IMPORTANT POINT
On the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the pre-incorporation profits of Rs. 24862/- cannot be included in the assessment of the assessee-Company for the Assessment Year 1974-75.

JUDGMENT

Bharucha, J.-This is a reference under Section 257 of the Income Tax Act, 1961, made by the Income Tax Appellate Tribunal directly to this Court in view of the difference in the views taken by the Allahabad and Calcutta High Courts upon the same issue. The question to be answered reads thus :

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the pre-incorporation profits of Rs. 24,862/- cannot be included in the assessment of the assessee-company for the Assessment Year 1974-75?"

2. The assessment year is the Assessment Year 1974-75. The relevant accounting year ended on 30th September, 1973. The assessee company was incorporated on 30th October, 1972. It filed a return for Assessment Year 1974-75 disclosing an income of Rs. 1,79,690/-. The Income Tax Officer assessed the assessee company s total income at Rs. 2,04,530/-. In so doing, he included, inter alia, the sum of Rs. 24,862 as the assessee company s pre-incorporation profit. He found that the promotors of the assessee company had carried on business on its behalf and had received the sum of Rs. 80,534/- for the period 1st October to 29th October, 1972. After deducting expenses, the income in this behalf was Rs. 24,862/-. According to the ITO, 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.

3. The assessee company s appeal to the Commissioner of Income Tax (Appeal) 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 incoporation? If so, who 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 persons and that the income which had accrued on 29th October, 1972, was income that was earned by the promoters. Accordingly, the appeal of the assessee company was allowed.

4. The reference was made because of the decisions we now cite.

5. In Commissioner of Income Tax, U.P. and Ajmer-Merwara v. The Bijli Cotton Mills Ltd., Agra 1, the respondent company was incorporated on 11th December, 1943. Prior to that date the firm that promoted it had entered into an agreement to purchase a mill for it and, on 10th December, 1942, had obtained its possession. The sale deed of the mill was executed in favour of the respondent company after it had been incorporated. The respondent company chose to accept the profits of the mill made before its incorporation, but treated the promoters as accountable therefor. The Allahabad High Court observed that it was true that under the law the respondent company had come into existence only upon its incorporation and it was not possible to hold that the legal title in the business or its profits had vested in it before its incorporation. It was, however, well settled that if the promoters of a company carried on business on behalf of a company which they intended to float, the company, on its incorporation, had a right to either accept what had been done on its behalf by the promoters or repudiate the same. If the company accepted what the promoters had done on its behalf it had a right to claim from them the entire income for the period during which the business was carried on for its benefit. Reliance was placed upon the judgments of the Bombay High Court in Commissioner of Income-tax, Bombay v. Abubaker Abdul Rehman2, and Commissioner of Income-tax, Bombay v. Trustees of Sir Currimbhoy Ebrahim Baronetcy Trust3, where it had been held that if the income of 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, th