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TMI Blog1962 (3) TMI 80X X X X Extracts X X X X X X X X Extracts X X X X ..... ri 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 assessee 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 assessee 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 Rosekandy Tea Estate from Messrs. Duncan Brothers & Co. Ltd. and the purchase price was the sum of ₹ 6,00,000, agreed upon between Shri B. L. Lahoty and the said Duncan Brothers & Co. Ltd. The state ment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsumer goods, foodstuff and clothing as shown in the books of the company as on the date of the handing over of the tea estate to the purchaser or its nominee for the sum of ₹ 6,00,000 on terms and conditions mentioned. The purchaser paid in ₹ 60,000 as earnest money and agreed to accept the title within eight weeks from the date of acceptance of the offer made by him. The relevant terms of the offer contained in a letter and accept ed 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 date of your handing over the said tea estate to me or my nominee. Clause 12.-" At the time of completion of the purchase I under take to take over and pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment 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 pattah's under which the same are held and possession of the moveable and immoveable 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... worked out to ₹ 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 unsuccessful. 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 [1953] 23 I. T. R. 278. 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 A-et. 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 him. 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of its incorporation, i.e., May 28, I951, 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. [1953] 23 I. T. R. 278. 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, I951, belonged. He referred to the clauses in the agreement of March 29, 1951, already mentioned from which according to him the following facts emerge: (i) The tea estate was to be sold as a going concern, all the tea manufactured after December 3I, 1950, was to belong to the purchaser including quota rights of the garden and all moveable and immoveable properties excepting 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 agent of the purchaser as from that date and the entire income of the business will be assessable in the hands of the purchaser but the purchaser must be a living person; he must be in existence. No such arrangement or agreement is possible between a living person and 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'. 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. ([1955] 1 S. C. R. 313) Elphinstone Spinning & Weaving Mills Co. Ltd. and (3) Apollo Mills Ltd., under various agreements. The assessee agreed to transfer i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e managing agency commission between the transferees and the assessee under the order of the Tribunal. In course of time assessments were made in spite of the objection of the assessee. After losing before the Tribunal the assessee got the Tribunal to refer the question "Whether, in the circumstances of the case, the managing agency commission was liable to be apportioned between the assessee company and the assignee ?" under section 66(i) of the Income-tax Act and section 2I of the Excess Profits Tax Act. According to the Tribunal the question was not when the Managing agency commission accrued but the real question was to whom it accrued. The Supreme Court examined the terms of the managing agency agreement with a view to find out whether the assessee was entitled thereunder to remuneration or commission for the broken periods. With regard to the E.D. Sassoon United Mills Ltd., the Supreme Court found that clause 2(d) of the agreement specified that the commission was to be due to the managing agents yearly on March 3I, in each and every year during the continuance of the agreement. The court observed that " the commission was thus an annual payment calculated upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the transferor and the transferee, whatever be their arrangements, inter se, whatever be the periods of the year during which they might have served the company in their capacity as the managing agents, the managing agents, as described in the recitals and clauses I and 3 of the managing agency agreement, were one entity and no severance of such periods of service during the course of a particular year was ever contemplated under the agreement. On assignment, the transferee became the managing agents as if its name had been inserted in the managing agency agreement from the beginning." Defiance was also placed on the observation of the Supreme Court in the above case at page 51 reading: " It is clear therefore that income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income". The Supreme Court went on to add (at page 55): " What has however got to be determined is whether the income, profits or gains ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the business and pay all taxes leviable either by the Central Government or the State in which the garden was situate. If for instance the formation of the company had taken two or three years to complete could it be suggested that the income-tax authorities or other taxing authorities should hold their hand and only bring the purchaser to tax after the company was formed? Clearly, the business would not be carried on on the assessee's account and the assessee would not be liable to pay tax. In Commissioner of Income-tax v. Bijli Cotton Mills Ltd ([I953] 23 I. T. R. 278) relied on by the Tribunal the facts were as follows: Messrs. David Mills Ltd. were the previous owners of the BijIi Cotton Mills. Messrs. ShyamIal Chimanlal, a partnership firm, thought of acquiring the BijIi Cotton Mills for a sum of ₹ 15 lakhs on behalf of a company, which they were going to get incorporated. Messrs. Shyamlal Chimanlal paid the stipulated price to Messrs. David Mills Ltd., purporting to do soon behalf of the company which they were going to float. On December 10, 1942, they obtained possession of the BijIi Cotton Mills as representing the purchaser company which had not then come into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a company which they intend to float, on the incorporation of the company, the company has a right to either accept what has been done on its behalf by the promoters or repudiate the same. If the company accepts what the promoters have done on its behalf it has a right to claim from the promoters the entire income of the property since its purchase or the entire income for the period during which the business was carried on for the benefit of the accompany." The learned judges went on to consider the fiduciary position held by a promoter in regard to the company and said "the fact that the assessee could not claim legal title from December 10, 1942, would for purposes of incometax make no difference as on equitable grounds the assessee could claim the entire profits of the business run from December 11, 1942, and in the case before us it did and realised the whole amount. It must be held, therefore, that the business was run on its behalf." Reliance was placed by the learned judges on the case of Commissioner of Income-tax v. Abubaker Abdul Rehman ([1939] 7 I. T. R. 139), where the learned judges of the Bombay High Court had held that the word "ownership&quo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he is entitled to deductions in respect of the amount of interest paid on borrowed capital. Under sub-clause (vi) he is entitled to deductions in respect of depreciation of such buildings, machinery, plant or furniture being his property, a sum equivalent to such percentage on the original cost thereof to him as may be prescribed; so also in the case of any sums paid on account of land revenue, local rates or municipal taxes under subclause (ix) and any sum paid to an employee as bonus or commission for services rendered under sub-clause (x). Mr. Meyer appearing for the revenue drew our attention to the case of Commissioner of Excess Profits Tax v. Remnath Bajoria ([[1951] 19 I. T. R. 79). In this case the assessee purchased the business of Messrs. Manton & Co., a firm carried on by three persons by the name of Mr. Donaldson and Mr. and Mrs. D. A. Brown, on July 23, 1946. By the agreement between the vendor and the purchaser all income-tax and excess profits tax in respect of the said business outstanding for the year from the first day of May, 1945, to April 30, 1946, together with all existing debits and liabilitie's of the vendors in respect of the business were to be on ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the estate except the account books an a certain sum on account of certain costs and expenses 'were handed over to him. Before the assessee took over possession of the estate, the executors had filed a return of the agricultural income of the estates for the accounting year 1945-46. Even after he took possession, notices under sections 24(4) and 25(2) were issued to the executors. Subsequently, fresh notices under these sections were issued to the assessee who responded to them and an assessment under section 25(3) was ultimately made on him in the dual capacity of receiver and beneficiary to the e state of the testator. Chakravartti j., as he then was, held that an executor did not, while the administration was still incomplete, hold the estate or receive its income on behalf of anyone else, but did so on behalf of himself as the person in whom the estate lay vested at the time. It was furl her held by this court that in 1945-46 when the estate had not been cleared and the executors had not come to hold it as trustees, the income was received by them on their own behalf and not on behalf of the assessee. The court also held that the assessee did not receive the income in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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