TMI Blog1953 (9) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... aternal uncle of Memunabai and Jenambai, joint guardians of the right, title and interest of the abovenamed minors in two immoveable properties and in an establishment situate at Grant Road and known as the New Coronation Durbar Hotel belonging to the minors abovenamed and authorised the guardians to continue the business carried on in the name of the New Coronation Durbar Hotel at Bombay and gave certain direction to the guardian for collecting and recovering the income, rents and profits of the hotel and the immovable properties and for making certain disbursements out of the income from both those sources. A copy of the order of the High Court referred to above is annexure 'A' and forms part of the case. The Income-tax Officer computed the assessee's income as follows:- Business income ₹ 54,979 Property income ₹ 4,488 Total income ₹ 59,467 The Income-tax Officer assessed the income as one unit in the hands of an association of persons. In appeal the Appellate Assistant Commissioner held that the provisions of Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness which was the business of a restaurant called the New Coronation Durbar Hotel. Mr. Justice Blagden on the 18th May, 1944, appointed two guardians of the two minors and he authorised the guardians to continue the business of the New Coronation Durbar Hotel and he also ordered that the guardians should collect and recover the income, rents and profits of the hotal and the immovable properties and to pay out of the income all necessary expenses of the management of the hotel and all the collection and other outgoings in respect of the business and immoveable properties and pay certain maintenance every month for the education and benefit of the minors, and he finally ordered that after defraying all the expenses aforesaid the guardians were to deposit twice every year, viz., at the end of April and October, with the Accountant General the share of the minors in the balance of income, rents and profits from the business and immovable properties, and the Accountant General was to open an account in the name of the two minors and invest the moneys and keep the amount received to the credit of the two minors. The two guardians made a return in respect of the income from the propert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Whether each minor being entitled to one half of the properties and business the income of each minor should not have been separately assessed on the minor by her guardians and managers the applicants? In the question raised by the Tribunal it does not appear that the assessment proceeded under Section 40 or Section 41 of the Act. As we shall presently point out, that was the very basis of the assessment made by the Department and therefore the question whether the Department was right in the way it had taxed the business income can only be decided by a consideration of the provisions of Section 40 or Section 41 of the Indian Income-tax Act. At no time was it the case of the Department that they were assessing the guardians to tax under Section 10 read with Section 3 of the Act irrespective of the provisions of Section 40 or Section 41. On the contrary, the order of the Income-tax Officer makes it perfectly clear that the guardians were assessed to tax by reason of the fact that they were guardians and by reason of the liability imposed upon them under Section 40. Before we consider the authorities that were cited at the Bar, we will look at the provisions of the Act itse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carried on, he may take a rather casual interest in his business, but that would not permit him to contend that he is not carrying on the business and he is not liable to pay tax in respect of the profits derived from that business. But an assessee must have the right to carry on a particular business before he can be called upon to pay the tax under Section 10 and the business must be carried on in the exercise of that right. If the owner of a business is incapacitated from carrying on the business and he has no right to carry on the business, then although he may be the owner of the business he would still not be liable to pay tax under Section 10 because he is not carrying on the business. The incapacity may be caused by natural reasons or by intervention of the Court. A person may be a minor, he may be a lunatic, and as such although he may own a business or inherit a business he would be incapable in law of carrying on that business. On the other hand, the Court may intervene and deprive the owner of the right of carrying on his own business and authorise someone else to carry on the business for him, in which case the person who would be carrying on the business would not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receives or is entitled to receive on behalf of his ward or beneficiary any income, he is liable to pay tax upon that income in the like manner and to the same amount as it would be leviable upon and recoverable from any such beneficiary if of full age and sound mind and in direct receipt of such income, profits or gains, and all the provisions of this Act shall apply accordingly. Therefore, to use simple language, Section 40 imposes a vicarious liability upon a guardian and trustee and that vicarious liability is co-extensive with the liability of the ward or the beneficiary of whom the assessee is the guardian or the trustee. It is not the liability of the guardian or the trustee himself; it is the liability of the minor or the beneficiary. But the law provides a machinery whereby the taxing department by this option, instead of recovering the tax from the minor or the ward or the beneficiary, may recover it from the guardian or the trustee. Sub-section (2) of that section deals with the case of a trustee or agent of a person not resident in the taxable territories who is not a minor, lunatic or idiot. In that case also it imposes a vicarious liability upon the trustee or agent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and Section 40(1) was enacted in order to deal with the specific case of a guardian, there is no reason why we should consider Section 41, and therefore in our opinion it is Section 40 that applies to the facts of this case and not Section 41. Now, inasmuch as the department contended that the assessee were liable to pay tax on the business income as a whole and they proceeded under Section 40, Sir Nusserwanji had to satisfy us that under Section 40(1) the guardians in this case were liable to pay tax on the income of the business earned as a whole by the guardians carrying on that business. What has been emphasised by Sir Nusserwanji is that Section 40 not only permits the taxing department to levy tax and make it recoverable from the guardian in like manner and to the same amount as it would be leviable upon and recoverable from a beneficiary, but it further goes on to say as if the beneficiary was of full age or sound mind and in direct receipt of such income, profits or gains. Therefore, according to Sir Nusserwanji we must assume that the minors were of full age and we must also assume that they were in direct receipt of the income which has been received by the guardia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a share would be arrived at by a computation which would be on a commercial basis and which in all probability would not be identical with the mode of computation laid down in the Indian Income-tax Act. Therefore it is fallacious to suggest that the income which the guardians earned by reason of carrying on the business was the income to which the minors were entitled and which income was received by the guardians on behalf of the minors. The income which the guardians earned was an income derived by them by reason of a business which they carried on in their right pursuant to the order of the Court. The income to which the minors were entitled was an entirely different kind of income which would be ascertained after the business was carried on, profits made and net profits ascertained. Sir Nusserwanji says that Section 40 does nothing more than enable the taxing department to tax income of a business carried on by a guardian on behalf of the minor. In our opinion such a contention is not borne out by the language of Section 40. Therefore, as the facts stand on this reference, it was open to the department to have assessed the income of the guardians under Section 10 on the basi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he shares of the beneficiaries which he received. What was emphasised by Mr. Palkhivala was that this was a case where the income was derived from business and yet the tax was not on the income of the business as a unit but it was on the specific share of each of the beneficiaries which he had in the profits of the business. Now, this is only a decision on the applicability of the proviso to Section 41. The department did not proceed to assess any person who was carrying on the business under Section 10, and therefore we do not find in this judgment any discussion as to the true interpretation of Section 10. The other decision is Mazumdar v. Commissioner of Income-tax [1947] 15 I.T.R. 484. That was the case of a receiver who was the assessee and he was appointed receiver of the Trigunait Brothers' Estate in a partition suit, and the Patna High Court came to the conclusion that the assessment should be made against the receiver under Section 41(1). It held that the Trigunaits had dissociated themselves from each other because the partition suit was pending, and therefore it could not be said that they were an association of persons carrying on the business. It says that the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view is taken that not only the widow but the other heirs also had the right to carry on this business, then the mere fact that Mrs. Saldhana was in physical charge or control of the business would not make any difference to the liability to pay tax under Section 10 of the others, who, although they did not actually share the carrying on of the business with the widow, had the right to carry on the business as much as the widow herself. It may also be pointed out, with respect to the learned Judges, that they seemed to have taken the view that a business under the Indian Income-tax Act is a unit of assessment and that the business as such can be assessed under Section 10. That clearly is not the true legal position. What is assessed under the Indian Income-tax Act is not a business, but the persons who carry on the business. The other case that was referred to at the Bar is a decision of the Punjab High Court in Hotz Trust v. Commissioner of Income-tax, Punjab*. There, under a testamentary trust deed the trustees were given full powers to carry on the hotel business of the testator; they had also the power to extend the business, accumulate income, borrow capital and to distrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not considering the Indian Income-tax Act, but it is certainly true of Section 10 which assessees to tax only that income which has been received by persons who carry on business and in that sense it may be said that they are in receipt and control of the income of the business. Therefore, on a review of these authorities, it is clear that there is no decision to which our attention has been drawn in which a person not carrying on the business in the sense in which we have indicated has been assessed to tax under Section 10, and as the whole foundation of the argument advanced before us by Sir Nusserwanji is that the persons who carry on the business within the meaning of Section 10 are an association of persons constituted by the minors, the contention must obviously fail. The department must fail in either view of the case. If we take the view as was advanced before the Tribunal and before the other taxing authorities that the persons who carry on the business are the guardians who constitute an association of persons because they have not been assessed directly under Section 10 but they have been assessed under Section 40, the department must fail. If, on the other hand, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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