Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME-TAX, BOMBAY
Vs.
RESPONDENT:
M/S. SHREE GOVERDHAN LTD. BOMBAY
DATE OF JUDGMENT:
09/01/1968
BENCH:
RAMASWAMI, V.
BENCH:
RAMASWAMI, V.
SHAH, J.C.
BHARGAVA, VISHISHTHA
CITATION:
1969 AIR 292 1968 SCR (2) 731
ACT:
Indian Income-tax Act, 1922, ss. 2(11) and 23A-Accounting
year of company ending on September 30, every year--Company
a partner in a firm-Accounting periods of firm for 1951-52
A.Y. ending on November 30, 1950 and March 31,
1951--Company’s annual general meeting held on May 17,
1951--Company’s share of income from partnership whether to
be included in its income for 1951-52 A.Y. for purpose of s.
23A.
HEADNOTE:
The assesee--a public limited company, entered into a
partnership on April 20, 1950 with another firm, and thus
had two sources of income,(i) from it,,, own business and
(2) from the shares of the partnership business. The
Income-tax Officer included the shares of profit of the
assessee from the partnership business up to November 30,
1950 and up to March 31, 1951 in the assessment of the
assessment year 1951-52. The see objected, contending that
this income accrued after the accounting year of the
assessee which ended on September 30, 1950, and at its
general meeting held on May 17, 1951, the assessee could not
be expected to declare a dividend for the assessment year
1951-52 which related to the accounting year ending on
September 30, 1950 out of its profits that accrued during
subsequent accounting period. The Revenue maintained the
assessment, which, on reference, the High Court answered in
favour of the assesse. In appeal, this Court.
HELD : The assessable income of the assessee included the
share of the assessee’s profits in the partnership for the
purpose of application of s. 23A of the Income-tax Act,
1922 so far as the assessment year 1951-52 was concerned.
Under s, 2(11) of the Act an assessee may have different
previous years in respect of different sources of income and
under the scheme of the Act the income of the varying
previous years from the different sources should be lumped
together to arrive at the total income of the assessee. The
provisions of s. 2(11) of the Act make it clear that, except
in cases where a previous year is determined by the
Department under cl. (b), the ’varying previous years must
all necessarily end with or within the financial years next
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preceding the assessment year. In the present case, the
previous year so far as the personal business of the
assessee was concerned, was the previous year ended on
September 30, 1950, but with regard to the income of the
partnership the previous year was the period between
November 30, 1950 and March 31, 1951 when the accounts of
the partnership were made up and closed. The provisions of
s. 23(1) must be construed in the context of s. 2(11) of the
Act and the expression’ previous year’ of the company in s.
13A(1) Must be. interpreted as meaning two previous years
where the company carries on two different businesses with
different sources of income for which there are separated
accounting periods. [736F-737 B]
The annual general meeting of the assessee was hold on May
17, 1951 after the close of the accounting year of the firm.
It is true that the actual profits of the assessee from its
partnership business were ascertained after the close of the
accounting period i.e., March 31, 1951. But the
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income may accrue to an assessee without actual receipt of
the same and if the assessee acquires a right to receive the
income, the income can be said to have accrued to him though
it may be received later on on its being ascertained. The
legal position is that a liability depending upon a
contingency is not a debt in praesenti or in futuro till the
contingency happens. But if it is a debt the fact that the
amount has to be ascertained does not make it any the less a
debt if the liability is certain and what remains is only a
quantification. of the amount : Debitum in praesenti.
Solvendum in futuro. [737 E-H]
Commissioner of Inland Revenue v. Gardner Mountain & D’
Ambrumenil Ltd. 29 T.C. 69, applied.
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 17 of1967.
Appeal by special leave from the judgment and order dated
September 18, 1962 of the Bombay High Court in Income-tax
Reference No. 34 of 1961.
C. K. Daphtary, Attorney-General, T. A. Ramachandran and
R. N. Sachthey, for the appellant.
Radhey Lal Aggarwal, Bishambar Lal and H. K. Puri, for the
respondent.
The Judgment of the Court was delivered by
Ramaswami, J. This appeal is brought, by special leave, on
behalf of the Commissioner of Income-tax against the
judgment of the Bombay High Court dated September 18, 1962
in Income Tax Reference No. 34 of 1961 whereby the High
Court held that the order passed against the respondent,
hereinafter referred to as the ’assessee’ under s. 23A of
the Indian Income Tax Act, 1922 (hereinafter referred to as
the "Act") was not justified and valid for the assessment
year 1951-52.
The assessee is a public, limited company registered under
the Indian Companies Act. Its share capital consists of
50,000 shares subscribed and paid up. Out of these shares,
47,493 are held by Shree Raghunath Investment Trust Ltd., a
company incorporated as a private company under the laws of
Jammu and Kashmir (hereinafter referred to as "The Jammu
Co.") and having its registered office there. Out of the
remaining 2,507 shares, 2,500 shares were held by another
private limited company incorporated in India and having its
registered office in New Delhi and the remaining 7 shares
were held by seven individuals. The shares of the assessee
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are not quoted on the Stock Exchange any where in India.
There is nothing, however, in its Memorandum and Articles of
Association placing any restriction on the free transfer of
its shares. The assessee entered
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into a partnership on April 20, 1950 with a firm called ’The
India Steel Syndicate’. There was a reconstitution of this
firm on December 1, 1950. The shares of profit of the
assessee from this firm (which was registered under s. 26-A
of the Act) as up to November 30, 1950 and upto March 31,
1951 totalling Rs. 70,895/- were included in the assessment
of the assessee for the assessment year 1951-52.
During the assessment years 1950-51 and 1951-52, for which
the previous years ended on September 30, 1949 and
September 30, 1950, the, Income Tax Officer determined the
assessable income of the assessee at Rs. 60,350 and Rs.
93,884 respectively.After deduction of the taxes payable,
the balance was Rs. 35,834 in the first year and Rs, 53,103
in the second year. As the assessee had not declared any
dividend at its Annual General Meetings during either of the
aforesaid two years or within six months thereafter, the
Income Tax Officer issued notices to the assessee to show
cause why an ’order under s. 23-A(1) of the Act should not
be passed for the two years. The assessee, however,
contended that s. 23-A was not applicable inasmuch as the
public were substantially interested within the meaning of
the Explanation appended to, the third proviso to s. 23-
A(l). Overruling this contention the Income Tax Officer
made an order under s. 23-A against the assessee in respect
of the undistributed profits for the said two years.
Against these orders the assessee appealed to the Appellate
Assistant Commissioner. A further ground was taken in the
appeal that the order under s. 23-A was unwarranted so far
as assessment year 1950-51 was concerned inasmuch as the
assessable profits included a sum of Rs. 70,895/- being the
share of the assessee’s income which arose in its
partnership with the Indian Steel Syndicate as up to
November 30, 1950 and March 31, 1951, and that the income
accrued after the accounting year of the assessee which
ended on September 30, 1950. The Appellate Assistant
Commissioner dismissed the appeals and his order was
affirmed by the Appellate Tribunal on June 28, 1959 for both
the assessment years. At the instance of the assessee the
Appellate Tribunal stated a case to the; High Court under s.
66 (1 ) of the Act on the following question of law :
"Whether the order passed against the assessee
for assessment years 1950-51 and 1951-52 under
section 13-A are justified and valid ?"
By its judgment dated September 18, 1962, the High Court an-
swered the question in so far as it pertained to assessment
year 1950-51 in the affirmative and in so far as it
pertained to assessment year 1951-52 in the negative and
against the appellant.
L3 Sup. CI/68-3
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Section 23-A of the Act, as it stood before its amendment by
the Finance Act, 1955 was to the following effect :
"23-A. Power to assess individual members of
certain companies.-(1) Where the Income-tax
Officer is satisfied that in respect of any
previous year the profits and gains
distributed as dividends by any company up to
the end of the sixth month after its accounts
for that previous year are laid before the
company in general meeting are less than sixty
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per cent of the assessable income of the
company of that previous year, as reduced by
the amount of income-tax and super-tax payable
by the company in respect thereof he shall,
unless he is satisfied that having regard to
losses incurred by the company in earlier
years or to the smallness of the profit made,
the payment of a dividend or a larger dividend
than that declared would be unreasonable, make
with the previous approval of the Inspecting
Assistant Commissioner an order in writing
that the undistributed portion of the
assessable income of the company of that
previous year as computed for income-tax
purposes and reduced by the amount of income-
tax and super-tax payable by the company in
respect thereof shall be deemed to have been
distributed as dividends amongst the
shareholders as at the date of the general
meeting aforesaid, and thereupon the
proportionate share thereof of each
shareholder shall be included in the total
income of such shareholder for the purpose of
assessing his total income :
Provided that when the reserves representing
accumulations of past profits which have not
been the subject of an order under this sub-
section exceed the paid up capital of the
company together with any loan capital which
is the property of the shareholders, or the
actual cost of the fixed assets of the company
whichever of these is greater, this section
shall apply as if instead of the words ’sixty
per cent’ the words one hundred per cent’ were
substituted :
Provided further that no order under this sub-
section shall be made where the company has
distributed not less than fifty-five per cent
of the assessable income of the company as
reduced by the amount of income-tax and super-
tax payable by the company in respect thereof,
unless the company, on receipt of a notice
from the Income-tax Officer that he proposes
to make
735
such an order, fails to make within three
months of the receipt of such notice a further
distribution of its profits and gains so that
the total distribution made is not less than
sixty per cent of the assessable income of the
company of the previous year concerned as re-
duced by the amount of income-tax and super-
tax payable by the company in respect thereof
:
Provided further that this sub-section shall
not apply to any company in which the public
are substantially interested or to a
subsidiary company of such a company if the
whole of the share capital of such subsidiary
company is held by the parent company or by
the nominees thereof........................
Section 2(11) of the Act states
"2. In this Act, unless there is anything
repugnant in the subject or context,-
(11)’previous year’ means-
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(i) in respect of any separate source of
income, profits
and gains-
(a) the twelve months ending on the 31st day
of
March next preceding the year for which the
assessment is to be made, or, if the accounts
of the assessee have been made up to a date
within the said twelve months in respect of a
year ending on any date other than the said
31st day of March, then, at the option of the
assessee, the year ending on the date to which
his accounts have been so made up :
Provided that where in respect of a particular
source of income, profits and gains an
assessee has, once been assessed, or where in
respect of a business, profession or vocation
newly set up an assessee has exercised the
option under sub-clause (c), he shall not, in
respect of that source or, as the case may be,
business, profession or vocation, exercise the
option given by this sub-clause so as to vary
the meaning of the expression ’previous year
as then applicable to him except with the
consent of the Income-tax Officer and upon
such conditions as the Income-tax Officer may
think fit to impose; or
(ii) in respect of the share of the income.
profits and gains of a firm where the assessee
is a partner in the firm and the firm has been
assessed as such, the
736
period as determined for the assessment of the
income, profits and gains of the firm;"
On behalf of the appellant the Attorney-General put forward
the argument that the High Court was in error in holding
that the sum of Rs.70,895 which was the assessee’s share of
income in its partnership with the Indian Steel Syndicate
should be left out of consideration so far as the assessment
year 1951-52 was concerned. It was pointed out that the
assessee had two different sources of income: (1) from its
own business, and (2) from the share of the partnership
business with the Indian Steel Syndicate and that under s. 2
(1 1 ) of the Act the assessee must be deemed to have two
previous years with regard to two different sources of
income. It was therefore argued that the High Court was in
error in holding that the income from the partnership could
not be, included in the assessment income of the assessee
for the assessment year 1951-52. On behalf of the assessee
the, contrary view-point was put forward by Mr. Radhey Lal
Aggarwal. It was submitted that the sum of Rs. 70,895
related to the share of the profits of the assessee from out
of the partnership for the period between November 30, 1950
to March 31, 1951 and this period was after the accounting
year of the assessee which ended on September 30, 1950. It
was contended that at its general meeting held on May 17,
1951 the assessee could not be expected to declare a
dividend for the assessment year 1951-52 which related to
the accounting year ending on September 30, 1950 out of its
profits that accrued during the subsequent accounting
period. In our opinion, the argument put forward by the
Attorney-General on behalf of the appellant is well-founded
and must be accepted as correct. It is true that the
assessee had prepared a balance sheet on the basis that its
accounting year ended on September 30, 1950. It is,
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however. admitted that the assessee had two sources of
income: 1 ) from its own business, and (2) from the share of
the partnership business with Indian Steel Syndicate. Under
s. 2(1l) of the Act an assessee may have different previous
years in respect of different sources of income and under
the scheme of the Act the income of the varying previous
years from the different sources should be lumped together
to arrive at the total income of the assessee. The
provisions of s. 2(11) of the Act make it clear that, except
in cases where a previous year is determined by the
Department under cl. (b), the varying previous years must
all necessarily end with or within the financial year next
preceding the assessment year. In the present case, the
previous year so far as the personal business of the
assessee was concerned, was the previous year ended on
September 30, 1950, but with regard to the income of the
partnership the previous year was
737
the period, between November 30, 1950 and March 31, 1951
when the accounts of the partnership were made up and
closed., In our opinion, the provisions of s. 23A(l) must
be, construed in the context of s. 2(11) of the Act and the,
expression ’previous year’ of the company in s. 23A(l) must
be interpreted as meaning two previous years where the
company carries on two different businesses with two
different sources of income for which there are separate
accounting periods. It follows therefore in the present
case that the Income Tax Officer was right in holding that
the assessable income of the company included the, share of
the assessee’s profits in its partnership with the Indian
Steel Syndicate for the purpose of application of s. 23A of
the Act so far as the assessment year 1951-52 was concerend.
The argument was, however, stressed on behalf of the res-
pondent that in any event the share of the profit of ’the
assessee from the partnership business for the period from
October 1, 1950 to March 31, 1951 was not known to the
assessee before its annual general meeting on May 17, 1951.
It was pointed out that for the first time the Income Tax
Officer was intimated on August 11 . 1953 that the share of
the profit of the assessee in the partnership was to the
extent of Rs. 70,895 and should be included in its
assessment. After receipt of the intimation the Income Tax
Officer rectified the original assessment made on February
29, 1952 and included the said amount of Rs. 70,895. In our
opinion, there is no warrant for the argument put forward on
behalf of the respondent. It is conceded in this case that
the annual general meeting of the assessee was held on May
17, 1951 after the close of the accounting year of the
Indian Steel Syndicate. It is true that the actual profits
of the assessee from its partnership business were
ascertained after the close of the accounting period, i.e.,
March 31, 1951. It is, however, well-established that the
income may accrue to an assessee without actual receipt of
the same and if the assesse acquires a right to receive the
income, the income can be said to have accrued to him though
it may be received later on on its being ascertained. The
legal position is that a liability depending upon a
contingency is not a debt in praesenti or in futuro till the
contingency happens. But if it is a debt the fact that the
amount has to be ascertained does not make it any the less a
debt if the liability is certain and what remains is only a
quantification of the amount : debitum in praesenti,
solvendum in futuro. Reference may be made in this
connection to the decision in Commissioners of Inland
Revenue v. Gardner Mountain & D’ Ambrumenil, Ltd.(1) The
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assessee in that case carried on the business of under-
writing agents, and entered into agree-
(1) 29 T.C. 69.
738
ments with certain underwriters at Lloyds under which it was
,entitled to receive as remuneration for its services in
conducting the agency, commissions on the net profits of
each year’s underwriting. The agreements provided that
"accounts should be kept for the period ending 31st December
in each year and that each such account shall be made up and
balanced at the end of the second clear year from the
expiration of the period or year to which it relates and the
amount then remaining to the credit of the account shall be
taken to represent the amount of the net profit of the
period or year to which it relates and the commission
payable to the company shall be calculated and paid
thereon." The accounts for the underwriting done in the
calendar y‘ear 1936 were made up at the end of 1938 and the
question that arose was whether the assessee was liable to
additional assessment in respect of the commission on
underwriters’ profits from the policies underwritten in
calendar year 1936 in the year in which the policies were
underwritten or in the year when the accounts were thus made
up. The assessee contended that the contracts into which it
entered were executory contracts under which its services
were not completed or paid for, as regards commission, until
the conclusion of the relevant account; the profit in the
form of commission was not ascertainable or earned, and did
not arise, until that time and the additional assessment
which was made in the year in which the policies were under-
written should accordingly be discharged. The Special Co-
mmissioners allowed the assessee’s contention and discharged
the additional assessment. The decision of the Special
Commissioners was confirmed on appeal by Macnaghten, J. in
the King’s Bench Division of the High Court. The Court of
Appeal however reversed this decision and a further appeal
was taken by the assessee to the House of Lords. The House
of Lords held that on the true construction of the
agreements, the commissions in question were earned by the
assessee in the year in which the policies were
underwritten, and must be brought into account accordingly
and confirmed the decision of the Court of Appeal. At page
96 of the Report Lord Wright observed :
"I agree with the Court of Appeal in thinking
that the necessary conclusion from that must
be that the right to the commission is treated
as a vested right which has accrued at the
time when the risk was underwritten. It has
then been earned, though the profits resulting
from the insurance cannot be then ascertained,
but in practice are not ascertained until the
end of two years beyond the date of
underwriting. ’The right is vested, though
its valuation is postponed, and is not merely
postponed but depends on all the contingencies
739
which are inevitable in any insurance risk,
losses which may or may not happen, returns of
premium, premiums to be arranged for
additional risks, reinsurance, and the whole
catalogue of uncertain future factors. All
these have to be brought into account
according to ordinary commercial practice and
under-standing. But the delays and
difficulties which there
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may be in any particular case, however they
may affect
the profit do not affect the right for what it
eventually
proves to be worth."
Lord Simonds also stated at page 1 10 of the
Report as follows
"It is clear to me that the commission is
wholly earned in year 1 in respect of the
profits of that year’s underwriting. If so, I
should have thought that it was not arguable
that that commission did not accrue for Income
Tax purposes in that same year, though it was
not ascertainable until later."
It is admitted in the present case that the Indian Steel
Syndicate, closed the accounts of the partnership for the
first time for the first set of partners on November 30,
1950 and for the other set of partners on March 31, 1951 and
the assessee as a partner was therefore entitled to the
share of the profits as on the last day of the accounting
period of the partnership i.e., March 31, 1951.
For these reasons we hold that the Income Tax Officer was
right in holding that the amount of Rs. 70,895/- which was
the share of the assessee’s income from its partnership with
Indian Steel Syndicate for the period ending March 31, 1951
should be included in the assessable profits of the company
for the assessment year 1951-52 and should be treated as
part of the distributable profits of the company for the
purpose of s. 23-A (1) of the Act. In other words, the
order made by the Income Tax Officer against the assessee
under s. 23-A of the Act for the assessment year 1951-52
must be held to be justified and valid and the question of
law referred by the Appellate Tribunal must be answered
against the assessee and in favour of the Income Tax
Department for the year 1951-52 also. We accordingly set
aside the judgment of the Bombay High Court dated September
18, 1962 so far as the assessment year 1951-52 is concerned
and allow this appeal with costs.
Y.P.
Appeal allowed.
740