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Petitioner: COMMISSIONER OF INCOME-TAX, MADRAS/BOMBAY VS Respondent: EXPRESS NEWSPAPERS, LTD.Honorable Justice RAMACHADRA IYERR. Venkataraman,C. S. Rama Rao Sahib
1960 P T D 1169
1960 P T D 1169
[Madras (India)]
Before Rajagopalan and Ramachandra Iyer, JJ
COMMISSIONER OF INCOME‑TAX, MADRAS/BOMBAY
Versus
EXPRESS NEWSPAPERS, LTD.
Case Referred No. 11 of 1955, decided on 1st March 1960.
Income‑tax Act (XI of 1922)----
-----Ss‑ 10 (2) (vii), 12‑B, 23, 26 (2), 34‑Assessment‑Company‑Voluntary liquidation Notice under--under S. 22 (2) accepted by person not authorised‑Return submitted by director without authority‑Company struck of register‑Jurisdiction of Income‑tax Officer to assess‑Succession Disappearance of predecessor‑Assessment of predecessor‑Invali dity‑Jurisdiction of Income‑tax Officer to initiate re‑assessment proceedings against successor‑Scope of liability of successor--"Profits or gains of business" ‑Meaning‑Successor whether liable to tax on capital gains of predecessor.
The Free Press Co. resolved on August 31, 1946, to transfer the right of printing and publishing its dailies to Express News papers Ltd., to let its machinery and assets to the latter on a monthly rent until they were sold, and to authorise the latter to collect the book debts and pay off the liabilities of the former. The Express Newspapers took possession of the machinery and assets and liabilities and started publishing the dailies on September 1, 1946. The Free Press Co. went into voluntary liquidation on October 31, 1946, and its assets and machinery were sold to the Express Newspapers on November 1, 1945, and, as a result, the Free Press Co. secured a sum of Rs. 6,08,666 in excess of the written down value of its machinery. That amount was broken up as follows : (i) Rs. 2,14,090, being the excess of the original cost price over the written down value, and (ii) Rs. 3,94,576, being the excess over the original cost price. The Free Press Co. was dissolved later and was struck off the register of companies on July 12, 1948.
In the meantime the general notice under section 22 (1) of the Income‑tax Act for the assessment year 1947‑48 was published in May, 1947, and a notice under section 22 (2) was issued to the Free Press Co. on June 14, 1947. This notice was received by the manager of the Express Newspapers purporting to act as the manager of the Free Press Co. G, who was the managing director of the Free Press Co. before its liquidation, submitted a return on January 3, 1948, on behalf of the company. The Income‑tax Officer made an assessment on the company in February 1950 (i.e., after it was struck off the register of companies) and served the order on G but G repudiated liability to pay the tax. Thereupon the Income‑tax Officer initiated re‑assessment proceedings under section 34 read with section 26 (2) against the Express Newspapers treating it as the successor of the Free Press Co., and assessed it to tax, (i) on the profits of the predecessor company for the account ing year ending December 31, 1946, (ii) on Rs. 2,14,090, under section 10 (2) (vii) of the Act, and (iii) on Rs. 3,94,576 being the capital gains of the predecessor on the sale of its assets:
Held, (i) that on the liquidation of the Free Press Co. its liquidator alone would represent it and the return submitted by G after its liquidation was not a valid return as he had no authority to act on behalf of the company. Normally all the powers of the directors ceased on the liquidation of a company, and a director, to act thereafter on behalf of the, company, should have been authorised either by a resolution of the company or by the liqui dator. The authority of the liquidator need not be in‑writing but was never a matter of assumption.
(ii) That what invested the Income‑tax under with jurisdiction to assess was the existence of a voluntary return submitted by the assessee or the service of a notice under section 22 (2) on the indi vidual concerned and not the general notice published under section 22 (1). There could be no proper assumption of jurisdic tion unless there was a service of notice on the assessee ; a mere issue of notice was not sufficient. The absence of such service would nullify the entire assessment proceedings. As, in this case, there was no authority on the part of the manager of the Express Newspapers to accept the notice under section 22 (2) on behalf of the company and G had no authority to submit the return, the assessment proceedings under section 23 against the Free Press Co. were without jurisdiction.
(iii) That the rules as to abatement of proceedings laid down in the Civil Procedure Code did not apply to proceedings before the Income‑tax Officer.
(iv) That the existence of an assessee was essential for an assessment ; there could not be an assessment of a non‑existent person. The assessment made on the Free Press Co. long after it was struck off the register of companies was not valid, and a fresh assessment was not possible on the original return as it had ceased to exist.
(v) That there was a succession to the business of the Free Press Co. under section 26 upon the sale of its assets and machinery.
(vi) That the liability under section 26 (1) of the successor which arose on the disappearance of the person succeeded to, was a statutory liability independent of the liability of the latter and where, in such a case, it was found that the successor had not been assessed it would be a case of an escape of assessment under section 34. The Income‑tax Officer had, therefore, jurisdiction to initiate re‑assessment proceedings against the Express Newspapers.
(vii) That the invalidity of the assessment on the predecessor company made contrary to the mandatory provisions of the proviso to section 26 (2) could be taken note of by the Officer himself to initiate proceedings under section 3 4 against the successor : it was not necessary that the Department should have had the invalid assessment set aside by taking appropriate proceedings under section 33 or section 33‑A.
(viii) That the sale of machinery was a closing down sale and the profits earned thereby, viz., Rs. 2,14,090, were not taxable under section 10 (2) (vii).
(ix) That the words "profits and gains of a business" had a distinct meaning under the Income‑tax Act and they could not include another equally distinct concept recognised by the Act, viz., a capital gain. Further section 26 (2) which made the successor vicariously liable for the profits earned by the predecessor had to be strictly construed. The "income, profits and gains of the busi ness" referred to in section 26 (2) were therefore limited in their meaning to the head of income referred to in section 6 (iv) and did not include a capital gain. The successor, the Express News papers Ltd., was not liable to be taxed on the sum of Rs. 3,94,576, being the capital gain made by the predecessor company.
Commissioner of Agricultural Income‑tax v. Sultan Ali Gharami (1951)201 TR432 fol.
United Commercial Bank Ltd. v. Commissioner of Income‑tax (1957) 32 I T R 688 applied.
Alfred v. First Additional Income‑tax Officer, Salem (1957) 32 I T R 401 ; Commissioner of Agricultural Income‑tax v. Sultan Ali Gharami (1951) 20 I T R 432; Commissioner of Income‑tax v. Chugandas & Co. (1960) 38 I T R 241 ; Commissioner of Income tax v. Ramaswamy Ayyangar (1943) 11 I T R 610 ; Crown Flour Mills v. Commissioner of Income‑tax (1956) 29 I T R 733 ; Govind arajulu Iyer v. Commissioner of Income‑tax (1948) 16 I T R 391 ; Kannan Rice Mills v. Commissioner of Income‑tax (1954) 26 I T R 351 ; Liquidators of Pursa Ltd. v. Commissioner of Income‑tax (1954) 25 I T R 265 ; Maharajadhiraj of Darbhanga v. Commissioner of Income‑tax (1934) 2 I T R 345 ; Mannalal Modi v. Commissioner of Income‑tax (1956) 29 I T R 30 ; Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax (1954) 26 I T R 765 ; Ranchhoddas Karsondas v. Commissioner of Income‑tax (1954) 26 I T R 105 ; Sir Rajindranath Mukherjee v. Commissioner of Income tax (1934) 2 I T R 71 and United Commercial Bank Ltd v. Com missioner of Income‑tax (1957) 32 I T R 688 ref.
STATEMENT OF CASE
By these applications, which are consolidated for the sake of convenience, the Express Newspapers/Limited, Madras, and the Commissioner of Income‑tax, Madras/Bombay City I, require the Appellate Tribunal to refer to the High Court certain questions of law, which are said to arise out of the Tribunal's order in I. I. A. No. 7349 of 1951‑52. Inasmuch as, in our opinion, a question of law does arise out of the aforesaid order, we hereby draw up a statement of the case and refer it to the High Court of Judicature at Madras, under section 66 (1) of the Indian Income‑tax Act. Parties agree that all the material facts are correctly stated and that there is no omission of any material fact.
2. Free Press of India (Madras) Limited, hereinafter referred, to as the Free Press Company, was a private limited company with the following shareholders and directors:
1. Ramnath Goenka
242 shares of Rs 50 each, i.e., Rs. 12,100.
Managing director.
2. Mahadeolal Dalmia
2,489 shares of Rs. 50 each, i.e., Rs. 1,24,450.
Director
The Free Press Company was carrying on business as printers and publishers of various newspapers, namely, Indian Express, Dinamani and Andhra Prabha at Madras, Eastern Express and Bharat at Calcutta and Sunday Standard and Morning Standard at Bombay. On or about April 22, 1946, another private limited company called the Express Newspapers Ltd., hereinafter referred to as the Express Company, was formed with the following shareholders
1. Ramnath Goenka
1,179 shares of Rs. 1,000 each, i.e., Rs. 11,79,000.
Managing director.
2. Mahadeolal Dalmia
758 shares of Rs. 1,000 each, i.e., Rs. 7,58,000
Director,
3. Bhagwanuas Goenka
1 share of Rs. 1,000.
Director.
4. Basantilal Bhagwandas.
62 shares of Rs. 1,000 each, i.e., Rs. 62,000.
Mahadeolal Dalmia is a cousin of Ramnath Goenka. He admitted before, the Income‑tax Officer that all the shares in the above‑named companies that stood in his name belonged to Ramnath Goenka and that he was only a benamidar for Ramnath Goenka.
3. Paragraph 3 (2) of the memorandum of association of the Express Company shows that it was formed "to acquire and take over the newspapers Indian Express, Dinamani and Andhra Prabha at Madras and Eastern Express and‑Bharat at Calcutta and all or any of the assets and liabilities of the Free Press of India (Madras) Limited, the proprietors of the said newspapers." Sunday Standard and Morning Standard of Bombay were acquired from one Mr. Hamilton in 1946, by the Free Press Company. They were acquired subsequent to April 22, 1946, and that is why no reference to these two newspapers is to be found in the memo randum of association of the Express Company.
4. The board of directors of the Free Press Company passed the following resolution on August 31, 1946:
"Resolved to give the right of printing and publishing our dailies and other publications in Madras, Bombay and Calcutta to Express Newspapers Limited, from September 1, 1946.
Resolved to let the machinery and assets to Express News papers Limited, on a lease of Rs. 10,000 per month till the sale of these assets.
Resolved, that Express Newspapers, Limited, do collect the book‑debts and pay off the liabilities on our behalf."
5. At an extraordinary meeting of the two shareholders of the Free Press Company held on October 31, 1946, the following resolutions were passed:
"(1) Resolved that the Free Press of India (Madras) Limited be wound up voluntarily.
(2) Resolved further that Sri N. V. B. Sankar Rao, Advocate, No. 21, Law Cambers, High Court, Madras, be and is hereby appointed liquidator, on a consolidated remuneration of Rs. 500 (rupees five hundred) and that the said liquidator may in addition to all the powers as such, exercise the powers given by clauses (b), (e), (f ) and (h) of section 179 of the Indian Companies Act to a liquidator in a winding up by the Court.
(3) Resolved further that the liquidator shall not carry on business for any purpose and that the business of the Free Press of India (Madras) Limited, be and the same is hereby disconti nued with effect from this day."
6. On November 1, 1946, Sankar Rao, the liquidator wrote the following letter to the Express Company:
"I am the liquidator of the Free Press of India (Madras) Limited (in voluntary liquidation). I find that you have been negotiating for purchase of' the assets at the value noted in the director s letter of August 31, 1946, and signified your acceptance in yours of September 1, 1946.
I confirm the said transaction.
I also find that you are to collect the book‑debts and advances and pay the liabilities and the cash and bank balance have been taken over by you. As a result of all these transactions your company is due to the vendor company shareholders, Rs. 19,30,000 being the amount due to the two directors as per details given overleaf.
The two directors who were the only shareholders of the vendor company agree to this sum being credited in your accounts and to this effect, I enclose herein their letter of consent. Please credit the above amount as follows in your books:
Rs.
Mr. Ramnath Goenka
11,78,000
Mr. Mahadeolal Dalmia
7,58,000
Total
19,36,000"
7. The excess of assets over liability of the Free Press Com pany amounted to Rs. 19,36,000. We might add that some of the assets like plant and machinery were not transferred at their book values, but at a revised valuation. The resolutions referred to earlier were given effect to. Rs. 19,36,000 were credited in the books of the Express Company as desired by the liquidator.
8. The Express Company printed and published the News papers referred to earlier with effect from September 1, 1946; without any change in the staff, management, agents, correspon dents, etc. The change over was effected without any break in the continuity of the business, .without any alteration in the organization.
9. The fact that the Free Press Company went into liquida tion was published in the Fort St. George Gazette dated February 10, 1948, and in the Indian Express and Dinamani, dated January 29, 1948. The notice of dissolution was filed with the Registrar of Joint Stock Companies, Madras, on April 12, 1948, and the Free Press Company was on July 12, 1948, struck off the rolls of joint stock companies maintained by the Registrar.
10. The liquidation of the Free Press Company was duly communicated to the Income‑tax Officer by the manager of the Free Press Company, (he had apparently become the manager of the Express Company) on September 15, 1947, and, also by the Express Company on April 4, 1949.
11. The Income‑tax Officer issued a notice under section 22(2) of the Act for the year 1947‑48 to the Free Press Company on June 14, 1947. It was not served on the liquidator. In response to this notice a return was filed on January 3, 1948, declaring an income of Rs. 2,50,818. It was signed by Ramnath Goenka as a director of the Free Press Company. On page 1 of the return it was clearly stated that the company was in voluntary liquidation and this fact was also mentioned in the report of the auditors which accompanied the return. The Free Press Company issued a letter of authority, dated June 30, 1947, in favour of the auditors, Messrs P. Subramania Iyer & Company. The letter of authority was filed with the Income‑tax Officer on July 4, 1947. It was signed on behalf of the Free Press Company, by the manager of that company. The auditors asked for extension of time from time to time. The Income‑tax Officer acted upon the return and ultimately .made an assessment on the Free Fress Company on February 28, 1950, on a total income of Rs. 6,44,702 which included a profit of Rs. 2,13,990 under the proviso to section 10 (2) (vii) of the .Act and capital gains amounting to Rs. 3,94,576. The assess ment order, notice of demand etc., were then served on the auditors, who in turn forwarded them to Ramnath Goenka. Ramnath Goenka, however, returned the papers to the Income‑tax Officer on March 27, 1950, on the ground that they had been wrongly served on him and repudiated the liability to pay the tax.
12. The Income‑tax Officer who made the assessment was then transferred and a new Income‑tax Officer took his place. He with the approval of the Commissioner of Income‑tax, as required by section 34 (1) of the Act, issued a notice to the Express Company on April 4, 1951, under section 34 (1) read with section 26 (2) of the Act. The notice was addressed to the Express Newspapers Limited, successors to the Free Press of India (Madras) Limited. The Express Company denied its liability to be assessed.
13. On April 4, 1951, the Income‑tax Officer passed an order under the proviso to section 26 (2) of the Act. This order is appealable to the Assistant Commissioner. The Income‑tax Officer then passed an assessment order on July 17, 1951, computing the total income of the Free Press Company from April 1, 1946 to October 31, 1946, at Rs. 6,44,802. This included a sum of Rs. 2,14,090 as business profit under the proviso to section. 10 (2) (vii) of the Act and the capital gains of Rs. 3,94,576.
14. The Express Company then appealed. Two appeals were filed against the order of the Income‑tax Officer under the proviso to section 26 (2) of the Act. One of these appeals was not in the prescribed form. The other‑ was in the prescribed form G. The right of appeal is given to the per son succeeding to the business : vide form G. A third appeal was filed against the assessment made by the Income‑tax Officer on the Express Company. All these three appeals were consolidated by the Appellate Assistant Commissioner who disposed of them by a common order. The contentions raised on behalf of the assessee, that is, the Express Company, were not accepted by the Appellate Assistant Commissioner.
15. The Express Company then appealed to the Appellate Tribunal (one appeal was filed) and raised various contentions. They may be briefly summarised : (1) Thu Express Company did not succeed to the business of the Free Press Company. (2) The notice issued under section 34 of the Act to the Express Company was invalid, inasmuch as the assessment made by the Income‑tax Officer on the Free Press Company on February 28, 1950, was subsisting. (3) The proviso to section 10 (2) (vii) of the Act did not apply, and, therefore, the profit of Rs. 2,14,090 should not be treated as the business profit of the Free Press Company. (4) The capital gains made by the Free Press Company on the transfer of its assets to the Express Company were not liable to tax, in view of the third proviso to section 12B (1) of the Act. (5) The capital gain is not covered by section '16 (2) of the Act.
16. The appeal of the Express
Company was heard by Messrs Malhotra and Karkhanis. They differed on the follow ing points:
"(1) Whether on the facts and in the circumstances of the case, proceedings under section 34 read with section 26 (2) of the Income‑tax Act were rightly initiated against the assessee company ?
(2) Whether on the facts of the case, capital gains of Rs.3,94,576 accrued to the Free Press of India (Madras) Limited, as a result of the transfer of its assets to the Express Newspapers Limited, and are liable to tax under section 12B of the Income‑tax Act ?
17. The case was then referred by the President to himself under section 5A (7) of the Act. He held that the proceedings under section 34 read with section 26 (2) were rightly initiated against the Express Company. He also held that the capital gains of Rs. 3,94,576 were liable to tax. In doing so, he felt that he was bound by the decision of the Madras High Court in the case of Sri Kannan Rice Mills Limited v. Commissioner of Income tax ((1954) 26 I T R 327), although he was inclined to think on the interpretation of the third proviso to section 12B (1) that the capital gain, namely, Rs. 3,94,576, was not liable to tax.
18. All the contentions of the Express Company, except the contention relating to the business profit of Rs. 2,14,090 were not accepted by the Appellate Tribunal for the ' reasons recorded by it in its order, a copy of which is annexure "A" and forms part of the case. The Tribunal held that the surplus of the cost price over the written‑down value of the plant and machinery trans ferred by the Free Press Company to the Express Company was not business income under the proviso to section 10 (2) (vii) of the Act. It was, however, liable to be assessed as a capital gain. This point was not made clear in the order of the Tribunal, but later on, an application made by the Income‑tax Officer, the position was made clear. In fact, even the Express Company agreed that if the sum of Rs. 2,14,090 was not liable to be included as business income, it was liable to be treated as a capital gain and as such liable to be taxed. The sum of Rs. 3,94,576 stands on a different footing. The surplus of the sale price over the cost price was Rs. 3,94,576. The surplus of the cost price over the written‑down value was Rs. 2,14,090.
19. No question of law arises out of the finding of the Tribunal that the Express Company succeeded to the business of the Free Press Company. The finding is a finding of fact. In fact, the assessee cannot blow hot and cold at the same time. If the case of Express Company was that it had not succeeded to the business of the Free Press Company, it had no right of appeal against the order passed by the Income‑tax Officer under the pro viso to section 26 (2) of the Act.
20. The questions of law that, therefore, arise are:
"(1) Whether the assessment made by the Income‑tax Officer on February 28, 1950, was valid in law ?
(2) Whether the notice under section 34 (I) of the Act issued by the Income‑tax Officer on April 4, 1951, was validly issued ?
(3) Whether the assessment made by the Income‑tax Officer on July 17, 951, is a valid assessment ?
(4) Whether the Free Press Company made a business profit of Rs. 2,14,090 under the proviso to section 10 (2) (vii) of the Act ?
(5) Whether the capital gain of Rs. 3,94,576 is not liable to tax in view of the third proviso to section 12B (1) of the Act ?
(6) Whether the capital gain made by the Free Press Com pany is liable to be assessed in the hands of‑ the Express Com pany under section 26 (2) of the Act ?
21. All the material facts have been properly stated in the case. Parties, however, desire that the Income‑tax Officer's order, dated April 4, 1951, the assessment order, dated July 17, 1951, and the Appellate Assistant Commissioner order, dated 18th January, 1952, be made a part of the case. As desired by them we make them a part of the case. The order, dated April 4, 1951, is annexure "B". The assessment order, dated July 17, 1951, is annexure "C" and the Appellate Assistant Commissioner's order is annexure "B".
C. S. Rama Rao Sahib and S. Ranganathan for the Commis sioner.
R. Venkataraman for the Assessee.
JUDGMENT
RAMACHADRA IYER, J.‑Free Press of India (Madras) Ltd., a private limited company (hereinafter referred to as the Free Press Company) was carrying on business as printers and publishers of certain newspapers, namely, the Indian Express, Dinamani and Andhra Prabha at Madras, and Eastern Express and Bharat at Calcutta. During the course of the year 1946, the company also acquired rights in respect of Sunday Standard and Morning Standard at Bombay. There were only two share holders in the company, and their holdings were as follows:
1. Ramnath Goenka (managing 242 shares of director)
Rs. 50 each.
Rs.12,100
2. Mahadeolal Dalmia(director)
2,489 shares of Rs. 50 each
Rs. 1,24,450
On April 22, 1946, another private limited company named Express Company) was formed with the following shareholders.
1. Ramnath Goneka(Mg. Director)
1,179 shares of Rs. 1,000 each
Rs. 11,79,000
2. Mahadeolal Dalmia(Director)
758 shares of Rs. 1,000 each
7,58,000
3. Bhagwandas Goneka (son of Ramnath Goneka director)
1 share of Rs. 1,000
1000
4. Basantilal Bhagwandas(Mrs. Goenka)
62 shares of Rs. 1,000 each
62,000
The object of the new company was to acquire and take over the newspapers, the Indian Express, Dinamani and Andhra Prabha at Madras, and Eastern Express and Bharat at Calcutta and all or any of the assets and liabilities of the Free Press of India Ltd., Madras. There was no reference in the memorandum of association to the Sunday Standard or Morning Standard, as the latter company had not acquired the right to publish those papers by then, but there can be no doubt that the Express Com pany was formed with the specific object of taking over the entire business of the Free Press Company. It was admitted before the Income‑tax Officer that Mahadeolal Dalmia who is the cousin of Ramnath Goenka was not the real owner of the shares in either of the two companies, but held them merely benami for the benefit of Mr. Ramnath Goenka. But the same thing cannot be said of Bhagwandas Goenka or Basantilal Bhag wandas who should be treated as…
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