http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 5  

PETITIONER: COMMISSIONER OF INCOME-TAX, MYSORE

       Vs.

RESPONDENT: BANGALORE TRANSPORT CO. LTD.

DATE OF JUDGMENT: 03/04/1967

BENCH: SHAH, J.C. BENCH: SHAH, J.C. SIKRI, S.M. RAMASWAMI, V.

CITATION:  1968 AIR   75            1967 SCR  (3) 393

ACT: Indian  Income-tax  Act,  1922 (Act 11  of  1922)  -Business carried for a part of year, if profits taxable-

HEADNOTE: The  undertaking and business of the  assessee-company  were taken  over  by  the Government and the  assessee  was  paid compensation.   The assessee submitted a  return’,  claiming that it had earned no income from its business, since it was taken  over  by  the  Government.   The  Income-tax  Officer brought  to tax a certain sum, disclosed by  the  assessee’s audited accounts as its taxable business income during  that part of the year before it closed the business.  This  order was  upheld by the Assistant Commissioner and the  Appellate Tribunal with certain reduction in the amount.  On reference the  High Court answered the question against  the  Revenue. In appeal to this Court :- HELD : The assessee was liable to be taxed. Under  S. 10(1) of the Income-tax Act, tax is payable by  an assessee  under  the head "Profits and  gains  of  business, profession  or vocation" in respect of profits or  gains  of any  business,  profession or vocation carried  on  by  him. There  is nothing in the Act which supports  the  assessee’s argument that for profits of the business to be taxable, the business  must be actively carried on for the whole  of  the previous year, or till the end of the previous year.   Under the scheme of the Act, whenever an assessee receives in  the course  of  his  business money  or  money’s  worth,  income embedded  therein  accrues  or arises to  him,  and  becomes subject to an ambulatory charge. If  at  the  end  of  the previous year, on making lip accounts there is nooverall income, the charge does not crystallize, because there is no incomeon which the charge of tax may settle. [395F-H] Turner  Morrison & Company Ltd. v. Commissioner  of  Income- tax, West Bengal, 23, I.T.R. 152, followed. Commissioner of Income-tax, Gujarat v. Ashokbhai  Chimanhhai [1965] 1 S.C.R. 758. explained. The  Department was not seeking to tax either the  whole  or any  part of the compensation received by the  assessee  and the  discussion  as  to what the  compensation  received  by assessee  was  intended  to  replace  was  not  relevant  in

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 5  

determining  whether the profits which accrued or  arose  to the assessee prior to its closure of the business. [395A-B]

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 435 of 1966. Appeal  by special leave from the judgment and  order  dated February  19, 1964 of the Mysore High Court  in  Income-tax. Referred Case No. 15 of 1962. S.T. Desai, A. N. Kirpal, S. P. Nayyar and R. H. Dhebar, for the appellant. T.V.  Viswanath  Iyer, K. Rajinder Chaudhuri  and  K.  R. Chaudhuri, for the respondent. The Judgment of the Court was delivered by 394 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 VIII of  1956) with   a  view  to  provide  for  the  acquisition  of   the undertaking  of the Company.  By virtue of S. 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. 15,50,0001- as compensation for loss of its undertaking, assets and documents. 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, 1956.   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/- as taxable income of the Company in the previous year. At  the instance of the Company, the following question  was submitted  by  the Appellate Tribunal to the High  Court  of Mysore under S. 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. The  High  Court  was of the opinion that  it  was  for  the Revenue to establish that out of Rs. 15,50,0001- 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   be   reasonably  held  that  any  portion   of   the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 5  

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 395 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  pro-fit 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. Counsel for the Company conceded that he was unable to  sup- port  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 previous year the assessee closes his business or  is compulsorily deprived of his undertaking and  assets, and  on that account the assessee is unable to carry on  his business,  in  law no profit can arise or accrue  to  or  be received  by the assessee even if during a part of the  year the  assessee  has received payments in the  course  of  his business, According to counsel for the Company in order that income from business may become taxable in the hands of  the assessee, it must be shown that the business was carried  on till  the end of the previous year, and if before  the  con- clusion  of that year the business is closed, no profit  may in law be deemed to accrue to the assessee. There  is no warrant for this argument in the scheme of  the Income-tax Act.  Under s. 10(1) of the Income-tax Act, 1922, tax  is payable by an assessee under the head  "Profits  and gains of business, profession or vocation" in respect of the profit  or  gains of any business,  profession  or  vocation carried  on  by  him.  There is nothing  in  the  Act  which supports the argument that for profits of the business to be taxable,  the business must be actively carried on  for  the whole of the previous year, or till the end of the  Previous year.   Under the scheme of the Income-tax Act, whenever  an assessee  receives  in the course of his business  money  or money’s worth, income embedded therein accrues or arises  to him; and becomes subject to an ambulatory charge.  If at the end of the previous year, on making up accounts there is  no overall  income,  the charge does not  crystallize,  because there  is no income on which the charge of tax  may  settle. In Turner Morrison & Company Ltd. v. Commissioner of Income- tax, West-Bengal(1), this Court in dealing with a case of  a business of selling salt in India observed at p. 160 : (1)23 I.T.R. 152. 396               "There  can .... be no question that when  the               gross  sale  proceeds  were  received  by  the               Agents  in  India  they  necessarily  received               whatever income, profits and gains were  lying               dormant  or  hidden or otherwise  embedded  in               them.  Of course, if on the taking of accounts               it  be found that there was no  profit  during

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 5  

             the  year  then  the question  of  receipt  of               income, profits and gains would not arise  but               if there were income, profits and gains,  then               the proportionate part thereof attributable to               the  sale proceeds received by the  Agents  in               India were income, profits and gains  received               by them at the moment the gross sale  proceeds               were received by them in India and that  being               the position the provisions of Section 4(1)(a)               were  immediately attracted -and  the  income,               profits   and   gains   so   received   became               chargeable to tax under Section 3 of the Act." The  same  principle applies to receipts in  the  course  of business of a transport operator. The Company carried on the, business of a transport operator between April 1, 1956 and September 30, 1956 and the audited accounts of the Company disclosed that embedded in the gross receipts  was  a net profit of Rs.  4,01,954/-  during  that period.    That  Profit  reduced  by  out  goings   properly allowable in the computation of the total taxable income be- came subject to a charge to tax.  The total taxable  profits may under the scheme of the Act be determined at the end  of the previous year : but it does not follow therefrom that to profits  earned during the year, the charge of tax does  not attach.   Assuming  that  the business of  the  Company  was closed  on October 1, 1956 when its undertaking  and  assets were  taken  over by the Government of Mysore, it  was,  for reasons stated earlier, still liable to be taxed in  respect of its profits which accrued or were received by the Company prior to the date of the closure of the business. Counsel  for  the Company relied upon a recent  decision  of this  Court  in  Commissioner  of  Income-tax,  Gujarat   v. Ashokbhai  Chimanbhai(1)   and contended that profits  of  a business  which are liable to tax under the Income-tax  Act, can  only  accrue at the end of the previous  year  and  not before.   But,  that  case lays down  no  such  proposition. Under  an agreement of partnership, the manager of  a  Hindu undivided family who was a partner was to receive a share in the  profits of the firm.  The accounts of the firm were  to be  adjusted at the end of every calendar year.  Before  the expiry of the previous year relevant to the assessment  year 1955-56, there was a partition in the family and the  entire share  in the profits of the firm was, under  the  partition agreement, allotted to the manager.  The Income-tax  Officer in proceedings for (1) (1965) 1 S.C.R. 758. 397 assessment  to tax sought to apportion the profits  received by the manager between the Undivided family and the  manager in his individual capacity.  This Court held that the  right to receive the share of profits of the firm for the previous year  1955 arose on the settlement of accounts of the  firm, and  not before, and on that date the manager alone was  the owner  of the share of profits and the family had  no  right therein and it was not liable to be taxed in respect of  any part  of the income.  It is clear on a bare perusal  of  the statement  of facts of that case that no income  or  profits had accrued to the Hindu Undivided family at any time in the year of in account prior to the date of dissolution.  It was observed A shokbhai Chimanbhai’s case(1) at p. 46 :               "In the gross receipts of a business day after               day  or from transaction to  transaction  lies               embedded  or dormant profit or loss : on  such               dormant  profit  or loss  undoubtedly  taxable               profits,  if  any,  of the  business  will  be

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 5  

             computed.   But  dormant  profits  cannot   be               equated  with  profits charged  to  tax  under               sections  3 and 4 of the Income-tax Act.   The               concept  of accrual of profits of  a  business               involves  the determination by the  method  of               accounting  at the end of the accounting  year               or  any shorter period determined by law.   If               profits  accrue to the assessee directly  from               the business the question whether they  accrue               de die, in deim or at the close of the year of               account has at best an academic  significance,               but  when  upon ascertainment of  profits  the               right  of  a  person to  a  share  therein  is               determined,  the  question  assumes  practical               importance,  for  it is only on the  right  to               receive  profits or income, profits accrue  to               that person.  If there is no right, no profits               will be deemed to have accrued." The Hindu Undivided family became entitled to a share in the profits of the firm only at the end of every calendar  year, and not before.  If before that date the right of the family to a share in the profits was divested, no income accrued or arose  to  the  family.  In the  present  case  the  profits directly arose to the Company de die, in diem, and could  be ascertained  by  the  method of accounting  adopted  by  the Company  at  the end of the year or when  the  business  was closed. The question whether the amount of profits assessed were ac- tually shared by the Company within the meaning of s.  26(2) of  the Indian Income-tax Act does not  need  consideration. By  sub-.-,.  (2) of s. 26 where a person  carrying  on  any business, profession or vocation,has been succeeded in  such capacity  by  another person’, such person  and  such  other person  shall,  each be assessed in respect  of  his  actual share, if any, of the income, profits and gains (1) [1965] 1 S.C.R. 758. 398 of  the  years. The question whether the profits of  the  Co pany held’taxable by the Income-tax Officer represented  the actual share of the Company in the profits and gains of  the previous  year  was  never  raised  before  the   Income-tax Appellate  Tribunal and has not been decided.   Counsel  for the  Company merely contended that the amount sought  to  be charged  was  not  liable to be taxed, because  it  was  not profit  of  the  Company.  Counsel has  also  not  contended before  us that for the profits received by the Company  the State of Mysore is by virtue of s. 26(2) of the  Income-tax- Act liable to be taxed. The answer recorded by the High Court will therefore be dis- charged and there will be an answer in the affirmative. The  appeal is allowed.  The Company will pay the  costs  of the Commissioner in this Court and the High Court. Y.P.                                                  Appeal allowed.