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PETITIONER: EXECUTORS OF THE ESTATE OF J.K. DUBASH

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, BOMBAYCITY.

DATE OF JUDGMENT: 21/12/1950

BENCH: KANIA, HIRALAL J. (CJ) BENCH: KANIA, HIRALAL J. (CJ) SASTRI, M. PATANJALI DAS, SUDHI RANJAN

CITATION:  1951 AIR  111            1950 SCR  969  CITATOR INFO :  R          1958 SC 269  (10)  RF         1986 SC 376  (21)

ACT:    Indian  Income-tax  Act  (XI of 1922), s.  25  Death  of person carrying on business--Executors carrying on  business as going concern for selling it under terms of will--Whether "succeed in such capacity "to testator--Date of succession.

HEADNOTE:    A person who carried on a business on which tax had been levied  under the Income-tax Act of 1918 died on the 9th  of April,  1942,  leaving  a will by which  he  authorised  his executors to carry    on his business as a going concern, as if  they were absolute owners but without being  responsible for  loss,  for a period not exceedin     12  months  during which if any of his nephews wanted to purchase the business, they might sell it to him or them. The business was sold  to one  of the nephews on the let January, 1993.  The  question being  whether for the purposes of s. 25 (4) of the  Income- tax  Act  of 1922 is amended in 1939 the succession  to  the business            took place on the 9th April, 1942,  when the  testator  died or on the 1st January,  1943,  when  the business was sold:     Held,  affirming the decision of the Bombay High  Court, that inasmuch as the business got vested in the executors on the death    of thetestator and the executors carried on the business within the meaning of es. 3 and 10 of the Act,  and as such became personally liable as assessees and there  was thus a change in the assessee, a succession to the  testator "in  such capacity" took place on the date of the  death  of the  assessee,  even  though the executors  carried  on  the business as a going concern under the terms of the will  and the  business was also being carried on not lot the  benefit of  the executors but for the benefit of the estate  of  the testator.     Per  PATANJALI SASTRI J.--The expression  "succeeded  by another  person" in s. 26 (2) and s. 25 (4) of the  Act  in- cludes  not  only cases of succession inter vivos  but  also cases of succession on death.     While  it is true that a transfer of ownership is  ordi-

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narily involved in cases of succession falling within s.  26 (2) and s. 25 (4),        it is not an essential element  of succession within the meaning those provisions.     The  words "in such capacity" in 8.26 (2) and s. 25  (4) mean nothing more than the capacity of a person who  carries on the business as the predecessor was carrying it on,  that is, with liability to be taxed on its profits and gains. 970     Commissioner of Income-tax, Bombay v.P. E, Polson  (L.R. 7 I.A. 196) referred to.     Jupuli   Kesava   Ra, o  v. Commisioner  of   Icome-tax, Madras (59 Mad. 377) explained.

JUDGMENT:     APPEAL (Civil Appeal No. CV of 1949) from  a Judgment of the  Bombay High Court (Chagla C.J. and Tendolkar J.)  dated March 19, 1948, in a reference made by the Income-tax Appel- late Tribunal under section 66 (1) of the Indian  Income-tax Act (Income* tax Reference No. 26 of 1947).     Sir N.P. Engineer (R. J. Kolah, with him) for the appel- lant.     M.C. Setalvad, Attorney General for India, (G. N. Joshi, with him) for the respondent.     1950.  December  21.  The Court  delivered  Judgment  as follows:     KANIA  C.J. -- This is an appeal from a judgment of  the High  Court  at  Bombay  delivered on  a  reference  by  the Income-tax  Appellate Tribunal under the  Indian  Income-tax Act.   The material facts are these.  The assessees  (appel- lants) are the executors of the will of Mr. J.K. Dubash  who died on the 9th of April, 1942, having made his last will on the  8th of April, 1942. Probate of the will was  issued  to the executors on the 10th of August, 1942. During his  life- time,  the  testator  carried on the  business  of  shipping agents.   Clause  13 of the will contains  directions  about carrying on this business of the testator till its disposal. It directs the executors to carry on the business as a going concern  after his death with power to make fresh  contracts and  discharge the existing and future liabilities  and  all other usual-and necessary  powers,  unless  special  circum- stances  arose which, in the opinion of the executors,  made it expedient to sell the business earlier. This business was to  be carried on for a period not exceeding  twelve  months during which time the executors were to ascertain whether or not  any  of his nephews was willing to  purchase  the  said undertaking.  For this purpose and generally for  sale  pur- poses,  he  directed that the executors shall,  as  soon  as possible, 971 after his death, have a valuation made of the said undertak- ing.   The undertaking was to be sold so as to  include  all his  interest in the premises, the goodwill,  the  stock-in- trade,  plant, furniture etc. but excluding  securities  for money  and cash in the bank to the credit of the account  of that  undertaking.  If the executors were  satisfied  before the  expiration of one year from the testator’s  death  that the  said undertaking would not be sold to his  nephews  be- cause  none  was  willing or able to purchase it  or  if  it remained unsold, at the end of a year, to any of the nephews then  (whichever  event first happened) the  executors  were directed  to  sell the undertaking to such third  person  on such  terms  and at such price as they thought  proper.  The clause  ended with the following words:-.-"I  expressly  de-

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clare  that in carrying on the said undertaking my  trustees shall, in addition to all powers, discretion and authorities vested in them by law, have power to carry on or discontinue any  part of the said undertaking or to augment or  diminish the capital employed and generally to act as absolute owners without being responsible for any loss."  The business  was, so1d to one of the nephews on the 1st of January, 1943.  The appellants  contended that within the meaning of section  25 (4)  of  the  Indian Income-tax Act the  succession  to  the business  took place on the 1st of January, 1943, while  the taxing authorities contended that the succession was on  the 9th  of  April,  1942, when the testator  died.   The  first question  submitted for the High Court’s opinion related  to this dispute.     The  second question referred to the High Court for  its opinion was in respect of an amount paid by the executors to the  widow  of  the testator.  That  question  was  answered against  the appellants by the High Court.  Learned  counsel appearing  for the appellants intiated that he did not  want to  contest  the High Court’s decision on  the  point.   The appeal therefore is limited to the first question only.     Section  25  of the Indian Income-tax Act,  1939,  gives certain  concessions in respect of a business where tax  had been paid by the person carrying the business 972 under  the  provisions of the Indian Income tax  Act,  1918. The material part of sub-clause 4 of section 25 is in  these terms :--     "Where  the  person who was at the commencement  of  the Indian  Income-tax  (Amendment)  Act, 1939  (VII  of  1939), carrying  on any business, profession or vocation  on  which tax  was  at any time charged under the  provisions  of  the Indian  Incometax  Act, 1918, is succeeded in such  capacity by another person............  "     The  scheme  of section 25 read with the  provisions  of section 26 (2) appears to be to give relief, inter alia,  to persons  who were carrying on business in 1921 and had  been taxed on their income under the Income-tax Act of 1918.   By a  change  effected by the Incometax Amendment Act  of  1922 they  were  subjected to taxation twice on’  the  income  of 1921-22.   The relief is intended against this levy  of  tax twice over.      The  rival contentions urged on behalf of  the  parties are  these.  The assessee contends that on the death of  the testator  under clause 13 of the will of the  deceased,  the executors were carrying on the business of the deceased only for  the purpose of winding it up, and there was no  succes- sion to the business on the death of the deceased within the meaning  of  section 25 (4) of the Income-tax  Act.   It  is argued  that  the clause provides for nothing  else  than  a direction to carry on the business with a view either (a) to sell it within a year to one of the nephews, or (b) to  sell it  to someone else at the end of the year as a  going  con- cern.  it was pointed out that all directions in the  clause permitting contracts to be made etc. were for the purpose of keeping  the  business alive and not allowing it to  die  so that the business which was a valuable asset of the deceased could be sold as a going concern with its goodwill.  It  was therefore  argued that the succession to the  business  took place  only on the 1st of January, 1943, when  the  business was sold by the executors to one of the nephews in terms  of clause  13  of  the will. In actual money,  the  contest  is whether the executors 973 are  entitled to get the benefit of the exemption  from  in-

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come-tax in respect of the profits earned only for the  nine days between the 1st of April and the 9th of April, 1942, or between  the 1st of April, 1942, and  1st of January,  1943, under section 25 (4) of the Indian Income-tax Act.  The High Court has answered the  question against the assessee.     In  our  opinion, the conclusion of the  High  Court  is correct.  It cannot be disputed that in the event of a  sale or gift of the business by the original owner the succession within the meaning of section 25 (4) will take place only on the date of such sale or gift and the exemption from liabil- ity  to tax will be for a period terminating on.  that  day. It  cannot again be seriously disputed that if the  testator settled’  his business on trust under a deed  of  settlement there will be a succession to the business by another person on the day of the settlement.  Similarly in the event of his death intestate his heir-at-law will succeed to the business on  the date of his death.  The argument advanced on  behalf of the appellants that in the present case having regard  to the  terms of clause 13 of the will there has been "no  suc- cession  in  such capacity to another  person"  because  the executors were carrying on the business only with a view  to sell  it as a going concern, cannot be accepted  because  on the  day of the death of the deceased the  estate  including the  business got vested in the executors and the  executors carried on the business within the meaning of section 3 read with  section  10 of the Act and as such  became  personally liable  as assessee. Thus there came about a change  in  the assessee and therefore "a succession in such capacity"  took place within the meaning of section 25 (4) of the Income-tax Act.   It seems clear that if the testator  had  transferred the business to a trustee, although the trustees will not be the beneficial owners, in law there will be a succession  of the  business to another person within the meaning of.  sec- tion 25 (4) of the Indian Income.tax Act.  If in such a case that  result  follows there appears no reason why  when  the legal estate is transferred by operation of law to an execu- tor 974 there should not be considered a succession to the estate by another  person  within the meaning of the same  section  25 (4).   The words "in such capacity" in that  clause  further make the position clear.  It makes the distinction of  legal and beneficial ownership irrelevant. The contention that the business was to be carried on by the executors as such, as a going concern or that it was being carried on for the  bene- fit or loss of the testator’s estate is not relevant for the present  discussion.  The only relevant question under  sec- tion  25  (4)  of the Indian Income-tax Act  is  whether  in respect  of  the business there is a succession  to  another person. This is a provision to give relief and the scope  of the  relief must be governed by the words used in  the  Act. In our opinion the answer to this question, on the facts  of the  present case, must be in the affirmative and the.  date of such succession must be considered to be the death of the testator,  which was on the 9th of April, 1942.  The  result is that the appeal fails and is dismissed with costs. PATANJALI  SASTRI  J.--I  agree that  this  appealshould  be rejected.      The  material facts have been set out in  the  judgment which  has just been delivered.  The only question  now  re- maining  for decision is:on what date was the testator,  who was  carrying  on the business of shipping  agent  and  land contractor  "succeeded in such capacity by  another  person" within the meaning of section 25 (4) of the Act--on the  9th April,  1942, when the testator died and the  appellants  as

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the executors took over the business and carried it on or on the 1st January, 1943, when the business was sold by them as a going concern ?      The  business being admittedly one  which  was  charged to  tax  under  the Income-tax Act, 1918, if  there  was  no succession  within the meaning of section 25 (4)  until  the sale took place, as the appellants contend, the profits  and gains  of the period from 1st April, 1942, to  1st  January, 1943,  would not be liable to tax, whereas. if the  testator could be said to have been "succeeded"    975 by  the appellants, the profits of the much  shorter  period between 1st April, 1942, and 8th April, 1942, alone would be exempt  from taxation.  The reason for this relief is to  be found in the change of the basis of taxation when the Act of 1922  was passed which resulted in the profits of  the  year 1921-22 being assessed twice over, once in that year as  the income thereof on adjustment" under the Act of 1918 and once in the next year as the income of the "previous year"  under the  Act  of 1922 [see Commissioner  of  Income-tax,  Bombay v.P.E.  Poison(1)].   The relief was, however,  confined  to discontinued  businesses,  as, in cases of  succession  till 1938 the successor alone was assessed to tax on the whole of the  profits of the previous year including those earned  by his  predecessor before the succession  occurred.   But  the Indian   Income-tax  (Amendment)  Act,  1939,   (hereinafter referred to as the amending Act), having amended section  26 (2)  so as to provide, in the case of a succession in  busi- ness,  prolession  or vocation, for the  assessment  of  the predecessor and the successor, each in respect of his actual share  of the profits of the previous year, the  relief  was extended,  by enacting section 25 (4), to  cases of  succes- sion occurring after the commencement of that Act, with  the same  object as in the case of discontinuance,  namely,   to redress   the hardship of the business having  been  Charged twice  over on the income of 1921-22.  In other  words,  the predecessor is given the same relief as if he had discontin- ued the business on the date of succession.  It will thus be seen  that the enactment of section 25 (4) is  consequential on  the  amendment  of section 26(2),  and  the   scope  and meaning  of  the expression "succeeded in such  capacity  by another  person" in section 26 (2) must determine  also  its scope and meaning in section 25 (4).     The  first question which arises on the language of  the amended section 26 (2), which speaks of "the person succeed- ed" being "assessed" and of his not being "found", is wheth- er the sub-section should be construed as applicable only to cases of succession 976 inter  vivos.   Whatever force there may have been  in   the suggestion that the sub-section could not have  contemplated cases  of  testamentary  or  intestate succession  if  there was no provision for the assessment     of profits earned by a deceased person in the hands    his representatives, there seems  to be no sufficient    reason for excluding from  the scope of the sub-section   cases  of  succession on death in view  of the provision in section 24B.  On the  other  hand, proviso  (c)  to section 24(9), which refers to a  person  ’ ’succeeded in such capacity by another person otherwise than by inheritance ", would seem to imply that "succession",  as that term is used in the Act, includes devolution on death.       The  next  question is what is the meaning to  be  at- tributed  to the phrase "in such capacity"? A Full Bench  of the  Madras High Court in Jupudi Kesava Rao v.  Commissioner of Income tax. Madras(1), held that the expression meant "in

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the  capacity as owner ", so that "the person  who  succeeds another  must, by such succession, become the owner  of  the business which his predecessor was carrying on and which he, after the succession, carries on in such capacity, that  is. the capacity as owner ".  Applying that test they held  that the  sole surviving member of a Hindu undivided  family  did not succeed to the business of the family within the meaning of  section 26(2), as he was previously a part-owner of  the business’ and there was no transfer of ownership.  While  it is  undoubtedly true that a transfer of ownership  is  ordi- narily  involved in cases of succession failing within  sec- tion 26 (2)  or section 25(4), it cannot, in my opinion,  be regarded  as an essential element of succession  within  the meaning of those provisions. The Income-tax Act directs  its attention  primarily to the person who receives the  income, profits  or gains rather than to the ownership or  enjoyment thereof.  The  assessee is defined in section 2 (2)  as  the person  by whom the income-tax is payable and by section  10 the  tax is payable by an assessee who carries on the  busi- ness, profession or (1) I.L.R 59 Mad 377 977 vocation. The statute thus fastens on the person who carries on  the business, etc., the liability to pay the tax on  the profits  earned  by him regardless of their  destination  or enjoyment.  It is also worthy of note that in  serviral  in- stances  person who have no  proprietory or other  right  in the income charged to tax are made liable to pay the tax for no  other  reason  than the convenience  of  assessment  and collection. Such instances are to be found in section  26(2) proviso, section 18 (7),  section 23-A (3), section 25-A and section  42(1).  As  observed by Lord Cave  in  Williams  v. Singer & Others(1) "the fact is that, if the Income-tax Acts are examined, it will be found that the person charged  with tax is neither the trustee nor the beneficiary as such,  but the  person  in actual receipt and control  of  the  income, which it is sought to reach".     There seems to be no warrant, therefore, to insist on  a transfer  of ownership as the decisive test of  ’succession’ within  the  meaning of section 26(2) or section  25(4)  any more than for insisting on the ownership of the business  by the  person  carrying  on a business, for  the  purposes  of section 10.  I do not of course wish to be understood to say that  a clerk or an agent in management of a business  would be an assessee liable to be taxed in respect of its  profits and -gains.  Some kind of title there must be, though not of a  beneficial character. Nor need it be of the same  quality in the predecessor and the successor.  The question in  each case must be: Is the person who has come in carrying on  the business  as a principal ?  If so, the Revenue looks to  him and makes him liable for payment of the tax.  The words  "in such  capacity" in sections 25 (4) and 26 (2)  mean  nothing more than the capacity of a person who carries on the  busi- ness  as the predecessor was carrying it on that is, with  a liability to be taxed on its profits and gains.     Applying  these  principles to the present  case,  I  am clearly of opinion that the testator who was carrying on the business in question was succeeded in such (1) [1921] 1 A.C. 65 125 978 capacity  by  the  appellants when the former  died  on  9th April,  1942,  and his estate vested in  them.   As  already stated,  the testator expressly authorised the    appellants to  carry on the business as a going concern  for  one  year

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after  his  death and gave them power to  enter  into  fresh contracts  and to discharge liabilities   past  and  future. They  are  thus an "association of    persons"  carrying  on business, and, being assessable as   such in respect of  the profits and gains of the business   carriedon by them  under section  10 read with section 3 of the Act, they are  liable to  be  taxed on the   profits earned after the  9th  April, 1942.     It was objected that the appellants being assessable  as the  representatives of the testator under section  24-B  in respect  of  the profits earned by him in    the  accounting year,  they  could not be treated as  successors  assessable under  section  26  (2)in respect of    the  profits  earned during the rest of that year, as such   apportionment  would be meaningless, the same interest,   namely, the  testator’s estate,  having to bear the incidence of the tax  in  either case.  It was accordingly   suggested that unless there  was a break in the continuity of the interest represented by the executors, there   could be no real apportionment such as is contemplated   by section 26 (2) and, therefore, no  succes- sion  within   the meaning of that section or of section  25 (4)  where   the same expression is used.  The argument  is, in  my   opinion,  fallacious.  It  overlooks the   distinc- tion    between the position of the executors visa  vis  the Revenue and their position visa vis the testator’s   estate. As already pointed out, their liability to pay   the tax  on the profits earned after the testator’s death   arises under section  10 (1) and, being that of assessees    carrying  on the  business,  is personal to them, although    as  between them and the estate they would be entitled   to be  indemni- fied in respect of the tax paid; while their   liability  to pay  tax  on  the profits earned  during  the     testator’s life-time  arises  under section 24-B and, being    that  of legal representatives of the testator, is limited   "to  the extent to which the testator’s estate is capable   of  meet- ing the charge".  It is therefore not correct to     979 say  that  an apportionment under section 26  (2)  would  be meaningless,  though,  if the testator’s estate  was  suffi- ciently  solvent,  it  would have    no  practical  signifi- cance. DAS J.--I agree with the Chief Justice. Appeal dismissed. Agent for the appellant: R.S. Narula. Agent for the respondent:P. A. Mehta.