PROFITS PRIOR TO INCORPORATION |
Income from other sources ID – 10 (JBC-002) |
Preface to the controvercy:
It said that under the Income-tax Act an assessee meant a person by whom income-tax or any other sum of money was payable thereunder. Tax had 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 could be assessed, it had to be shown that it was he who had carried on the business, profession or vocation. The Calcutta High Court could not see how a person could be said to have carried on a business during a period when he was not born or he could be assessable to tax in respect thereof. As in the case of a natural born person, so in the case of a legal entity like a company, the liability to pay tax could only arise after the date of birth or incorporation. The liability of a company to pay income-tax for the business carried on by its promoter could only be in respect of a period subsequent to its incorporation.
[1953] 023 ITR 0278 [All] Commissioner of Income-tax v Bijli Cotton Mills Ltd.
Respondent company was incorporated on December 11, 1943. Prior to that date, the firm that promoted it had entered into an agreement to purchase a mill for it and, on December 10, 1942, had obtained its possession. The sale deed of the mill was executed in favour of the espondent-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.
Learned counsel for the Department has laid great stress on the language of Income-tax Act and has pointed out that tax is payable by an assessee in respect of the profits or gains of any business carried on by him. The argument is that the assessee cannot be said to have been carrying on a business prior to its incorporation when it did not exist and Messrs. Shyamlal Chimanlal, must be deemed to have been carrying on the business and they are, therefore, the persons who are liable to assessment.
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. And thus company would be assessable for the profits.
CIT v. Abubaker Abdul Rehman [1939] 7 ITR 139 [Bom]
Where it had been held that if the income of the 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, the income came into the hands of the trustee and he had the right to dispose of it and it was only the balance left over that was payable to the beneficiary, then the income was taxable in the hands of the trustee.
These decision showed that under the Income-tax Act, it was not only legal ownership that had to be looked into, but the court could also go into the question of beneficial ownership and decide who should be held liable for tax after taking into account the question as to who, as a matter of fact, was in receipt of the income which was to be taxed. The assessment proceedings in respect of the respondent-company had been started at a time when it had already decided to accept what had been done on its behalf by the promoters and take over the business and income made therefrom. It was, therefore, in the same position as a beneficiary for whom the income was earmarked as payable to it and the same could be legally assessed in its hands.
[1963] 048 ITR 0200- [Cal] Commissioner of Income-tax v Tea Producing Co. of India Ltd.
Whatever may be the agreement between the vendor and the assessee, the income-tax authorities have to look to the person who is legally liable under the Act, i.e., the person who carried on the business, and, as the assessee came into existence only after its incorporation, and could not have carried on the business before that date even as an agent of the vendor, the assessee can only have the benefit of the loss, if any, incurred during the period mmencing from the date of its incorporation
[1996] 219 ITR 0001- [SC] Commissioner of Income-tax v City Mills Distributors (P.) Ltd.
The relevant question was : what was the legal entity that had carried on the business before the assessee-company was incorporated and earned the income at the time of its accrual. A company becomes a legal entity in the eye of law only when it is incorporated. Prior to its incorporation, it simply does not exist. The assessee-company did not exist when the income with which we are here concerned was earned. It is, therefore, not the assessee-company which earned the income when it accrued and it is not liable to pay tax thereon. The same result is reached by a somewhat different process of reasoning. A company can enter into an agreement only after its incorporation. It is only after incorporation that a company may decide to accept that its promoters have carried on business on its behalf and appropriate the income thereof to itself. The question as to who is liable to pay tax on such income cannot depend upon whether or not the company after incorporation so decides. It is he who carried on the business and received the income when it accrued who is liable to bear the burden of tax thereon.
Conclusion :
The company chose to accept the profits made before its incorporation and treated the promoters as accountable for all profits made during the period prior to incorporation in the circumstances of the case, the income of the period prior to incorporation could be legally assessed in the hands of the company.
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