1965 (11) TMI 22 - SC - Income Tax

Whether, on the facts found, it could be said that the company had been carrying on business in the two accounting years? 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

Issues Involved:

1. Whether the assessee-company had ceased to carry on business during the relevant accounting period.
2. If the company was carrying on business, whether the expenses allowed by the Tribunal are admissible under section 10(2) of the Income-tax Act.

Detailed Analysis:

Issue 1: Whether the assessee-company had ceased to carry on business during the relevant accounting period.

The respondent-company, incorporated in 1912, primarily engaged in the business of supplying electricity. By 1942, the company had disposed of all its licenses except for the Lahore electric supply license. The Government of Punjab acquired the Lahore undertaking in 1946, and the company ceased to generate and supply electricity thereafter. The company claimed deductions under section 10(2)(xv) of the Income-tax Act, 1922, for the years 1948-49 and 1949-50, asserting that it continued to carry on business during the relevant accounting periods.

The Income-tax Officer rejected this claim, concluding that the company was not carrying on business. On appeal, the Appellate Assistant Commissioner partially allowed the deductions but did not accept that the company was carrying on business. The Income-tax Appellate Tribunal, however, accepted the company's contention, stating that the company had not ceased to carry on business. The High Court of Punjab affirmed this view, leading to the present appeal.

The Supreme Court analyzed whether the company intended to carry on business, considering several factors:
1. The company did not sell its undertaking as a going concern.
2. It retained assets other than those related to the Lahore license.
3. It continued to hold deposits from electricity consumers.
4. There was no intention of liquidation.
5. The directors considered purchasing a new manufacturing concern.
6. The abnormal situation due to the partition of India explained the lack of new business.

However, the Supreme Court concluded that these factors did not establish an intention to carry on business. The company had ceased its business activities on September 5, 1946, and had not commenced any new business during the relevant years. Retaining assets and staff did not indicate an intention to resume business. The Court emphasized that business, as contemplated under section 10, involves an activity capable of producing taxable profit, which was not the case here. Consequently, the Court held that the company had ceased to carry on business and answered the first question in the negative.

Issue 2: If the company was carrying on business, whether the expenses allowed by the Tribunal are admissible under section 10(2) of the Income-tax Act.

The Additional Solicitor-General abandoned the second question during the proceedings in the Supreme Court. Therefore, the primary focus remained on whether the company was carrying on business. Since the Supreme Court concluded that the company had ceased to carry on business, it did not delve into the admissibility of expenses under section 10(2) of the Income-tax Act.

Separate Judgment by BACHAWAT J.:

BACHAWAT J. concurred with the conclusion that the company was carrying on business during the relevant accounting periods. He highlighted that the company's memorandum included investment activities as part of its business. The company invested its funds and received income from these investments, which constituted business activities. The Tribunal found that the company was dealing in investments and realized business income from the sale of investments. BACHAWAT J. emphasized that there was ample material to support the Tribunal's finding that the company had not ceased to carry on business. He concluded that the appeals should be dismissed with costs.

Order:

In accordance with the majority judgment, the appeals were allowed with costs here and below. Appeals allowed.

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