TMI Blog1996 (2) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... s incorporated. Prior to its incorporation, it simply does not exist. The assessee-company did not exist when the income with which we are here concerned was earned . It is, therefore, not the assessee-company which earned the income when it accrued and it is not liable to pay tax thereon. Who is liable to pay tax? - A company can enter into an agreement only after its incorporation. It is only after incorporation that a company may decide to accept that its promoters have carried on business on its behalf and appropriate the income thereof to itself. The question as to who is liable to pay tax on such income cannot depend upon whether or not the company after incorporation so decides. It is he [promoter] who carried on the business a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was ₹ 24,862. According to the Income-tax Officer, this was the income of the assessee-company because its promoters had acted and carried on business on its behalf and the assessee-company had accepted the act of the promoters after its incorporation. The assessee-company's appeal to the Commissioner of Income-tax (Appeals) was dismissed. The assessee-company then appealed to the Tribunal. The Tribunal observed that the real questions were : When did the pre-incorporation profit accrue ? Did it accrue before incorporation ? If so, which was the legal entity which carried on the business and earned the income at the time of accrual ? The Tribunal held that, in law, the promoters and the assessee-company were different legal per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efit. Reliance was placed upon the judgments of the Bombay High Court in CIT v. Abubaker Abdul Rehman [1939] 7 ITR 139 and CIT v. Trustees of Sir Currimbhoy Ebrahim Baronetcy Trust, AIR 1932 Bom 106, where it had been held that if the income of the trust property as it accrued was earmarked and had to be handed over by the trustee to the beneficiary, the beneficiary could be said to be in receipt of that income and could be taxed directly. If, on the other hand, the income came into the hands of the trustee and he had the right to dispose of it and it was only the balance left over that was payable to the beneficiary, then the income was taxable in the hands of the trustee. The latter decision had been upheld by the Privy Council. These dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng December 31, 1951, the respondent-company showed a loss. The Income-tax Officer held that the assessee was not entitled to claim the whole of 40 per cent. of the loss but only the portion of the 40 per cent. 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. The High Court considered the judgment in the case of Bijli Cotton Mills Ltd. [1953] 23 ITR 278 (All) and disagreed therewith. It said that under the Income-tax Act an assessee meant a person by whom income-tax or any other sum of money was payable thereunder. Tax had to be paid by an assessee under the head 'Profits and loss of business, profession or vocation, in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our view, the Tribunal was right in saying that the relevant question was : what was the legal entity that had carried on the business before the assessee-company was incorporated and earned the income at the time of its accrual. A company becomes a legal entity in the eye of law only when it is incorporated. Prior to its incorporation, it simply does not exist. The assessee-company did not exist when the income with which we are here concerned was earned. It is, therefore, not the assessee-company which earned the income when it accrued and it is not liable to pay tax thereon. The same result is reached by a somewhat different process of reasoning. A company can enter into an agreement only after its incorporation. It is only after inco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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