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Petitioner: COMMISSIONER OF INCOME-TAX, WEST BENGAL VS Respondent: TEA PRODUCING Co. OF INDIA, LTD.Honorable Justice G. K. MITTFR
1968 P T D 791
1968 P T D 791
[Calcutta (India)]
Before G. K. Mitter and Laik, JJ
COMMISSIONER OF INCOME‑TAX, WEST BENGAL
Versus
TEA PRODUCING Co. OF INDIA, LTD.
Income‑tax Reference No. 38 of 1958, decided on 23rd March 1962.
Company‑Formation of company for taking over going concern‑Agreement between vendor and company that sale shall have effect from beginning of accounting year‑Liability to tax --Whether agreement binding on Income‑tax authorities‑Whether c9mpany entitled to claim loss of entire accounting year or only from date of incorporation‑Income‑tax Act, 1922, S. 10‑[Com missioner of income‑tax v. Bijli Cotton Mills Ltd. (1953) 23 I T R 278 and Commissioner of Income‑tax v. Abubaker Abdul Rahman (1939) 7 I T R 139 dissented from].
The assessee was incorporated as a company on May 29, 1951, for the object, among others, of taking over a tea estate as a going concern and it commenced business on June 23, 1951. In November 1951, the estate was purchased by the assessed with effect from January 1, 1951, one of the terms of the sale deed being that all income and profits from January 1, 1951, would belong to the assessed, and the assessed, should pay all tax etc., from that date. The trading results of the assessee's accounting year January 1, 1951, to December 31, 1951, showed a loss of Rs. 1,05,593. The Income‑tax Officer held that the assessee was not entitled to claim the whole of 40 percent. of this loss (which should be treated as business loss) but only a portion of the 40 percent. proportionate to the period from which it commenced business, i.e., from June 23, 1951 to December 31, 1951. The Tribunal allowed the loss for the entire year following Commis sioner of Income‑tax v. Bijli Cotton Mills Ltd. (1953) 23 I T R 278.
On a reference:
Held, that, whatever may be the agreement between the vendor and the assessed, the Income‑tax authorities have to look to the person who is legally liable under section 10 of the Act, i.e., the person who carried on the business, and, as the assessee came into existence only on May 29, 1951; and could not have carried on the business before that date even as an agent of the vendor, the assessee can only have the benefit of the loss, if any, incurred during the period commencing from the date of its incorporation to the end of the year 1951.
Commissioner of Income‑tax v: Bijli Cotton Mills Ltd. (1953) 23 I T R 278 and Commissioner of Income‑tax v. Abubaker Abdul Rahman (1939) 7 I T R 139 dissented from.
E. D. Sassoon & Co. Ltd. v. Commissioner of Income‑tax (1954) 26 I T R 27 explained.
Asit Kumar Ghose v. Commissioner of Agricultural Income‑tax (1952) 22 I T R 177 Commissioner of Excess Profits Tax v. Ramnath Bajoria (1951) 19 I T R 79 and Commissioner of Income‑tax v. Dewan Bahadur Dewan Krishna Kishore (1941) 9 I T R 695 ref.
STATEMENT OF CASE
By this application presented ort 22nd April 1958 the Com missioner of Income‑tax, West Bengal, requires the Appellate Tribunal to refer a question of law said to arise out of the Tribunal's order dated 5th February 1958, in I. T. A. No. 7862 of 1956‑57. Inasmuch as, in our opinion, a question of law arises out of the aforesaid order of the Tribunal, we hereby draw up an agreed statement of case and refer it to the High Court.
2. The assessment year is 1952‑53, the corresponding accounting period ended 31st December 1951. The assessee is a company incorporated on 29th May 1951, and obtained its certificate of commencement with elect from 21st June 1951. Previous to these dates, on 29th March 1951, Shri B. L. Lahoty entered into an agreement with Duncan Brothers & Co. Ltd. to purchase Rosekandy tea Estate for a sum of Rs. 6,00,000 with the stipulation that the conveyance would be made to the Shri B. L. Lahoty or to his nominee. This agreement, which is Annexure "A" hereto forming part of the case, included a term that the estate would be transferred as a going concern to the said Shri B. L. Lahoty or to his nominee with effect from 1st January, 1951. On 23rd June 1951, the said Shri B. L. Lahoty agreed with the assessed company to nominate the company as purchaser under the aforesaid agreement dated 29th March 1951, which is Annexure "B" hereto forming part of the case. Later on, the conveyance was executed by Duncan Brothers & Co. Ltd. in favour of the assessed‑company, in issuing the prospectus for the assessee company, the promoters clearly stated that the objects of the company were in particular to take over Rosekrandy Tea Estate from Messrs Duncan Brothers & Co. Ltd. and the purchase price was the sum of Rs. 6,00,000, agreed upon between Shri B L. Lahoty and the said Duncan Brothers & Co. Ltd. The statement of the promoters incorporated in the prospectus issued by the company is Annexure "C" hereto and forms part of the case. The trading results of the year ended in a loss and the total loss computed in the assessment was for Rs. 1,05,593. The Income tax Officer took 46% of the aforesaid loss as a loss for the tea business. The Income‑tax Officer after computing this loss held that as the company commenced business only with effect from 23rd June 1951, the proportionate loss for the period worked to Rs. 20,808 and the balance of the loss should, therefore, be disallowed in the hands of the assessee company. The assessed was unsuccessful in his appeal before the Appellate Assistant Commissioner.
3. Following the decision in the case of Commissioner of Income‑tax v. Bijli Cotton Mills Ltd. (1953) 23 I T R 278 the Tribunal held that the entire amount of loss was attributable to the assessee company and should be allowed in its hands. The order of the Appellate Tribunal is Annexure "D" hereto forming part of the case.
4 From the facts and circumstances stated above, the fol lowing question of law arises:
"Whether, on the facts and in the circumstances of the case, the entire amount of loss related to the trading period from 1st January 1951, to 31st December 1 51, as computed by the Income‑tax Officer should be allowed in the hands of the assessee company?"
E. R. Meyer with B. L. Pal for the Commissioner.
S. Mitra and S. B. Sen for the Assessed.
JUDGMENT
G. K. MITTFR, J.‑In this reference the question involved is whether in computing the income of a company which received a certificate of commencement of business on June 21, 1951, but actually took over a business on December 1, 1951, the profit and loss for the period January 1, 1951, to December 31, 1951, can to taken into account in view of the fact that the promoter of the company bad entered into an agreement with a third person formerly owning the business to be entitled to the profit and loss, if any, from January 1, 191.
The facts lie within a very short compass.
On March 29, 1951, one B. L. Lahoty entered into an agreement with Duncan Brothers & Co. Ltd. agents of the Indian Tea Co. of Cacher Ltd. owning a tea garden in Assam by the name of Roeskandy Tea Estate to purchase the said estate as a going concern subject to a good marketable title being made out as from January 1, 1951, together with all movable and immova ble properties, etc., attached to or belonging to the tea estate and quota rights but excluding all stocks, stores, manures, tea chests, coal, oil, consumer goods, foodstuff and clothing as shown in the books of the company as on the date of the banding over of the tea estate to the purchaser or its nominee for the sum of Rs. 60,00,000 on terms and conditions mentioned. The purchaser paid in Ps. 60,000 as earnest money and agreed to accept the title with in eight weeks from the date of acceptance of the offer made by him. The relevant terms of the offer contained in a letter and accepted by Duncan Brothers & Co. Ltd. on behalf of their principals are as follows:
Clause 7.‑I understand and agree that the sale does not include the tea manufactured at the estate prior to 31st December 1950, nor any unused stores, tea boxes, coal, oil foodstuff, clothing, consumer goods and tools on the said tea estate nor any book debts, outstandings, advances (save as provided in clause 12 hereof), unadjusted profits, cash reserves, balance investments and sums of money belonging to the company in respect of the said tea estate nor any securities for the same as at the crate of your handing over the said tea estate to me or, my nominee."
Clouse 12.--"At the time of completion of the purchase I undertake to take over and pay to the company all advances made by the company to working garden labourers or other garden employees, whom I or my nominee will retain, towards wages, or salary as will be outstanding in the books of the company on the date of your handing over the said tea estate to me or my nominee."
Clause 13.‑"All claims of garden employees including salaries, bonuses, provident fund commission, etc., up to and including 31st December 1950, will be paid by you and I or my nominee will not be responsible in any way for any such claims."
Clause 14.‑"It is understood that the services of the present employees of the said tea estates will be terminated by you on or before my or my nominees taking possession of the said tea estate from you. It will be my or my nominee's option to re‑employ any of the previous employees on terms which I or my nominee will fix with such employees."
Clause 15.‑"I understand and agree that until completion of the sale the management and the operational control of the said tea estate will be in the hands of the company and the company will have absolute control in the purchases of stores, garden appliances, tea seed, manures, fuel and other items necessary for the working of the said tea estate and I will have to pay to company at the time of completion all expenditure outlaid by the company in respect of the tea estate as from 1st January 1951, including the salary of the European and the Indian staff and labour, all other expenditure incurred by the company whether in the said tea estate or in London or in Calcutta in connection with the management and working of the said tea estate and also such remuneration to the secretaries and agents of the company for supervision as may be mutually ; agreed until delivery of possession to me."
Clause 16.-- "I further understand and agree that in addition to the purchase price and the sums mentioned above I shall have to pay to the company at the time of completion of the transaction for the stocks, unused stores, tea chests, manures, coal, oil, consumer goods, foodstuffs, clothing and tools, such sums as are lying on the said tea estate and shown in the books of the company as at the date of handing over the said tea estate to me or my nominee at the landed cost price thereof as per company's books of account."
Clause 17.--"Upon payment of the balance of the purchase price and the sums mentioned in the clauses, viz., clauses 12, 15 and 16, the Rosekandy Tea Estate will be transferred to me or my nominee as the case may be free from encumbrances but subject to the terms of the grants of pattahs under which the same are held and possession of the movable and immovable properties appertaining to the said tea estate will also be made over to me at the same time. I shall also be entitled to the proceeds of the sale of any crop made for the season 1951, viz., crop manufactured on or after 1st January 1951, and to all profits of the said tea estate as from 1st January 1951."
Clause 18. It being understood and agreed that I shall receive the entire benefit of the working of the said tea estate from the period commencing 1st January 1951, I agree to reimburse the company for any Income‑tax, national defence contribution, profits tax and agricultural income‑tax or any other tax or duty which may be levied on it in India or in the United Kingdom calculated by reference to profits arising or deemed to arise to the company from the working of the estate subsequent to 31st December 1950. I agree to accept for this purpose a certificate of such liability (if any) from the auditors of the company in London or in Calcutta. I will also be liable to pay revenue rents, taxes, local rates and other impositions in respect of the said tea estate and will be liable for all expenses incurred by the company for the working of the said tea estate as from 1st January 1951, as hereinbefore mentioned in clause 15 hereof."
The assessee company was incorporated on May 29, 1951. The object with which it was formed included the taking over of the Rosekandy Tea Estate from Messrs Duncan Brothers & Co. Ltd. agents of the Indian Tea Company of Cachar Ltd., as a going concern on and from January 1, 1951, as per agreement dated March 29, 1951, above mentioned. The assessee company was incorporated on May 24, 1951. The certificate of commence ment of business was granted to the company on June 21, 1951. On June 23, 1951, an agreement was entered into between B. L., Lahoty and the company to the effect that B. L. Lahoty would nominate the company as the purchaser under the agreement dated March 29, 191. The company would pay to B. L. Lahoty the sum of Rs. 60,000 advanced by him to Messrs Duncan Brothers & Co. Ltd. with interest and, penning such payment, the charge in favour of B. L. Lahoty on the said tea estate would continue. The company would also pay to Lahoty all costs and expenses incurred by him on account of legal charges, travelling expenses and otherwise. Under clause 4 of this agreement the company adopted the agreement dated March 29, 1951, and covenanted to observe and carry out all the terms and conditions thereof. Further, the company undertook to save, defend and keep harmless and indemnified the said B. L. Lahoty from and against all manner of claims and demands or liabilities in respect of or arising out of the said agree vent dated March 29, 1951: The conveyance of the tea estate was executed by Duncan Brothers & Co. Ltd. in favour of the assessee company in November 1951. Actual possession of the tea estate was taken over on and from December 1, 1951. The trading results of the year ended in a loss computed at Rs. 1,05,593. The Income‑tax Officer took 40 percent. of the aforesaid loss as a loss for the tea business: He held that as the company commenced business only with effect from June 23, 1951, the proportionate loss for the period worked out to Rs. 20,808 and that the balance of the loss should be disallowed in the hands of the assessee. The assessee's appeal to the Appellate Assistant Commissioner was un-successful. On a further appeal to the Appellate Tribunal it was held that the decision in Commissioner of Income‑tax v. Bijli Cotton Mills Ltd. ((1953) 23 I T R 278) applied to the facts of the case and the company was entitled to claim the loss for the entire period as its loss.
In my opinion, the Tribunal did not come to the right conclusion. I am unable to guide myself by the decision in Bijli Cotton Mills' case. Under section 2(2) of the Income-tax Act assessee" means a person by whom income tax or any other sum of money is payable under the Act. Under section 10 tax has to be paid by an assessee under the head "profits and loss of business, profession or vocation" in respect of the profits or gains of any business, profession or vocation carried on by aim.
Therefore, before a person can be assessed under section 10 it must be shown that it was he who carried on the business, profession or vocation. In the case of a business it is open to any person to put another else in charge thereof and, although ostensibly such person would appear to be carrying on the business, in reality the business would be that of the person who owned it and under section 10 of the Act such owner of the business would be the assessee. If a. business car led on by A is transferred to B as from a certain point of time B alone can be assessed to tax in respect of the period subsequent to the change of the ownership. A and B may agree that any profits or loss of the business as from a date anterior to that of the change of ownership will be on B's account. In such a case A will have to account to B for the income and profits of the business covered by the period of the agreement and A may be held to have carried on the business as B s agent from the agreed date. I cannot see how a person can be said to have carried on a business during a period when he was not born or how he can be assessable to tax in respect thereof. It may be open to B to enter into an agreement with A that the business as from a certain date will be on the account of B's son not yet born in which case A may be accountable to B's son for the period before his birth during the subsistence of the agreement on the ground of some sort of fiduciary relationship. But this cannot affect the liability of A to tax before the date of the birth of B's son. Although B's son may not be able to carry on a business for some years after his birth as the owner of the business, of necessity it would be carried on for him by some guardian or trustee. Section 40 of the Act makes provision for assessment of the guardian or trustee in such a case. As in the case of a natural born person, so in the case of a legal entity like a company, liability to pay tax can only arise after the date of birth or incorporation. Under section 27 of the Specific Relief Act it is no doubt open to a company to adopt ratify a contract entered into by a promoter and enforce the same. The company would then get all the benefits and advantages under the contract. The liability of the company to pay income‑tax for any business carried on by the promoter can only be in respect of the period subsequent to its incorporation. It cannot go beyond that.
If the above reasoning be correct then it would appear that the assessee could not possibly own any business before the date of its incorporation, i.e., May 28, 1951, and could not be assessable to tax in respect thereof prior to that date. Mr. Mitra appearing for the assessee did not rely on the case of Bijli Cotton Mills Ltd. He put his client's case as follows: According to him one must scan the contract entered into on March 29, 1951, and the surrounding circumstances down to the period when the assessee took over the business itself and find out to whom the income of the Rosekandy Tea Estate from January 1, 1951, belonged. He referred to the clauses in the agreement of March 29, 1951, already mentioned from which according to him the following facts emerge:
(1) The tea estate was to be sold as a going concern, all the tea manufactured after December 31, 1950, was to belong to the purchaser including quota rights of the garden and all movable and immovable properties accepting those specifically mentioned, namely, unused stores, tea boxes, food‑stuff, clothing, etc.
(2) At the time of the completion of the purchase the purchaser was to take over and pay to the vendor all advances made by it to garden labourers or employees.
(3) All claims of garden employees including salaries, bonuses, provident fund, commission, etc., up to and including 31st December 1950, were to be paid by the vendor.
(4) The services of the employees of the garden were to be terminated before the purchaser took over possession and it would be the purchaser's option to re‑employ any of the previous employees or not.
(5) The vendor would have only the operational control of the tea estate as from January 1, 1951, and all expenses incurred after that date including the salaries of the staff, and labour, all costs and charges incurred either in the tea estate or in London in connection with the management of the estate as also such remuneration to the secretaries and agents of the company for supervision would be on the account of the purchaser.
(6) At the time of the completion of the transaction the purchaser would pay for the stocks, unused stores, tea chests, lying in the garden.
(7) Upon payment of the amounts mentioned in clauses 12, 15 and 16, the tea estate would be transferred to the purchaser free from encumbrance and the purchaser would be entitled to the proceeds of the sale of any crap made for the season 1951 on or after January 1, 1951, and to all profits of the tea estate as from the said date.
(8) The purchaser would reimburse the vendor for any income‑tax, national defence contribution, profits tax and agricultural income‑tax or any other tax or duty which might be levied on the tea estate calculated by reference to profits subsequent to 31st December 1950.
It was argued that the above make it sufficiently clear that a line was to be drawn as from January 1, 1951. On and from this date the tea estate, its business including all its income and profits, were to belong to the purchaser and, consequently, the income‑tax authorities could thereafter only look on the purchaser as the person assessable to tax under section 10 of the Act. It was contended that section 10 of the Act does not lay down that the business for the whole of the accounting year should be carried on by the assessee and therefore even if the assessee itself carried on the business for a fractional period daring the accounting year by an agreement with the previous owner of the business the whole of the income and profits could become the assessee's that is to say, the purchaser's. I find myself unable to accede to this contention. According to section 10 tax has to be paid by the assessee in respect of the profits or gains of the business carried on by him. If he carries on the business for a short period during the accounting year he will be assessable to tax only for that period. Further, although it is open to a vendor and a purchaser of the business to agree that as from a certain date the business will be carried on by the purchaser, the vendor may be treated as an gent of the purchaser as from that date and the entire income of the business will be assessable in the hands of me purchaser but the purchaser must be a living person; he must be to existence. No such arrangement or agreement is possible between a living person arid a person who is yet to be born.
Reliance was placed by Mr. Mitra chiefly on the case of E. D. Sassoon & Co. Ltd. v. Commissioner of Income‑tax ((1954) 26 I T R 27). There the facts were as follows:
E. D. Sassoon & Co. Ltd. (hereinafter referred to as the assessee) were the managing agents of three mills : ((1954) 26 I T R 27) E. D. Sassoon United Mills Ltd. ((1954) 26 I T R 27) Elphinstone Spinning & Weaving Mills Co. Ltd. and ((1954) 26 I T R 27) Apollo Mills Ltd., under various agreements, The assessee agreed to transfer its managing agencies of the said companies to Messrs Agarwal & Co., Chidambaram Mulraj & Co. Ltd. and Rajputana Textile (Agencies) Ltd., by letters dated September 3, 1943, April, 16, 1943, and April 27, 1943. The consent of the shareholders of the respective companies to the agreements for transfer was duly obtained and the managing agencies were ultimately transferred to the respective trans ferees with effect from December 1, 1943 June 1, 1943, and July 1, 1943. The assessee executed in favour of the transferees formal deeds of assignment and received from them Rs. 57,80,000, Rs. 12,50,000 and Rs. 6,00,000 respectively. The accounts of the managing agency commission payable by the respective companies, to the managing agents for the year 1943 were made up in the ear 1944 and the three transferees received respectively Rs. 27,94, 504, Rs. 2,37,602 and Rs. 3,82,608 by way of commission. For the assessment year 1944‑45 and the chargeable accounting period, January 1, 1943, to December 3, 1943; the original income‑tax and excess profits tax assessments of the assessee were made on May 31, 1945, at a total income of Rs.46.48.483. This income did not include any part of the managing agency commission received by the transferees. The entire amounts of the managing agency commission received by the transferees were assessed by the Income‑tax‑Officer for the assessment year 1945‑46 as the income of the transferees. This was confirmed by the Appellate Assistant Commissioner, but on a further appeal to the Income‑tax Appellate Tribunal, the latter body by its order dated December 28, 1949, accepted the transferees' contention that the managing agency commission received by them should be apportioned on a proportionate basis and the transferees should be made liable to pay tax only on the commission earned by them during the period that they had worked as the managing agents of the respective companies. Thereupon, the Income‑tax Officer and the Excess Profits Tax Officer issued notices under section 34 of the Indian Income‑tax Act and section 15 of the Excess Profits Tax Act upon the assessee on the ground that the income from the managing agency had escaped assessment. The Income‑tax Officer and the Excess Profits Tax Officer wanted to include in the assessable income of the assessee the various amounts by reason of the…
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