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TMI Blog1996 (2) TMI 364X X X X Extracts X X X X X X X X Extracts X X X X ..... he who carried on the business and received the income when it accrued who is liable to bear the burden of tax thereon. It may be that the transaction of appropriation by a company to itself of income earned by its promoters before its incorporation is also subject to tax; that is not in issue before us and we do not express any view in that behalf. For the reasons aforestated, we answer the question in the affirmative and in favour of the assessee. - TAX REFERENCE CASE NO. 11 OF 1982 - - - Dated:- 5-2-1996 - J.S. VERMA, S.P. BHARUCHA AND SUJATA V. MANOHAR, JJ. JUDGMENT Bharucha, J. - This is a reference under section 257 of the Income-tax Act, 1961 ('the Act'), made by the Tribunal directly to this Court in view of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit accrue ? Did it accrue before incorporation ? If so, who was the legal entity which carried on the business and earned the income at the time of accrual ? The Tribunal held that, in law, the promoters and the assessee-company were different legal persons and that the income which had accrued on 29-10-1972, was income that was earned by the promoters. Accordingly, the appeal of the assessee-com- pany was allowed. 4. The reference was made because of the decisions we now cite. In CIT v. Bijli Cotton Mills Ltd. [1953] 23 ITR 278 (All), the respondent-company was incorporated on 11-12-1943. Prior to that date the firm that promoted it had entered into an agreement to purchase a mill for it and, on 10-12-1942, had obtained its p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trustee and he had the right to dispose of it and it was only the balance left over that was payable to the beneficiary, then the income was taxable in the hands of the trustee. The latter decision had been upheld by the Privy Council. These decisions showed that under the Act it was not only legal ownership that had to be looked into, but the Court could also go into the question of beneficial ownership and decide who should be held liable for tax after taking into account the question as to who, as a matter of fact, was in receipt of the income which was to be taxed. The assessment proceedings in respect of the respondent-company had been started at a time when it had already decided to accept what had been done on its behalf by the promo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other sum of money was payable thereunder. Tax had to be paid by an assessee under the head 'Profits and loss of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him. Therefore, before a person could be assessed, it had to be shown that it was he who had carried on the business, profession or vocation. The Calcutta High Court could not see how a person could be said to have carried on business during a period when he was not born or how he could be assessable to tax in respect thereof. As in the case of a natural born person so in the case of a legal entity like a company, the liability to pay tax could only arise after the date of birth or incorporation. The liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s reached by a somewhat different process of reason-ing. A company can enter into an agreement only after its incorporation. It is only after incorporation that a company may decide to accept that its promoters have carried on business on its behalf and appropriate the income thereof to itself. The question as to who is liable to pay tax on such income cannot depend upon whether or not the company after incorporation so decides. It is he who carried on the business and received the income when it accrued who is liable to bear the burden of tax thereon. It may be that the transaction of appropriation by a company to itself of income earned by its promoters before its incorporation is also subject to tax; that is not in issue before us and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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