1950 (12) TMI 3 - SC - Income Tax

Whether the executors are entitled to get the benefit of the exemption from income-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 ? Held that - 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 Section 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 executor 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 benefit or loss of the testator s estate is not relevant for the present discussion. The only relevant question under Section 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

Issues Involved:
1. Determination of the date of succession for tax purposes under Section 25(4) of the Indian Income-tax Act.
2. Tax liability of the executors for the period between the testator's death and the sale of the business.

Issue-Wise Detailed Analysis:

1. Determination of the Date of Succession for Tax Purposes Under Section 25(4) of the Indian Income-tax Act:
The primary issue revolves around the interpretation of Section 25(4) of the Indian Income-tax Act, which provides relief to businesses that were taxed under the Indian Income-tax Act, 1918. The contention is whether the succession to the business took place on the testator's death (9th April 1942) or on the date the business was sold (1st January 1943).

The assessee argued that the executors were merely carrying on the business to wind it up and sell it as a going concern, and therefore, the succession should be considered to have occurred on the sale date. They contended that the executors' activities were aimed at preserving the business's value for sale, not as a continuation of the business in the usual sense.

However, the court held that the succession occurred on the date of the testator's death. The reasoning was that upon the testator's death, the estate, including the business, vested in the executors. The executors carried on the business and were personally liable as assessees under Section 3 read with Section 10 of the Act. Therefore, a change in the assessee occurred, constituting a "succession in such capacity" within the meaning of Section 25(4). The court emphasized that the relief provided by Section 25(4) is governed by the words used in the Act, and the legal estate's transfer to the executors by operation of law constituted a succession.

The judgment concluded that the date of succession must be considered the testator's death, i.e., 9th April 1942. Consequently, the executors were liable for the tax on the profits earned from 1st April 1942 to 9th April 1942, and not for the period up to the sale date.

2. Tax Liability of the Executors for the Period Between the Testator's Death and the Sale of the Business:
The second issue addressed the tax liability of the executors for the period between the testator's death and the sale of the business. The court noted that the executors were carrying on the business in their capacity as executors, and thus, they were assessable as an "association of persons" under Section 10 read with Section 3 of the Act. This meant that the executors were liable to be taxed on the profits earned after the testator's death.

The court rejected the argument that the executors could not be treated as successors assessable under Section 26(2) because their liability under Section 24B for the profits earned during the testator's lifetime was distinct from their liability for the profits earned after his death. The apportionment under Section 26(2) was meaningful as it distinguished the executors' personal liability from their liability as legal representatives of the testator.

The court emphasized that the executors' liability to pay tax on the profits earned after the testator's death was personal to them, although they could seek indemnification from the estate. This distinction made the apportionment under Section 26(2) significant, even if the testator's estate was solvent.

Conclusion:
The court affirmed the High Court's decision, holding that the succession to the business occurred on the testator's death, and the executors were liable for the tax on the profits earned from 1st April 1942 to 9th April 1942. The appeal was dismissed with costs.

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