1967 (4) TMI 6 - SC - Income Tax

Acquisition of the undertaking of the company - company was paid Rs. 15, 50, 000 as compensation for loss of its undertaking assets and documents - tribunal was justified in bringing the amount as taxable income of the company in the previous year - profits received by the company the State of Mysore is by virtue of s. 26(2) of the IT Act liable to be taxed.

Summary

Issues:
1. Taxability of compensation received by a company for loss of undertaking.
2. Liability to pay tax on profits earned by a company before closure of business.
3. Interpretation of the Income-tax Act regarding the accrual of profits for taxation purposes.

Analysis:

Issue 1: The primary issue in this case was the taxability of the compensation received by a company for the loss of its undertaking. The High Court held that the compensation was not received in lieu of profits earned by the company and, therefore, not taxable. However, the Supreme Court disagreed, stating that the nature of the payment was irrelevant, and the focus should be on the profits earned by the company. The Court clarified that the revenue sought to tax the profits earned by the company, not the compensation received. The method of payment or measure was not determinative of tax liability.

Issue 2: Another crucial issue was whether the company was liable to pay tax on the profits earned before the closure of its business. The company argued that since it had closed its business before the end of the previous year, no profit had accrued, and thus, no tax liability existed. However, the Court rejected this argument, emphasizing that under the Income-tax Act, income accrues to an assessee when money or money's worth is received in the course of business. The company's profits, as per audited accounts, were subject to tax even if the business closed before the end of the previous year.

Issue 3: The interpretation of the Income-tax Act regarding the accrual of profits for taxation purposes was a significant aspect of the judgment. The Court clarified that the Act does not require a business to be actively carried on for the entire previous year for profits to be taxable. Income embedded in receipts accrues to the assessee and becomes subject to tax. The Court cited precedents to support the principle that profits earned during a specific period are taxable, irrespective of the business's closure before the end of the year.

In conclusion, the Supreme Court allowed the appeal, holding that the profits earned by the company were taxable, regardless of the compensation received for the loss of undertaking. The Court emphasized that income accrues to an assessee when profits are earned, irrespective of the business's operational status at the end of the previous year. The judgment clarified the principles of tax liability concerning profits earned by a business within a specific period under the Income-tax Act.