Commissioner of Income-Tax, Mysore Vs.
Bangalore Transport Co. Ltd. [1967] INSC 82 (3 April 1967)
03/04/1967 SHAH, J.C.
SHAH, J.C.
SIKRI, S.M.
RAMASWAMI, V.
CITATION: 1968 AIR 75 1967 SCR (3) 393
ACT:
Indian Income-tax Act, 1922 (Act 11 of 1922)
-Business carried for a part of year, if profits taxable
HEADNOTE:
The undertaking and business of the
assessee-company were taken over by the Government and the assessee was paid
compensation. The assessee submitted a return', claiming that it had earned no
income from its business, since it was taken over by the Government. The
Income-tax Officer brought to tax a certain sum, disclosed by the assessee's
audited accounts as its taxable business income during that part of the year
before it closed the business. This order was upheld by the Assistant
Commissioner and the Appellate Tribunal with certain reduction in the amount.
On reference the High Court answered the question against the Revenue.
In appeal to this Court :HELD : The assessee
was liable to be taxed.
Under S. 10(1) of the Income-tax Act, tax is
payable by an assessee under the head "Profits and gains of business,
profession or vocation" in respect of profits or gains of any business,
profession or vocation carried on by him.
There is nothing in the Act which supports
the assessee's argument that for profits of the business to be taxable, the
business must be actively carried on for the whole of the previous year, or
till the end of the previous year. Under the scheme of the Act, whenever an assessee
receives in the course of his business money or money's worth, income embedded
therein accrues or arises to him, and becomes subject to an ambulatory charge.
If at the end of the previous year, on making lip accounts there is nooverall
income, the charge does not crystallize, because there is no incomeon which the
charge of tax may settle. [395F-H] Turner Morrison & Company Ltd. v.
Commissioner of Incometax, West Bengal, 23, I.T.R. 152, followed.
Commissioner of Income-tax, Gujarat v.
Ashokbhai Chimanhhai [1965] 1 S.C.R. 758. explained.
The Department was not seeking to tax either
the whole or any part of the compensation received by the assessee and the
discussion as to what the compensation received by assessee was intended to
replace was not relevant in determining whether the profits which accrued or
arose to the assessee prior to its closure of the business. [395A-B]
CIVIL APPELLATE JURISDICTION : Civil Appeal
No. 435 of 1966.
Appeal by special leave from the judgment and
order dated February 19, 1964 of the Mysore High Court in Income-tax.
Referred Case No. 15 of 1962.
S.T. Desai, A. N. Kirpal, S. P. Nayyar and R.
H. Dhebar, for the appellant.
T.V. Viswanath Iyer, K. Rajinder Chaudhuri
and K. R. Chaudhuri, for the respondent.
The Judgment of the Court was delivered by
394 Shah, J. The Bangalore Transport Company Ltd. hereinafter called 'the
Company-operated a public motor transport service in the town of Bangalore for
several years. The Legislature of the State of Mysore enacted the Bangalore
Road Transport Service Act, 1956 (Mysore Act VIII of 1956) with a view to
provide for the acquisition of the undertaking of the Company. By virtue of S.
3 of the Act the undertaking, assets and documents of the Company vested in the
Government of Mysore, on October 1, 1956, and the Company was paid Rs.
15,50,0001as compensation for loss of its undertaking, assets and documents.
In respect of the previous year ending March
31, 1957, the Company submitted a return under the Income-tax Act, claiming that
it had earned no income from its business, since its undertaking and business
was taken over by the Government of Mysore on October 1, 1956. The Income-tax
Officer, Urban Circle, Bangalore, brought to tax Rs. 4,01,954/disclosed by the
Company's audited accounts as its taxable business income. This order was
confirmed by the Appellate Assistant Commissioner in appeal. The Incometax
Appellate Tribunal modified the order of assessment and allowed Rs. 97,208/as
development rebate for the previous year and after making certain adjustments
brought to tax an amount of Rs. 3,16,439/as taxable income of the Company in
the previous year.
At the instance of the Company, the following
question was submitted by the Appellate Tribunal to the High Court of Mysore
under S. 66(1) of the Income-tax Act, 1922 :
"Whether the sum of Rs. 3,16,439/was
income and liable to tax on the assessee for the year 1957-58 ?" The High
Court answered the question in the negative.
Against that order, this appeal is preferred
with special leave.
The High Court was of the opinion that it was
for the Revenue to establish that out of Rs. 15,50,0001received by the Company
as compensation for loss of its undertaking, assets and documents, Rs.
3,16,439/were paid towards profits earned by the Company during the period
April 1, 1956 to September 30, 1956. The High Court observed that even if the
compensation paid to the Company was worked out as a multiple of profits earned
in one or more years, that circumstance was not sufficient to prove that any
compensation or any part thereof was received by the Company in lieu of the
profits earned by it, and that the nature of the payment was decisive of its
character and "not the method of payment or measure". The High Court
accordingly held that there was no material on the record from which it could
be reasonably held that any portion of the compensation paid represented
replacement of profits earned during April 1, 1956 to September 30, 1956. In
our judgment the High Court erred in assuming that the character of the
compensation received by the Company was determinative of 395 the question
submitted by the Tribunal. It was the claim of the Revenue that in the previous
year the Company had earned taxable profit amounting to Rs. 3,16,439/and that
pro-fit was subject to tax in the hands of the Company. The Department was not
seeking to tax either the whole or any part of the compensation received by the
Company and the discussion as to what the compensation received by the Company
was intended to replace was not relevant in determining whether the profits
which accrued or arose to the Company during the period April 1, 1956 to
September 30, 1956 were taxable.
Counsel for the Company conceded that he was
unable to support the reasoning adopted by the High Court in recording their
answer to the question submitted. Counsel however contended that during the
previous year no profit had accrued or arisen to the Company, and no profit was
received by the Company; therefore the Company incurred no liability to pay
tax. Counsel in expounding his theme said that under the Income-tax Act
liability to pay tax arises only at the end of the previous year and not
before, and if during the course of the previous year the assessee closes his
business or is compulsorily deprived of his undertaking and assets, and on that
account the assessee is unable to carry on his business, in law no profit can
arise or accrue to or be received by the assessee even if during a part of the
year the assessee has received payments in the course of his business,
According to counsel for the Company in order that income from business may
become taxable in the hands of the assessee, it must be shown that the business
was carried on till the end of the previous year, and if before the conclusion
of that year the business is closed, no profit may in law be deemed to accrue
to the assessee.
There is no warrant for this argument in the
scheme of the Income-tax Act. Under s. 10(1) of the Income-tax Act, 1922, tax
is payable by an assessee under the head "Profits and gains of business,
profession or vocation" in respect of the profit or gains of any business,
profession or vocation carried on by him. There is nothing in the Act which
supports the argument that for profits of the business to be taxable, the
business must be actively carried on for the whole of the previous year, or
till the end of the Previous year. Under the scheme of the Income-tax Act,
whenever an assessee receives in the course of his business money or money's
worth, income embedded therein accrues or arises to him; and becomes subject to
an ambulatory charge. If at the end of the previous year, on making up accounts
there is no overall income, the charge does not crystallize, because there is
no income on which the charge of tax may settle.
In Turner Morrison & Company Ltd. v.
Commissioner of Income tax, West-Bengal(1), this Court in dealing with a case
of a business of selling salt in India observed at p. 160 :
(1)23 I.T.R. 152.
396 "There can .... be no question that
when the gross sale proceeds were received by the Agents in India they
necessarily received whatever income, profits and gains were lying dormant or
hidden or otherwise embedded in them. Of course, if on the taking of accounts
it be found that there was no profit during the year then the question of
receipt of income, profits and gains would not arise but if there were income,
profits and gains, then the proportionate part thereof attributable to the sale
proceeds received by the Agents in India were income, profits and gains
received by them at the moment the gross sale proceeds were received by them in
India and that being the position the provisions of Section 4(1)(a) were
immediately attracted -and the income, profits and gains so received became chargeable
to tax under Section 3 of the Act." The same principle applies to receipts
in the course of business of a transport operator.
The Company carried on the, business of a
transport operator between April 1, 1956 and September 30, 1956 and the audited
accounts of the Company disclosed that embedded in the gross receipts was a net
profit of Rs. 4,01,954/during that period. That Profit reduced by out goings
properly allowable in the computation of the total taxable income became
subject to a charge to tax. The total taxable profits may under the scheme of
the Act be determined at the end of the previous year : but it does not follow
therefrom that to profits earned during the year, the charge of tax does not
attach. Assuming that the business of the Company was closed on October 1, 1956
when its undertaking and assets were taken over by the Government of Mysore, it
was, for reasons stated earlier, still liable to be taxed in respect of its
profits which accrued or were received by the Company prior to the date of the
closure of the business.
Counsel for the Company relied upon a recent
decision of this Court in Commissioner of Income-tax, Gujarat v. Ashokbhai
Chimanbhai(1) and contended that profits of a business which are liable to tax
under the Income-tax Act, can only accrue at the end of the previous year and
not before. But, that case lays down no such proposition.
Under an agreement of partnership, the
manager of a Hindu undivided family who was a partner was to receive a share in
the profits of the firm. The accounts of the firm were to be adjusted at the
end of every calendar year. Before the expiry of the previous year relevant to
the assessment year 1955-56, there was a partition in the family and the entire
share in the profits of the firm was, under the partition agreement, allotted
to the manager. The Income-tax Officer in proceedings for (1) (1965) 1 S.C.R.
758.
397 assessment to tax sought to apportion the
profits received by the manager between the Undivided family and the manager in
his individual capacity. This Court held that the right to receive the share of
profits of the firm for the previous year 1955 arose on the settlement of
accounts of the firm, and not before, and on that date the manager alone was
the owner of the share of profits and the family had no right therein and it
was not liable to be taxed in respect of any part of the income. It is clear on
a bare perusal of the statement of facts of that case that no income or profits
had accrued to the Hindu Undivided family at any time in the year of in account
prior to the date of dissolution. It was observed A shokbhai Chimanbhai's
case(1) at p. 46 :
"In the gross receipts of a business day
after day or from transaction to transaction lies embedded or dormant profit or
loss : on such dormant profit or loss undoubtedly taxable profits, if any, of
the business will be computed. But dormant profits cannot be equated with
profits charged to tax under sections 3 and 4 of the Income-tax Act. The
concept of accrual of profits of a business involves the determination by the
method of accounting at the end of the accounting year or any shorter period
determined by law. If profits accrue to the assessee directly from the business
the question whether they accrue de die, in deim or at the close of the year of
account has at best an academic significance, but when upon ascertainment of
profits the right of a person to a share therein is determined, the question
assumes practical importance, for it is only on the right to receive profits or
income, profits accrue to that person. If there is no right, no profits will be
deemed to have accrued." The Hindu Undivided family became entitled to a
share in the profits of the firm only at the end of every calendar year, and
not before. If before that date the right of the family to a share in the
profits was divested, no income accrued or arose to the family. In the present
case the profits directly arose to the Company de die, in diem, and could be
ascertained by the method of accounting adopted by the Company at the end of
the year or when the business was closed.
The question whether the amount of profits
assessed were actually shared by the Company within the meaning of s. 26(2) of
the Indian Income-tax Act does not need consideration.
By sub-.-,. (2) of s. 26 where a person
carrying on any business, profession or vocation has been succeeded in such
capacity by another person', such person and such other person shall, each be
assessed in respect of his actual share, if any, of the income, profits and
gains (1) [1965] 1 S.C.R. 758.
398 of the years. The question whether the
profits of the Company held 'taxable by the Income-tax Officer represented the
actual share of the Company in the profits and gains of the previous year was
never raised before the Income-tax Appellate Tribunal and has not been decided.
Counsel for the Company merely contended that the amount sought to be charged
was not liable to be taxed, because it was not profit of the Company. Counsel
has also not contended before us that for the profits received by the Company
the State of Mysore is by virtue of s. 26(2) of the Income-tax Act liable to be
taxed.
The answer recorded by the High Court will
therefore be discharged and there will be an answer in the affirmative.
The appeal is allowed. The Company will pay
the costs of the Commissioner in this Court and the High Court.
Y.P. Appeal allowed.
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