not be liable to tax, whereas. if the testator
could be said to have been "succeeded" 975 by the appellants, the
profits of the much shorter period between 1st April, 1942, and 8th April,
1942, alone would be exempt from taxation. The reason for this relief is to be
found in the change of the basis of taxation when the Act of 1922 was passed
which resulted in the profits of the year 1921-22 being assessed twice over,
once in that year as the income thereof on adjustment" under the Act of
1918 and once in the next year as the income of the "previous year"
under the Act of 1922 [see Commissioner of Income-tax, Bombay v. P.E. Poison(1)].
The relief was, however, confined to discontinued businesses, as, in cases of
succession till 1938 the successor alone was assessed to tax on the whole of
the profits of the previous year including those earned by his predecessor
before the succession occurred. But the Indian Income-tax (Amendment) Act,
1939, (hereinafter referred to as the amending Act), having amended section 26
(2) so as to provide, in the case of a succession in business, procession or
vocation, for the assessment of the predecessor and the successor, each in
respect of his actual share of the profits of the previous year, the relief was
extended, by enacting section 25 (4), to cases of succession occurring after
the commencement of that Act, with the same object as in the case of
discontinuance, namely, to redress the hardship of the business having been
Charged twice over on the income of 1921-22. In other words, the predecessor is
given the same relief as if he had discontinued the business on the date of
succession. It will thus be seen that the enactment of section 25 (4) is
consequential on the amendment of section 26(2), and the scope and meaning of
the expression "succeeded in such capacity by another person" in
section 26 (2) must determine also its scope and meaning in section 25 (4).
The first question which arises on the
language of the amended section 26 (2), which speaks of "the person
succeeded" being "assessed" and of his not being
"found", is whether the sub-section should be construed as applicable
only to cases of succession 976 inter vivos. Whatever force there may have been
in the suggestion that the sub-section could not have contemplated cases of
testamentary or intestate succession if there was no provision for the
assessment of profits earned by a deceased person in the hands his
representatives, there seems to be no sufficient reason for excluding from the
scope of the sub-section cases of succession on death in view of the provision
in section 24B. On the other hand, proviso (c) to section 24(9), which refers
to a person ' 'succeeded in such capacity by another person otherwise than by
inheritance ", would seem to imply that "succession", as that
term is used in the Act, includes devolution on death.
The next question is what is the meaning to
be attributed to the phrase "in such capacity"? A Full Bench of the
Madras High Court in Jupudi Kesava Rao v. Commissioner of Income tax.
Madras(1), held that the expression meant "in the capacity as owner
", so that "the person who succeeds another must, by such succession,
become the owner of the business which his predecessor was carrying on and
which he, after the succession, carries on in such capacity, that is. the
capacity as owner ". Applying that test they held that the sole surviving
member of a Hindu undivided family did not succeed to the business of the
family within the meaning of section 26(2), as he was previously a part-owner
of the business' and there was no transfer of ownership. While it is
undoubtedly true that a transfer of ownership is ordinarily involved in cases
of succession failing within section 26 (2) or section 25(4), it cannot, in my
opinion, be regarded as an essential element of succession within the meaning
of those provisions. The Income-tax Act directs its attention primarily to the
person who receives the income, profits or gains rather than to the ownership
or enjoyment thereof. The assessee is defined in section 2 (2) as the person by
whom the income-tax is payable and by section 10 the tax is payable by an
assessee who carries on the business, profession or (1) I.L.R 59 Mad 377 977
vocation. The statute thus fastens on the person who carries on the business,
etc., the liability to pay the tax on the profits earned by him regardless of
their destination or enjoyment. It is also worthy of note that in serviral instances
person who have no proprietary or other right in the income charged to tax are
made liable to pay the tax for no other reason than the convenience of
assessment and collection. Such instances are to be found in section 26(2)
proviso, section 18 (7), section 23-A (3), section 25-A and section 42(1). As
observed by Lord Cave in Williams v.
Singer & Others(1) "the fact is
that, if the Income-tax Acts are examined, it will be found that the person
charged with tax is neither the trustee nor the beneficiary as such, but the
person in actual receipt and control of the income, which it is sought to
reach".
There seems to be no warrant, therefore, to
insist on a transfer of ownership as the decisive test of 'succession' within
the meaning of section 26(2) or section 25(4) any more than for insisting on
the ownership of the business by the person carrying on a business, for the
purposes of section 10. I do not of course wish to be understood to say that a
clerk or an agent in management of a business would be an assessee liable to be
taxed in respect of its profits and -gains. Some kind of title there must be,
though not of a beneficial character. Nor need it be of the same quality in the
predecessor and the successor. The question in each case must be: Is the person
who has come in carrying on the business as a principal ? If so, the Revenue
looks to him and makes him liable for payment of the tax. The words "in
such capacity" in sections 25 (4) and 26 (2) mean nothing more than the
capacity of a person who carries on the business as the predecessor was
carrying it on that is, with a liability to be taxed on its profits and gains.
Applying these principles to the present
case, I am clearly of opinion that the testator who was carrying on the
business in question was succeeded in such (1) [1921] 1 A.C. 65 125 978
capacity by the appellants when the former died on 9th April, 1942, and his
estate vested in them. As already stated, the testator expressly authorised the
appellants to carry on the business as a going concern for one year after his
death and gave them power to enter into fresh contracts and to discharge
liabilities past and future.
They are thus an "association of
persons" carrying on business, and, being assessable as such in respect of
the profits and gains of the business carried on by them under section 10 read
with section 3 of the Act, they are liable to be taxed on the profits earned
after the 9th April, 1942.
It was objected that the appellants being
assessable as the representatives of the testator under section 24-B in respect
of the profits earned by him in the accounting year, they could not be treated
as successors assessable under section 26 (2)in respect of the profits earned
during the rest of that year, as such apportionment would be meaningless, the
same interest, namely, the testator's estate, having to bear the incidence of
the tax in either case. It was accordingly suggested that unless there was a
break in the continuity of the interest represented by the executors, there
could be no real apportionment such as is contemplated by section 26 (2) and,
therefore, no succession within the meaning of that section or of section 25
(4) where the same expression is used. The argument is, in my opinion,
fallacious. It overlooks the distinction between the position of the executors
visa vis the Revenue and their position visa vis the testator's estate.
As already pointed out, their liability to
pay the tax on the profits earned after the testator's death arises under
section 10 (1) and, being that of assessees carrying on the business, is
personal to them, although as between them and the estate they would be
entitled to be indemnified in respect of the tax paid; while their liability to
pay tax on the profits earned during the testator's life-time arises under
section 24-B and, being that of legal representatives of the testator, is
limited "to the extent to which the testator's estate is capable of meeting
the charge". It is therefore not correct to 979 say that an apportionment
under section 26 (2) would be meaningless, though, if the testator's estate was
sufficiently solvent, it would have no practical significance.
DAS J.--I agree with the Chief Justice.
Appeal dismissed.
Agent for the appellant: R.S. Narula.
Agent for the respondent: P. A. Mehta.
Back
