Full Judgment Text
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PETITIONER:
THE COMMISSIONER OF INCOME TAX, PUNJAB
Vs.
RESPONDENT:
THE LAHORE ELECTRIC SUPPLY CO.
DATE OF JUDGMENT:
25/11/1965
BENCH:
SARKAR, A.K.
BENCH:
SARKAR, A.K.
MUDHOLKAR, J.R.
BACHAWAT, R.S.
CITATION:
1966 AIR 843 1966 SCR (2) 720
CITATOR INFO :
R 1976 SC 10 (9)
ACT:
Income Tax Act 1922-s. 10(2) (xv)-Whether company
carried on business-Therefore whether entitled to deduction
of expenses.
HEADNOTE:
The assessee company carried on the business of
supplying electricity to various cities under licences from
the Government. All the licences, except one for the supply
of electricity to the city of Lahore, were terminated or
disposed of by 1942. Soon after that, the Provincial Gov-
ernment acquired the company’s undertaking for the supply of
electricity in Lahore and part of the value for the
acquisition remained due to be paid to the company after the
listing and valuation of the assets. The company also
possessed considerable assets not appertaining to the Lahore
Electric Supply Undertaking and all its funds were invested
in securities and shares, the income from which was the sole
income after September 5, 1946.
In its assessment to income-tax for the years 1948-49
and 1949-50, the company claimed deduction of various
amounts under s. 10(2)(xv) of the Income-tax Act, 1922, on
the basis that it had been carrying on business in the
accounting years concerned and the expenses had been
incurred solely for the purpose of that business. Their
contention was rejected by the Income-tax Officer and his
stand was confirmed by the Appellate Assistant Commissioner.
However, the Tribunal held in appeal, that the question
depended on what the intentions of the company were and on
the facts took the view that the assessee company had not
ceased to carry on business. The High Court, upon a
reference, also answered the question in the assessee’s
favour. In arriving at this conclusion, the Tribunal and
the High Court relied on, Inter alia, the following facts :-
(1) the company did not sell its undertaking as a
going concern;
(2) it continued in possession of all assets of its
undertakings other than those appertaining to the Lahore
Electric Supply Undertaking;
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(3) it continued to hold deposits from consumers of
electricity which had to be returned with interest;
(4) it had no intention of going into liquidation;
(5) the Directors had indicated in their report that
they were considering purchasing some manufacturing concern
to have an additional source of profit; etc.
HELD : (Per Sarkar and Mudholkar JJ.)
None of the grounds set out by the Tribunal and the
High Court led to the conclusion that the company intended
to carry on business.
The facts found made it clear that since 1942 the
only business of the company was to work the Lahore Electric
Supply licence. It stopped that business when the
undertaking was taken over by the Government. Thereafter,
during the accounting years concerned, namely 1947-48 and
1948-49 it bad not started any other business. [723 F]
721
The Commissioners of Inland Revenue v. The Anglo Brewing
Co. Ltd. 12 T.C. 803, referred.
The Commissioners of Inland Revenue v. The South Behar
Railway Co. 12 T.C. 657, 712 distinguished.
(Per Bachawat, J., dissenting)
(i) The Memorandum of the assessee company showed that
one of its subsidiary objects was to invest in stocks,
shares, securities, etc. and to sell, exchange or otherwise
deal with them from time to time. The main business of
generating and supplying electricity having stopped, the
company invested its funds in deposits and stocks and
shares. The activity of investment and getting a return for
its capital was a part of its legitimate business activities
[728 H-729 B]
The Commissioners of Inland Revenue v. The Korean
Syndicate Ltd. 12 T.C. 181; Karanpura Development Co. Ltd.
v. C.I.T. West Bengal, (1962) 3 S.C.R. 368, 378;
Laxminarayan Ram Gopal & Sons v. Govt. of.,, Hyderabad
(1955) I S.C.R. 393, 405-407; The Commissioners of Inland
Revenue v. Dale Steamship Co. Ltd. 12 T.C. 712; referred to.
(ii) On the facts of the case, the Tribunal had rightly
come to the conclusion that the company had not ceased to
carry on its business.
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 813
and 814 of 1963.
Appeals by Special Leave from the Judgment and Order
dated the December 30, 1960 of the Punjab High Court in
Income Tax Reference No. 10 of 1959.
Niren De, Additional Solicitor-General, Gopal Singh
and R. N. Sachthey, for the appellant.
G. C. Sharma, Uma Mehta, B. S. Pachauri and K. K.
fain, for the respondent.
The Judgment of Sarkar and Mudholkar, JJ. was
delivered by
Sarkar J. Bachawat, J. delivered a dissenting Opinion.Sarkar
J. The respondent is a company incorporated in 1912. The
immediate object of the Company was to acquire from the
People’s Bank of India Ltd. the licence it had obtained from
the Government for the supply of electricity to Lahore city.
The Company acquired that licence in 1913 and the necessary
plants and machinery for the generation and supply of
electricity. Between 1923 and 1939 it acquired licences for
similar purposes in regard to various other places in
different parts of India. All these licences were however
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either terminated or disposed of one by one and in 1942 the
only licence which the Company possessed was that in respect
of the city of Lahore. About the end of 1942 or beginning
of 1943, the Government of the then Province of Punjab
acquired the Company’s undertaking in regard to the supply
of electricity to the city of Lahore and on September 5,
722
1946, the Company delivered its aforesaid undertaking with
all assets to the Government. It was agreed that the
Company would pay to the Government half of the net profits
of the Lahore electric supply undertaking arising between
November 27, 1942 and September 5, 1946. On September 5,
1946, the Company received from the Government a part of the
moneys payable to it in respect of the Lahore electric
supply undertaking leaving a large amount due which was to
be paid after the listing and valuation of its assets.
Besides this sum the Company also possessed considerable
assets not appertaining to the Lahore electric supply
undertaking. All these funds were invested by the Company
in government and other securities and shares and the income
from these investments appears to have been the sole income
of the Company after September 5, 1946.
In its assessment to income-tax for the years 1948-1949
and 1949-1950 the Company claimed deduction of various
amounts under S. 10(2)(xv) of the Income-tax Act, 1922, on
the basis that it had been carrying on business in the
accounting years concerned and the expenses had been
incurred solely for the purpose of that business. This
contention was rejected by the Income-tax Officer. On
appeal by the Company to the Appellate Assistant
Commissioner, certain deductions were allowed but that
authority did not accept the contention that the Company was
carrying on business so as to come within S. 10 of the Act.
The Company then took the matter up in further appeal to the
Income-tax Appellate Tribunal. The Tribunal accepted the
Company’s contention and granted it large deductions under
S. 10(2)(xv) of the Income-tax Act. The appellate
Commissioner of Income-tax requested the Tribunal to state a
case to the High Court but that request was rejected. The
appellant Commissioner thereafter on August 20, 1958
obtained an order from the High Court of Punjab directing
the Tribunal to refer the following two questions to the
High Court for its opinion :
1. Whether on the facts and in the
circumstances of the case the conclusion of
the Appellate Tribunal that the assessee
company had not ceased to carry on business
during the relevant accounting period, is, in
law, correct.
2.If the answer to the first question be in
the affirmative, whether all the expenses
which the Tribunal has allowed are admissible
under section 10(2) of the Income-tax Act ?
723
Accordingly the Tribunal stated a case to the High Court in
regard to these two questions. The High Court answered both
the questions in the affirmative. Hence the present appeals
by the Commissioner of Income-tax.
In this Court the learned Additional Solicitor General
appearing for the appellant abandoned the second question.
The only point, therefore, that arises for decision in this
appeal is whether on the facts found it could be said that
the Company had been carrying on business in the two
accounting years.
As we have earlier stated, the Tribunal took the view
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that the Company had not ceased to carry on business. The
Tribunal observed that the question would depend on what the
intentions of the Company were. The High Court was of the
same opinion. We also think that that is the correct view.
This postulates that the Company was not in fact carrying on
any business for if it was, it would be superfluous to
enquire whether the Company intended to carry on a business.
The Courts below thought that the facts showed that the
Company intended to carry on business. The facts on which
they relied were(1) the Company did not sell its undertaking
as a going concern; (2) it continued in possession of all
assets of its undertakings other than those appertaining to
the Lahore electric supply undertaking; (3) it continued to
hold deposits made by consumers of electricity supplied by
the Lahore electric supply undertaking which had to be
returned to them with interest; (4) it had no intention of
going into liquidation; (5) the Directors’ report showed
that the Directors were "considering if they could possibly
purchase some manufacturing concern which might become an
additional source of profit to the shareholders"; and (6)
there was nothing to show that there was permanent
discontinuance of the business of the Company. So far as
the High Court is concerned, it appears to have held that
the Company was carrying on business because there was
nothing to show that it intended to go into liquidation and
because by keeping its staff and establishment it indicated
that it would resume business, for otherwise it would not
have retained them. The High Court also took into account
the fact that during the larger part of the accounting
periods the situation in the country was abnormal as a
result of the partition of India and that explained why the
Company had not commenced any fresh business.
In our opinion, none of the grounds mentioned in the
preceding paragraph leads to the conclusion that the Company
intended to carry on business. The facts found make it
abundantly clear that since 1942 the only business of the
Company was to work the
724
Lahore electric supply licence. It stopped that business on
September 5, 1946 when the undertaking was taken over by the
Government. Thereafter, during the accounting years
concerned, namely, 1947-48 and 1948-49 it had not started
any other business. The mere fact that the Company had not
gone into liquidation would not establish that it had the
intention to do business. If it were not so, then in the
case of all trading companies it had to be held that they
were always doing business. There is neither authority nor
principle to support such a proposition. There was further
no question of the Company’s going into liquidation in the
accounting years, .for during that time it had not received
from the Government the entire amount due to it as
compensation for the acquisition of its Lahore electric
supply undertaking. At the relevant time the Company was
not possessed of any commercial undertaking. What we have
quoted earlier from the Directors’ report would show that
what was in the contemplation of the Directors was the
purchase of a new concern. The Directors however had not
stated that they did intend to do so. What they said was
that they were considering whether they would do so or not.
That does not express an intention to resume business. It
is unnecessary to go into the question whether an expression
of an intention to resume business in vacuo would amount to
carrying on business. It is sufficient for the purpose of
this case to state that even an intention to resume business
has not been established.
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It would, therefore, appear that the business was closed
and the Company had not established an intention to resume
it. That would be enough to show that no business was
carried on and it would be irrelevant to enquire whether the
business was permanently closed. We may add that we do not
understand what was meant by saying that the Company did not
sell its undertaking as a going concern. The only going
trading concern that it possessed was the Lahore electric
supply undertaking and that it sold; it had no other
commercial undertaking. After the sale of the Lahore
electric supply concern all it did was to invest its moneys
and the Tribunal has not found this activity to be a
business.
The facts that the Company had to pay the Government
half share of the profits between November 27, 1942 and
September 5, 1946 and that it had to return the consumers
the deposits made by them would not indicate that it was
carrying on a business. It would be laying down strange law
to hold that where a business has in fact ceased to be run,
it must be deemed as continuing because the outstanding
liabilities of that business had not been liquidated. The
question whether the Company was carrying on business arises
725
only because if it was, it would be entitled under s. 10 to
deductions from its business income in regard to certain
expenses incurred by it for the purpose of that business.
Business as contemplated by that section is an activity
capable of producing a profit which can be taxed. Payment
of outstanding liabilities is not an activity which can ever
produce such a result. It cannot be said, therefore, that
because liabilities of a closed business were outstanding,
it has to be held that either the business was continuing or
that an intention to resume business must be inferred : see
commissioners of Inland Revenue v. The Anglo Brewing Co.
Ltd.(1).
Some reliance was placed in this connection on an
observation of Lord Sumner in The Commissioners of Inland
Revenue v. The South Behar Railway Co. (2). There Lord
Sumner observed, "If, as was held in re Dagnall, (1896)2
Q.B. 407, a married woman continues to carry on business for
the purpose of 45 & 46 Vict., c. 75, s. 1(5), as long as her
trade debts remain undischarged, there would seem to be a
presumption that a company continues to carry on business as
long as it is engaged in collecting debts periodically fall-
ing due to it in the course of its former business." We are
unable to hold that Lord Sumner intended to lay down that a
business which is closed down is deemed to be carried on so
long as its outstandings are being collected. South Behar
Railway’s case(2) was concerned with a financing company
whose only activity after the finances had been furnished
was to receive from the Government by way of profits of the
financing activity, earlier a certain proportion of the net
earnings of the undertaking financed which was being managed
by the government and later a fixed sum and to receive from
the Government the finance supplied when the Government
acquired the undertaking as it intended to do. All that
Lord Sumner intended to say was that the receipt of the
moneys was the business of the company and its only business
after the financing had been completed. He was not
concerned with the case of a closed business whose
outstandings were being collected.
The Tribunal did not hold that the Company was in fact
doing business or that anything that it did amounted to
carrying on business. The onus of showing this was clearly
on the Company. All that it did was to refer to the sale of
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its Lahore electric supply undertaking to the Government and
the listing of the assets of that undertaking and valuing it
as the carrying on of business. This contention was rightly
rejected by the Tribunal on the ground that the sale of the
undertaking though within its memorandum was not
(1) 12 T.C 803, 813.
L3Sup. CI/66-16
(2) 12 T.C. 657,712.
726
its business which was really the working of that
undertaking. It also seems to us that the condition of the
country immediately following the partition is by itself
irrelevant for deciding whether the Company was doing
business.
Learned counsel for the respondent contended that the
Incometax Officer’s order showed that in one of the
assessment years the Company had received a certain amount
as a result of a business of dealing in investments. The
Tribunal however did not find this as a fact. Neither does
it seem to us that the Income-tax Officer considered this
income as business income though it described it as such,
for he held that the Company was not doing any business at
all.
In our opinion, it must, therefore, be held that the
Company had ceased to carry on business and we would answer
the first question in the negative. The appeals must be
allowed with costs here and below and we order accordingly.
Bachawat, J. These appeals by special leave raise the
question whether the respondent-Company was carrying on
business during the according years 1947-48 and 1948-49
corresponding to the assessment years, 1948-49 and 1949-50,
and, therefore, entitled to deduction of expenses for
carrying on the business under s. 10(2)(xv) of the Indian
Income-tax Act, 1922. The company was incorporated in 1912.
In 1913, it acquired the license to supply electric energy
in Lahore and thereafter it acquired other licenses for
supply of electric energy at various other places. Before
1942, it disposed of all the licenses other than the Lahore
license. The Punjab Government took steps for the
acquisition of the undertaking relating to Lahore license
under the Defence of India Act and Rules, and there were
disputes and litigations between it and the company. The
disputes were compromised by an agreement dated June 2,
1945, whereby the company sold the undertaking to the
Government at a price to be settled by valuation and also
agreed to pay to the Government half the net profits of the
undertaking less taxes from November 27, 1942 till the date
of the delivery of the undertaking to the Government.
Pending the compilation of the lists and the making of the
valuation of the assets of the undertaking, the company and
the Punjab Government entered into a supplementary agreement
dated September 2, 1946 under which the Company received a
sum of rupees one crore towards part payment of the price,
and on September 5, 1946 the company delivered the
undertaking to the Punjab Government.
727
It is common case that until September 5, 1946 the
company was carrying on the business. The dispute is
whether the company had ceased to carry on business
thereafter and more particularly during the accounting years
1947-48 and 1948-49. During this period, the company was
not generating or supplying electricity at Lahore or at any
other place, and it carried on its activities with a reduced
staff. It devoted a part of its activities for the making
of the lists and the valuation of the assets sold to the
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Punjab Government. It had considerable undisposed of
assets. The deposits of its old customers were outstanding
and it was liable to repay the same with interest. It
invested the cash received from the Government and other
sources in stocks and shares and bank deposits and received
by way of income, large sums of money from interest on
deposits and dividends. During the accounting year 1947-48,
it was in receipt of some business income from the sale of
its investments. It utilised its income to pay dividends to
the shareholders and to meet its expenses. It had no
intention of going into liquidation and successfully opposed
a winding-up petition. In the directors’ report for the
accounting year, 1946-47 dated November 25, 1948, the
directors stated :
"In the meanwhile, however, your Directors are
considering if they could possibly purchase
some manufacturing concern which might become
an additional source of profit to the
shareholders."
For the assessment years, 1948-49 and 1949-50, the
company claimed deduction of expenses for carrying on its
business during the accounting years 1947-48 and 1948-49
under s. 10(2)(xv) of the Indian Income-tax Act, 1922. The
Income-tax Officer held that the company was not carrying on
any business and totally disallowed contribution to
employees’ provident fund, pension and gratuity to old
staff, valuer’s remuneration, legal expenses, depreciation
and income-tax provision, but he allowed a part of the
salary paid to certain employees, rent, office expenses,
interest, auditor’s and directors’ fees. On appeal, the
Appellate Assistant Commissioner held that though there was
some little business income, there was practically no
business and be allowed in full the audit charges,
directors’ fees and payment for interest, but he reduced the
rent and establishment charges allowed by the Income-tax
Officer. On further appeal by the company, the Appellate
Tribunal recorded the following finding:
"Keeping in mind the entire facts and
circumstances of this case, we have come to
the clear conclusion that
728
the assessee Company had not ceased to carry
on its business."
On this finding, the Tribunal held that in addition to the
expenses allowed by the Appellate Assistant Commissioner the
whole of the contribution to provident fund, pension,
gratuity, rent, depreciation, establishment charges and
office expenses and the legal expenses for resisting the
winding-up should be allowed. Under the orders of the
Punjab High Court, the Tribunal referred the following
questions of law for the decision of the High Court :
"(1) Whether on the facts and in the
circumstances of the case the conclusion of
the Appellate Tribunal that the assessee
company had not ceased to carry on business
during the relevant accounting period is, in
law correct ?
(2) If the answer to the first question be
in the affirmative, whether all the expenses
which the Tribunal has allowed are admissible
under section 10(2) of the Income-tax Act ?"
The Punjab High Court answered both the questions in the
affirmative, and the Commissioner of Income-tax now appeals
to this Court by special leave. Counsel for the appellant
conceded that if the first question is answered in the
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affirmative, the second question must also be answered in
the affirmative. The sole question before us is, therefore,
whether on the facts found the company had ceased to carry
on business during the accounting years 1947-48 and 1948-49.
The memorandum of the company discloses the objects for
which the company was constituted. If a question arises
whether a particular activity of the company is a business
activity, it is pertinent and relevant to enquire whether it
is so regarded in its memorandum. See The Commissioners of
Inland Revenue v. The Korean Syndicate Ltd.(1), Karanpura
Development Co. Ltd., v. The Commissioner of Income-tax,
West Bengal(2), Laxminarain Ram Gopal & Sons v. Government
of Hyderabad("). In the instant case, the memorandum of the
company discloses that its main purpose is to carry on the
business of electric light and power company in all its
branches, including generating and supplying electricity.
Clause 4 of the memorandum shows that one of its subsidiary
objects is to invest in stocks, shares, investments or
securities of all classes and descriptions and to hold,
sell,
(1) [1921] 12 T.C. 181.
(2) [1962] 3 S.C.R. 368, 378.
(3) [1955] 1 S.C.R. 393, 405-407.
729
exchange or otherwise dispose of, deal with them from time
to time, A company may of course own shares and make
investments, and still not carry on any business; but in
this case there is nothing to show that its investments are
not to be regarded as part of its business activities. The
main business of generating and supplying electricity had
stopped and the company, therefore, invested its funds in
deposits and stocks and shares. The activity of investment
and getting a return for its capital is a part of its
legitimate business activities. In The Commissioners of
Inland Revenue v. Dale Steamship Co. Ltd.(1), the objects of
the company were, inter alia, to acquire steamships and
other vessels, to build, charter, let out on hire and trade
with ships, to carry on business as shipowners, merchants,
etc., and to invest and deal with the moneys not immediately
required. At the outbreak of the war, the company owned and
traded with five ships. Of these, one was detained by the
enemy at Hamburg, one was sold and the remaining three (all
insured) were sunk during the war. The proceeds of sale and
the insurance moneys received were all placed on deposit or
invested in easily realisable investments in order to
facilitate the resumption of trading or winding up. In an
assessment of the company to Corporation. Profits Tax, it
was held on the authority of The Commissioners of Inland
Revenue v. The South Behar Railway Company Limited(2) that
the company was carrying on a trade or business, and that it
was liable to assessment to Corporation Profits Tax. The
wording of s. 52 of the Finance Act, 1920 made no
difference, for as pointed out by Viscount Cave, L.C in the
South Behar Railway Company’s case(2) at p. 705, the words
"including the holding of investments" in the statute
referred not to all cases in which the company had money
invested, but to cases where the holding of investments was
the business or part of the business of the company. The
activity of investment of its available funds may be
regarded as a business activity of the company even though
the company for the time being may not be carrying on its
main business. The company’s main business may be
quiescent, but, nevertheless, it may still carry on
business.
It has been specifically found that the company was
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dealing in investments during the accounting year, 1947-48
and that a surplus of Rs. 2,447/- realised by the company
from sale of its investments during the year was a business
income of the assessee. See paragraph 6 of the statement of
case dated March 6, 1959, paragraph 4 of the order of the
Appellate Assistant Commissioner dated April 18, 1951 and
the last part of the order of the Income-tax Officer for
(1) 12 T.C. 712. (2) 12 T.C. 657.
Sup. C.I./66-17
730
the assessment year, 1948-49, dated August 21, 1949. The
order of the Income-tax Officer specifically stated that
even the balancesheet for the period ending March 31, 1947
showed that the difference on realisation of assets stood at
Rs. 1,25,783/, and it thus appeared that the company was
dealing in securities. The Revenue thus claimed to assess
the surplus on the realisation of the investments as the
profits of a business under S. 10, and its claim has been
upheld. I fail to see how the Revenue can take an
inconsistent stand and claim that the activity of investment
was not a business activity of the company.
The Tribunal also found that the entire business of the
company was not sold to the Punjab Government as a going
concern and the company continued to own and hold
considerable assets not appertaining to the Lahore licence.
The company sold and disposed of only its undertaking
relating to the Lahore license, on September 5, 1946. Even
then, the Punjab Government did not take up all the business
debts and liabilities of the undertaking. The company
continued to remain liable to the old consumers in respect
of their deposits, The company continued to pay interest on
these deposits to the consumers. In paragraph 12 of its
order dated December 8, 1951, the Tribunal observed, and, in
my opinion, rightly :
"If payment of interest on consumers deposits
was a proper business expense in the preceding
years, we do not see why or how its character
changed in the years under review."
The Tribunal rightly pointed out that the activity of
making lists and valuing the assets of the company for the
purpose of ascertaining the price of the Lahore undertaking
from the Punjab Government is not a business activity of the
company. But, looking at the other facts and circumstances
of the case and the relevant authorities on the point, the
Tribunal came to the clear conclusion that the company had
not ceased to carry on its business, There is enough
material on the record to support this finding.
There is no set formula for determining whether in a
given case a company is carrying on business. For the right
understanding of the matter, one must import a little common
sense. From the shareholders’ and the directors’ point of
view, the company was undoubtedly carrying on business
during the relevant accounting periods. From the popular
point of view, what the company did during these years was a
business activity. Again, if the question arose whether the
company was carrying on business during these
731
years for the purpose of s. 20 of the Code of Civil
Procedure, I have no doubt in my mind that the answer would
be in the affirmative. From whatever point of view the
matter is looked at, the conclusion is irresistible that the
company was carrying on business during the relevant
accounting years. There is ample material on which the
Tribunal could come to this finding, and I see no reason for
disturbing its finding.
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In the result, the appeals are dismissed with costs.
ORDER
In accordance with the majority Judgments, the Appeals
are allowed with costs here and below.
732