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TMI Blog1960 (3) TMI 48X X X X Extracts X X X X X X X X Extracts X X X X ..... shares of ₹ 50 each, i.e., ₹ 12,100. Managing director. 2. Mahadeolal Dalmia 2,489 shares of ₹ 50 each, i.e., ₹ 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 ₹ 1,000 each, i.e., ₹ 11,79,000. Managing director. 2. Mahadeolal Dalmia 758 shares of ₹ 1,000, each, i.e., ₹ 7,58,000. Director. 3. Bhagwands Goenka 1 share of ₹ 1,000. Director. 4. Basantilal Bhagwandas 62 shares of ₹ 1,000 each, i.e., ₹ 62,000. Mahadeolal Dalmia is a cousin of Ramnath Goenka. He admitted before the Income-tax Officer that all the shares in the abovenamed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter 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, ₹ 19,36,000 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 Company amounted to ₹ 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. ₹ 19,36,000 were credited in the books of the Express Company as desired by the liquidator. 8. The Express Company prin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 than 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 ₹ 6,44,802. This included a sum of ₹ 2,14,090 as business profit under the proviso to section 10(2)(vii) of the Act and the capital gains of ₹ 3,94,576. 14. The Express Company then appealed. Two appeals were filed against the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 the interpretation of the third proviso to section 12B(1) that the capital gain, namely, ₹ 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 ₹ 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 transferred 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, 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 ₹ 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 ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tain 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 shareholders in the company, and their holdings were as follows: 1. Ramnath Goenka (managing director) 242 share of ₹ 50 each. ₹ 12,100 2. Mahadeolal Dalmia (director) 2,489 shares of ₹ 50 each. ₹ 1,24,450 On April 22, 1946, another private limited company named the Express Newpapers Ltd. (to be referred to hereafter as the Express Company) was formed with the following shareholders: 1. Ramnath Goenka (Mg. Director) 1,179 share of ₹ 1000 each ₹ 11,79,000 2. Mahadeolal Dalmia (Director) 758 shares of ₹ 1000 each ₹ 7,58,000 3. Bhagwandas Goenka (son of Ramnath Goenka, director) 1 share of ₹ 1000 ₹ 1,000 4. Basantilal Bhagwandas (Mrs. Goenka) 62 shares of ₹ 1000 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 Exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Free Press of India (Madras) Ltd., be and the same is hereby discontinued with effect from this day." Mr. Sankar Rao, who appears to have taken charge immediately wrote a letter to the Express Company on the following day (November 1, 1946) thus: "I am the liquidator of the Free Press of India (Madras) Ltd. (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 your of September 1, 1946." The liquidator also intimated that the balance of the assets, bookdebts, bank balance etc. over the liabilities taken over by the Express Company was asserted to be a sum of ₹ 19,36,000, and that that sum should be distributed to the two directors of the former company thus: Mr. Ramnath Goenka ₹ 11,78,000 Mr. Mahadeolal ₹ 7,58,000 These sums were duly credited in the books of the Express Company, as directed by the liquidator, and with the consent of the two directors. The valuation of assets and the sale thereof which resulted in the Free Press Company getting a sum of ₹ 19,36,000 secured for it a profit of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been duly communicated to the Income-tax Officer by the manager of the Free Press Company on September, 15, 1947. There was another communication by the Express Company to have been taken of these communications, nor of the fact that the company had been struck off the rolls on July 12, 1948. Perhaps the Income-tax Officer was misled by the prompt submission of the return for the assessment year 1947-48 by Mr. Ramnath Goenka, by the appearance of the auditor before him during the enquiry, the payment of the tax under section 18A, and there being no dispute about the liability to pay the tax. On February 28, 1950, the Income-tax Officer assessed the Free Press Company Ltd., on a total income of ₹ 6,44,802. That amount was made up as follows: 1. Profits during the year of account. ... ₹ 36,136 2. Profit under proviso 2 to section 10(2)(vii), viz., written down value of the machinery ... ₹ 2,14,090 3. Capital gains under section 12B that is, excess profits of the Prices obtained on sale over the original cost price ... ₹ 3,94,576 The assessment order was served on Mr. Goenka who, however, returned the same on March 27, 1950, repudiating his liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f its assets to the Express Company were not liable to tax under the third proviso to section 12B(1). (5) Even if such capital gains were assessable to income-tax, the successor under section 26(2) could not be made liable for the same, as the profits did not represent the profits of the business which was transferred. The appeal was first heard by two members of the Tribunal namely, Messrs. Malhotra and Karkhanis. They agreed that the sum of ₹ 2,14,090 which represented the different between the cost price and the written down value of the machinery sold to the Express Company, should not be assessed to tax, as the proviso 2 to section 10(2)(vii) would not apply where the sale of assets was not made when the company was carrying on business, but only after cessation of such business. There was a difference of opinion between them on two questions. The former held that it would be open to the Income-tax Officer, in the circumstances of the case, to initiate proceedings under section 34 read with section 26(2) but that the capital gains of ₹ 3,94,576 would not be liable to be included in the assessment against the successor under section 12B of the Act. He, therefore, d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not present much difficulty, as the succession by the assessee to the business of the former company was by virtue of the sale and would, therefore, be conterminous with it. On behalf of the assessee, it was contended that the assessment of the Free Press Company on February 28, 1950, was a valid one, and there could be no justification for proceedings under section 34 for any escape of assessment, as there was none. It was further contended that the non-existence of the former company could not invalidate all assessment lawfully commenced by a valid return made oil behalf of the Free Press Company. Even assuming that such all assessment was invalid, it was contended that the Income-tax Officer had no jurisdiction to go behind his own order of assessment and initiate proceedings under section 34 read with section 26(2). It has, therefore, to be considered whether the proceedings under section 34 were properly initiated. The power to assess under section 34(1) would exist where there has been no assessment or where there has been an escape of assessment during the relevant assessment year. An invalid assessment would mean that there was no assessment at all. Such invalidity may b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record I find that no evidence was recorded by the Income-tax authorities on this point. It would not have been difficult for the Income-tax authorities to examine either Sri R.N. Goenka or the liquidator. Therefore before the assessment made on the Free Press of India (Madras) Ltd. was dubbed as nullity the Income-tax authorities should have considered all these facts." Great reliance is placed on behalf of the assessee on the above observations. We cannot, however, accept the argument. The normal rule is that, on liquidation, all the powers of the directors cease, and that it is necessary that a director, while. acting on behalf of the company, should either have been authorised by a resolution of the company or, at least by the liquidator. It is, no doubt, true that the authority of the liquidator need not be in writing. But the existence of such authority can never be a matter of assumption. The Appellate Assistant Commissioner held that Mr. Ramnath Goenka had no power to act on behalf of the defunct company in any manner whatsoever, and his submission of the return for the company after it had gone into liquidation was totally unauthorised. There is really no material f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these assumptions seriatim. It has been held that the word "assessment" has been sometimes used in the Act as comprehending the entire procedure prescribed for imposing the tax liability on the assessee. But when does an assessment proceeding actually start? Section 22(1) enjoins on the Income- tax Officer to issue a public notice in the first month of each financial year requiring every person who had received the minimum taxable income in the previous year to submit a return. The failure on the part of an individual having a taxable income to submit a return within the period allowed will expose him to a penalty under section 28(1) or to a punishment under section 51(e). That, however, has nothing to do with the jurisdiction of the Income-tax Officer to assess an individual. For instance, he cannot assess an individual immediately after the time limited in the notice, unless there is a return or there has been an individual notice under section 22(2). What, therefore, invests the officer with a jurisdiction is the existence of a voluntary return by the assessee or the service of a notice under section 22(2) on the individual concerned. In Commissioner of Agricultural I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the absence of such service would nullify the entire assessment proceedings as one without jurisdiction. The case cannot be treated either as one where there was a voluntary return on behalf of the company, as the only return that was purported to be filed on its behalf was that by Mr. Goenka, who, as we held, is not shown to have the necessary authority. There having been no proper initiation of proceedings, the individual concerned should be deemed to have escaped assessment. This conclusion is sufficient to dispose of the contention that there was no jurisdiction in the Income-tax Officer to start assessment proceedings on the footing that there had been an escape of assessment. But will the exercise of the powers under section 34 be valid even if one were to assume that the return submitted by Mr. Goenka was authorised? To answer that question it is first necessary to consider whether the assessment on the basis of the return was valid. The learned counsel for the assessee urged that the assessment could not be held to be invalid for the mere reason that the Free Press Company was not in existence on the date of assessment, and that the rules of abatement of suits under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings were started under section 34 against Burn and Co. The Privy Council held that the income which had been duly returned for assessment could not be said to have escaped assessment, though such income had not been taxed within the assessment year. In Ranchhoddas Karsondas v. Commissioner of Income-tax [1954] 26 I.T.R. 105, a notice under section 22(l) for the assessment year 1945-46 was published on May 1, 1945. However, no notice was issued to the assessee under section 22(2). Nearly 4? years thereafter, tile assessee made a return oil January 5, 1950, showing less than the taxable income. There was no assessment on that return within the year. The Income-tax Department initiated proceedings under section 34 On the- ground that certain monies standing iii the name of his wife were not included in the return. It was held that two clear options were open to the Department: (1) to issue a notice under section 22(2), and if no return was made within the time fixed by that notice, to proceed under Section 23(4); and (2) if no return was made within the time prescribed under the notice under section 22(1), to proceed under section 34. But if the Department took no action at all and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : Provided that, when the person succeeded in the business, profession or vocation cannot be found, the assessment of the profits of the year in which the succession took place up to the date of succession, and for the year preceding that year shall be made on the person succeeding him in like manner and to the same amount, as it would have been made on the person succeeded or when the tax in respect of the assessment made for either of such years assessed on the person succeeded cannot be recovered from him, it shall be payable by and recoverable from the person succeeding, and such person shall be entitled to recover from the person succeeded the amount of any tax so paid." The substantive part of the section lays down the rule that the successor is not liable to tax in respect of the business transferred, anterior to the ate of transfer. This is but a recognition of the principle that a person is liable for tax only on the profits made by him. If, therefore, there has been a succession to the business during the year of account, the transferor on, the person succeeded to, will be liable on the profits made up to the date of succession, and the transferee or the person suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that his earlier assessment order was invalid. The order of assessment made on February 28, 1950, is contrary to section 26(2), and, therefore, invalid, We are of opinion that the invalidity of that kind could be taken note of by the officer himself to initiate proceedings under section 34. Further, the liability of the successor arises on the disappearance of the person succeeded. That is a statutory liability, indepented of the liability of the latter. If it is found that the successor in such a case has not been assessed, if would be a case of an escape of assessment. The Income-tax Officer would, therefore, have jurisdiction to initiate proceedings under section 34. Our answer to question No. 1 is in the negative, and question Nos. 2 and 3 in the affirmative. The next question to be considered is the extent to which the assessee is liable to be taxed under the provisions of section 26(2) of the Act. There is no doubt that the Express Company would be liable for the actual income or the profits of the business earned by the Free Press Company in the year of account. Earlier in the judgment we have referred to the fact that, in addition to the actual profits of the business, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich the sale took place." The rest of the section is omitted as being unnecessary for the present purpose. The principle underlying the second proviso to the section is that, depreciation to the limit of the written-down value of the building or machinery having been claimed in previous years and relief from taxation obtained, it is but proper that, if ultimately it were found that there had been actually no such depreciation but something more than the written-down value was obtained on the sale of the machinery, the excess over the written-down value should be made liable to tax. As pointed out by Mr. Kanga in his commentaries on the Income-tax Act, at page 355.: "The Revenue takes back what it had given by way of depreciation allowance in preceding years, for otherwise the result would be to recoup the assessee an amount in excess of his original cost." When, therefore, a building or machinery belonging to a business is sold, the excess of the price obtained in such sale over the written-down value would be deemed to be income up to the limit of the original cost price. Anything obtained over and above the original cost price would be deemed to be capital gain. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case the sale of machinery and plant was a step in the process of winding up of its business, the intention of the company having been to discontinue the business, such a sale was not an operation in furtherance of the business carried on by the company, but was only a realisation of its assets in the process of gradual winding up of its business which eventual by terminated in the voluntary liquidation of the company, and provision of section 10(2)(vii) would not apply. In the present case, the formation of the new company was to take over the business of the old company. The lease of the machinery, the transfer of the right to carry on the business of publishing newspapers, and the ultimate sale of the machinery were part of the same scheme for winding up the Free Press Company. The sale of machinery was undoubtedly a closing down sale and the profit earned therein could not come in for assessment under section 10(2)(viii). We therefore answer question No. 4 in the negative. Question 5 and 6 relate to the profits of ₹ 3,94,576 made by the Free Press Company by the sale of machinery, the amount being the excess of the sale price of the machinery over its original cost pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... head of income, i.e., that which is referred to in section 6(iv). Capital gain referred to in section 6(vi) is another head of the income independent of profits from business. It is now well settled that income which is chargeable under one head, cannot be so done under a different head, and that the various heads of income specified in section 6 are distinct and mutual exclusive. In United Commercial Bank Ltd. v. Commissioner of Income-tax [1957] 32 I.T.R. 688, a question arose under section 24(2) as to whether income from securities under section 8 of the Act could be brought under a different head of income, namely, profits or gains in business, profession or vocation under section 10, where the securities formed part of the trading assets in the assessee's banking business. The Supreme Court, after reviewing the scheme of the various charging provisions, held that, although the income of an assessee is one, and the various sections, i.e., section 7 to 12, are modes in which the income-tax is to be levied, the section are mutually exclusive, and that income received as interest on securities which would come under section 8 could not come under section 10 which deals with pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee's business as earning interest on the securities which constituted part of the stock-in-trade. It was held that, where the assessee firm had paid tax on its business under the Indian Income-tax Act of 1918, it would be entitled to relief under section 25(3) on its dissolution, and, for that purposes, the income, profits and gains of a business should include the interest earned on securities, as those securities form part of the stock-in-trade. It cannot be said that machinery in the present case was a part of the stock-in-trade of the Free Press Company. That company was not a dealer in machinery, and any profits that might be obtained by the sale of such machinery could not be said to arise out of the business activity of the company. We are not prepared to read the decision in Commissioner of Income-tax v. Chugandas [1960] 38 I.T.R. 241, as laying down that the word "income, profits and gains of a business" would include the profit not merely of the business etc. as such but also those falling under other distinct heads of income for the mere reason that there is some connection between the two. In our opinion, the Income-tax Act designedly classified and used d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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