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1967 Supreme(SC) 108
SUPREME COURT OF INDIA
J.C. SHAH, S.M. SIKRI AND V. RAMASWAMI, JJ
Commissioner of Income-tax. Mysore Appellant
Versus
Bangalore Transport Company Ltd., (In Liquidation) Bangalore, Respondent.
Civil Appeal No. 435 of 1966
D/-3-4-1967.
Advocates Appeared
Mr. S. T. Desai, Senior Advocate (Mr. A. N. Kirpal, Advocate and Mr. S. P. Nayyar, Advocate for Mr. R. H Dhebar, Advocate with him), for Appellant; Mr. T. V. Viswanath Iyer, Senior Advocate (M/s. K. Rajinder Chaudhuri and K R. Chaudhuri, Advocates; with him), for Respondent.
A.N.KIRPAL, K.R.CHAUDHARY, K.RAJENDRA CHAUDHARY, R.H.Dhebar, S.P.NAIR, S.T.DESAI, T.V.VISHVANATH IYER
Profits earned during the year are subject to tax under the Income-tax Act, even if the business is closed before the end of the previous year.
Headnote:
INCOME TAX - Profits and gains of business, profession or vocation - Accrual of profits - Profits earned during the year, subject to charge of tax - Closure of business before end of previous year - Liability to tax not affected.
Fact of the Case:
The Bangalore Transport Company Ltd. (Company) operated a public motor transport service in Bangalore. The Mysore Legislature enacted the Bangalore Road Transport Service Act, 1956, acquiring the Company's undertaking and assets on October 1, 1956, with compensation paid to the Company. The Company claimed no income from its business for the previous year ending March 31, 1957, but the Income-tax Officer assessed taxable business income of Rs. 3,16,439. The Appellate Tribunal referred the question of whether this amount was income liable to tax to the High Court.
Finding of the Court:
The High Court held that the character of the compensation received by the Company was determinative of the taxability of the profits earned during April 1, 1956 to September 30, 1956. The Supreme Court disagreed, finding that the profits accrued or arose to the Company during that period and were subject to tax.
Issues: Whether the sum of Rs. 3,16,439 was income and liable to tax on the assessee for the year 1957-58?
Ratio Decidendi: The Supreme Court held that under Section 10 (1) of the Income-tax Act, 1922, tax is payable on profits and gains of business, profession, or vocation carried on by the assessee. The Court rejected the argument that the business must be actively carried on for the whole of the previous year for profits to be taxable, finding that income accrues or arises whenever an assessee receives money or money's worth in the course of business. The Court also held that the closure of the business before the end of the previous year did not affect the liability to tax on profits earned during the year.
Final Decision: The Supreme Court answered the question in the affirmative, holding that the sum of Rs. 3,16,439 was income and liable to tax on the assessee for the year 1957-58.
Judgement
SHAH, J. :- The Bangalore Transport Company Ltd. hereinafter called the Company - operated a public motor transport service in the town of Bangalore for several years. The Legislature of the State of Mysore enacted the Bangalore Road Transport Service Act, 1956 (Mysore Act 8 of 1956) with a view to provide for the acquisition of the undertaking of the Company. By virtue of Section 3 of the Act the undertaking, assets and documents of the Company vested in the Government of Mysore, on October 1, 1956, and the Company was paid Rs. 15,50,000 as compensation for loss of its undertaking assets and documents.
2. In respect of the previous year ending March 31, 1957, the Company submitted a return under the Income-tax Act claiming that it had earned no income from its business since its undertaking and business was taken over by the Government of Mysore on October 1, 1966 The Income-tax Officer, Urban Circle, Bangalore, brought to tax Rs. 4,01,954 disclosed by the Company s audited accounts as its taxable business income. This order was confirmed by the Appellate Assistant Commissioner in appeal. The Income-tax Appellate Tribunal modified the order of assessment and allowed Rs. 97,208 as development rebate for the previous year and after making certain adjustments brought to tax an amount of Rs. 3,16,439 a taxable income of the Company in the previous year.
3. At the instance of the Company, the following question was submitted by the Appellate Tribunal to the High Court of Mysore under Section 66 (1) of the Income-tax Act, 1922 :
"Whether the sum of Rs. 3,16,439 was income and liable to tax on the assessee for the year 1957-58?"
The High Court answered the question in the negative. Against that order this appeal is preferred with special leave.
4. The High Court was of the opinion that it was for the Revenue to establish that out of Rs. 15,50,000 received by the Company as compensation for loss of its "undertaking, assets and documents," Rs. 3,16,439 were paid towards profits earned by the company during the period April 1,1956 to September 30, 1956. The High Court observed that even if the compensation paid to the Company was worked out as a multiple of profits earned in one or more years, that circumstance was not sufficient to prove that any compensation or any part thereof was received by the Company in lieu of the profits earned by it, and that the nature of the payment was decisive of its character and "not the method of payment or measure." The High Court accordingly held that there was no material on the record from which it could he reasonably held that any portion of the compensation paid represented replacement of profits earned during April 1, 1956 to September 30, 1956. In our judgment the High Court erred in assuming that the character of the compensation received by the Company was determinative of the question submitted by the Tribunal. It was the claim of the Revenue that in the previous year the Company had earned taxable profit amounting to Rs. 3,16,439 and that profit was subject to tax in the hands of the Company. The department was not seeking to tax either the whole or any part of the compensation received by the Company and the discussion as to what the compensation received by the Company was intended to replace was not relevant in determining whether the profits which accrued or arose to the Company during the period April 1, 1956 to September 30, 1956 were taxable.
5. Counsel for the Company conceded that he was unable to support the reasoning adopted by the High Court in recording their answer to the question submitted. Counsel however contended that during the previous year no profit had accrued or arisen to the Company, and no profit was received by the Company, therefore the Company incurred no liability to pay tax. Counsel in expounding his theme said that under the Income-tax Act liability to pay tax arises only at the end of the previous year and not before, and if during the course of the previ
