2004 (7) TMI 299 - AT - Income Tax

Discontinuance of business u/s 176 - Validity of assessment on a non-existent entity - Taxability of share application monies waived by a foreign company - Whether the share application monies waived by the Argentinian Co. can be assessed as casual or non recurring receipt? - HELD THAT - Under the present Act section 187 deals with an assessment after a change in the constitution of the firm the business being continued after the change. Section 188 deals with an assessment on a succession of one firm by another the business still continuing. It says that assessments shall be made in accordance with section 170 which provides for general rules for assessment in case of succession to a business otherwise than on death in relation to all entities assessable under the Act except a natural person such as an individual. The method is not different from the method prescribed under section 26 of the old Act. Section 189 of the present Act deals with the dissolution of the firm the business being no longer continued. In such a case the Assessing Officer shall make an assessment of the firm as if no such discontinuance or dissolution had taken place. That is the firm will be assessed as such notwithstanding the dissolution and every person who was a partner and every legal representative of a deceased partner shall be jointly and severally liable for the amount assessed upon the firm and all the provisions of the Act such as recovery penalty etc. shall apply. The assessment of a dissolved firm was dealt with by section 44 of the 1922 Act; section 26 dealt with a change in the constitution of the firm. The concept of discontinuance in our humble view presupposes the existence of the entity which carried on the business both before and after the discontinuance. Section 25(3) of the 1922 Act provided for relief from tax in the case of a business which was discontinued in the previous year. This provision was considered by the Bombay High Court in CIT v. Merwanji Kola Co. 1968 (1) TMI 4 - BOMBAY HIGH COURT . It was held that the requirement of the sub-section is that the business should be discontinued and not that the proprietor of the business or the proprietary body which owns the business should be discontinued and that it was the failure of the AAC in that case to make this initial distinction that resulted in an erroneous interpretation of the sub-section. Applying this decision to the present case it will be seen that since the company itself was dissolved and became extinct with effect from18-9-2001 it cannot be considered to be a case of discontinuance of the business. Section 176 is therefore not attracted. Waiver amounts to constructive receipt of the share application monies - We are of the view that the monies cannot be treated as income. The monies were received by the assessee towards issue of shares. If the V. Sat project had taken off and had proceeded as per the assessee s plans there is no doubt that the company would have become operational and therefore the share application monies would have been converted into share capital. The receipt of share capital by issue shares can never be considered as the income of a company. What unfortunately has happened is that the project was aborted and had to be abandoned. In the normal course the share application monies would have had to be returned to the Argentinian Co. at least to the extent of the assets held by the assessee company under the relevant provisions of the Companies Act 1956. That would have only amounted to the return of the capital. By waiving right to get back the capital contributed by them or any part of it the Argentinian Co. was only giving up its right over the capital contribution. This by any stretch of imagination cannot result in the assessee retaining the share application monies as its income. Conclusion The appeal was allowed and the assessment order passed on the dissolved assessee-company was declared a nullity. The share application monies waived by the Argentinian company were not taxable as casual or non-recurring receipts.

Summary

Issues Involved:
1. Whether a company dissolved u/s 560 of the Companies Act, 1956 can be assessed to tax after dissolution.
2. Whether the amount of Rs. 1,65,29,255 is assessable u/s 56(1) of the Income-tax Act as a casual and non-recurring receipt.

Summary:

Issue 1: Assessment of a Dissolved Company
The Tribunal examined whether a company whose name has been struck off from the register u/s 560 of the Companies Act, 1956 and thus dissolved, can be assessed to tax post-dissolution. The Tribunal concluded that a company ceases to exist upon dissolution and, therefore, cannot be assessed for income-tax as there is no provision in the Income-tax Act to assess a dissolved company. The Tribunal emphasized that the existence of the "person" sought to be taxed at the point of making the assessment is a condition for the validity of the assessment. The Tribunal cited several judgments, including Ellis C. Reid v. CIT and Patiala State Bank, In re, to support the principle that income-tax is a charge on the person in relation to their income and not on the income itself. Thus, the assessment order passed on the dissolved company was declared a nullity.

Issue 2: Nature of the Receipt
The Tribunal addressed whether the amount of Rs. 1,65,29,255, waived by the Argentinian company, can be assessed as casual and non-recurring income u/s 56(1) of the Income-tax Act. The Tribunal noted that the share application monies were initially capital receipts and their nature did not change upon waiver. The Tribunal referred to the Supreme Court judgment in Travancore Rubber & Tea Co. Ltd. v. CIT, which held that the nature of a receipt for income-tax purposes is fixed when the receipt is first made and subsequent events do not change its nature. The Tribunal concluded that the share application monies, even if waived, remain capital receipts and cannot be treated as income. Therefore, the amount of Rs. 1,65,29,255 was not assessable as casual and non-recurring income.

Conclusion:
The appeal was allowed, with the Tribunal holding that the assessment order on the dissolved company was a nullity and that the waived share application monies could not be assessed as income.