Vibhuti
Glass Works Vs. Commissioner of Income Tax, Lucknow [1989] INSC 148 (28
April 1989)
Pathak,
R.S. (Cj) Pathak, R.S. (Cj) Misra Rangnath
CITATION:
1989 AIR 1443 1989 SCR (2) 797 1989 SCC Supl. (2) 431 JT 1989 (2) 257 1989
SCALE (1)1141
ACT:
Income
Tax Act, 1961: Section 28--Income--Accrual of- Factory owned by assessee--State
Government allowed to manage for 20 years as condition for grant of
loan--Profits earned--Applied by managing State Government for paying assessee's
debts--Whether assessee assessable.
HEAD NOTE:
The assessee
Company had a glass factory besides other business. Since the glass factory
business had been suffer- ing losses for several years, resulting in increasing
debt, the assessee took loans from the State Government and mort- gaged the
land, buildings and machinery. Later, under a deed executed by it the assessee
allowed the State Government to take over running of the glass factory for a
period of 20 years and permitted it to have a share of the business, if and
when they exceeded a prescribed limit, as conditions for guaranteeing repayment
of a loan of Rs.20 lakhs granted by the Industrial Finance Corporation.
During
assessment proceedings for the assessment year 1962-63, the assessee contended
that the profits earned by the glass factory business during that period were
not assessable in its hands, but in the hands of the State Government, which
had taken over the factory and was running the business, and that, in any
event, only half of the profit could be included in its assessment as the State
Government was entitled to 50 per cent of profits under the deed. Rejecting the
contentions, the Income-tax officer held that the assessee was liable to be
assessed in respect of the entire profits earned by the glass factory.
The assessee's
appeals were dismissed by both the Appel- late Assistant Commissioner and the
Appellate Tribunal. On a reference made at assessee's instance, the High Court af-
firmed the Tribunal's finding that the entire profits of the factory, and not
half of them accrued to the assessee. It also rejected assessee's contention
that the income was diverted through an overriding title before it reached the assessee.
Dismissing
the appeal of the assessee, this Court, 798
HELD:
The present case is one where the income accrued to the assessee directly and
was merely, upon such accrual, applied to discharge an obligation of the assessee.
[.801B] Although the Deed executed by the assessee is described as a lease-deed
and provides that the glass factory is demised to the State Government, in
substance possession of the factory was transferred to the State Government
only for the purpose of enabling it to manage and run the business.
[800F]
The entire income earned during the year under consider- ation was the income
of the assesee and was merely applied by the managing State Government for the
payment of the assessee's debt, and there was no over-riding title. The profits
earned during the year under consideration were not sufficient for the State
Government to enjoy a share in the profits in accordance with the terms of the
Deed, and there- fore, no part of the profits could be regarded as assessable
in the hands of the State Government. In point of fact, no part of the profits
was actually taken by the State Govern- ment. [801C-D] Commissioner of
Income-tax, Bombay City H v. Sitaldas Tirathdas, [1961] 41 ITR 367, relied on.
CIVIL
APPELLATE JURISDICTION: Civil Appeal No. 1442 (NT) of 1975.
From
the Judgment and Order dated 14.3.1974 of the Allahabad High Court in I.T.R.
No. 437 of 1971.
E.C. Agarwala
for the Appellant.
S.C. Manchanda,
Ms. A Subhashini and M.B. Rao for the Respondent.
The
Judgment of the Court was delivered by PATHAK, CJ. This appeal by certificate
granted by the Allahabad High Court is directed against a judgment of the High
Court answering the following questions in favour of the Revenue and against
the assessee in an income tax refer- ence:
"(1)
Whether on the facts and in the circumstances of the case, and on a correct
interpretation of the leasedeed 799 dated 22.8.1960, the Tribunal was fight in
holding the profits of the Glass factory during the relevant accounting year
accrued to the assessee-company? (2) If the answer to the question no. 1 is in
the affirmative, whether the Tribunal was right in holding that the entire
profits and not one half of the profits of the glass factory during the
relevant accounting year accrued to the assessee-company?" The assessee,
Messrs. Vibhuti Glass Works is a public limited company. It has a glass factory
and also carries on other business. The accounts of the glass factory are
closed on 31 March each year, while the assessee closes its ac- counts on 30
September each year. We are concerned with the assessment year 1962 -63.
For
several years the glass factory business had been suffering losses resulting in
increasing debt. It took heavy loans from the Banaras State Bank, Varanasi, for which purpose its stocks and
stores were hypothecated to the Bank.
It
also took loans from the Uttar Pradesh Government and the land, buildings and
machinery were mortgaged accordingly.
The assessee
found it difficult to emerge out of its finan- cial embarrassment. It
discovered also that it needed cer- tain equipment in order to produce better
quality goods and also required funds for its working capital and for repaying
loans to other creditors. It approached the industrial Finance Corporation, New
Delhi, and the State Finance Corpo- ration for financial assistance and the
Industrial Finance Corporation agreed to grant a loan of Rs.20 lakhs on condi- tion
(a) that the State Government guaranteed repayment and (b) that the State
Government postponed their charge under the mortgage deeds and the Industrial
Financial Corporation was allowed to have the first charge. The State Government
agreed to those conditions provided the assessee allowed the State Government
to take over the running of the glass factory for a period of 20 years. The
State Government also stipulated that if and when the profits of the business
exceeded a prescribed limit, a share of those profits would go to the State
Government. The assessee agreed to this arrangement and executed a document
dated 22 August, 1960 incorporating the requisite
conditions.
For
the relevant accounting period the glass factory business disclosed a profit of
Rs.92,960 while the assessee suffered a loss of Rs.3,47,656 according to its
separate profit and loss account. During 800 assessment proceedings for the
assessment year 1962-63 it was contended by the assessee before the Income Tax
Officer that the profit of Rs.92,960 earned by the glass factory business was
not assessable in the hands of the assessee but in the hands of the Uttar
Pradesh Government which had taken over the factory and was running the
business. It was con- tended that in any event only half of the profits could
be included in the assessment of the assessee, the remaining profit being
assessable in the hands of the State Government which was entitled to 50 per
cent of the profits under the Deed dated 22 August, 1960. Both contentions were rejected by
the Income Tax Officer, who held that the assessee was liable to be assessed in
respect of the entire profits earned by the glass factory. He set off the
profit against the loss declared by the assessee and computed a net loss of
Rs.2,54,785.
The assessee
appealed to the Appellate Assistant Commis- sioner of Income Tax, but without
success. A second appeal by the assessee filed before the Income Tax Appellate Tribu-
nal was also dismissed. At the instance of the assessee the Appellate Tribunal
referred the two questions of law set forth earlier to the High Court of
Allahabad. The High Court considered the various provisions of the Deed dated 22 August, 1960 and answered both the questions in favour
of the Revenue and against the assessee.
It is
apparent that this appeal must be disposed of on a consideration of the terms
of the Deed dated 22
August, 1960. A
perusal of the conditions set forth in that document discloses that the State
Government was given the power to manage the glass factory business for a
period of 20 years from the date it assumed possession. Although the Deed is
described as a lease-deed and it provides that the glass factory is demised to
the State Government, in substance possession of the glass factory was
transferred to the State Government only for the purpose of enabling it to
manage and run the business. The High Court has given good reason for reaching
that conclusion.
Clause
(c) of paragraph 7 of the Deed provides "that if upon the expiration or
sooner determination of this demise it is found that the working of the factory
has shown prof- its after meeting the entire liabilities of the company the
balance profits, after accounting for all charges and ex- penses incurred by
the State Government, shall be divided between the company and the Governor in
equal proportion." It was contended by the assessee before the High Court
that the 801 income was diverted through an overriding title before it reached
the assessee. The High Court. in our opinion, has rightly rejected the
contention, holding that there was no overriding title and in fact it was a
case of mere applica- tion of the income. The proper test to be applied in such
a case has been laid down by this Court in Commissioner of Income-tax, Bombay
City H v. Sitaldas Tirathdas, [1961] 41 ITR 367 and we are satisfied that the
present case is one where the income accrued to the assessee directly and was
merely applied upon such accrual to discharge an obligation of the assessee.
The entire income earned during the year under consideration was the income of
the assessee and was merely applied by the managing State Government for the
payment of the assessee's debts.
We are
also in agreement with the High Court that the profits earned during the year
under consideration were not sufficient for the State Government to enjoy a
share in the profits in accordance with the terms of the Deed, and no question,
therefore, arises of any part of the profits being regarded as assessable in
the hands of the State Government.
In
point of fact, it appears that no part of the profits was actually taken by the
State Government.
In the
result, the appeal fails and is dismissed but in the circumstances there is no
order as to costs.
N.P.V.
Appeal dismissed.
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