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TMI Blog1960 (3) TMI 48X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 50 each, i.e., ₹ 12,100. Managing director. 2. Mahadeolal Dalmia 2,489 shares of ₹ 50 each, i.e., ₹ 1,24,450. Director. The Free Press Company was carrying on business as printers and publishers of various newspapers, namely, Indian Express, Dinamani and Andhra Prabha at Madras, Eastern Express and Bharat at Calcutta and Sunday Standard and Morning Standard at Bombay. On or about April 22, 1946, another private limited company called the Express Newspapers Ltd., hereinafter referred to as the Express Company, was formed with the following shareholders: 1. Ramnath Goenka 1,179 shares of ₹ 1,000 each, i.e., ₹ 11,79,000. Managing director. 2. Mahadeolal Dalmia 758 shares of ₹ 1,000, each, i.e., ₹ 7,58,000. Director. 3. Bhagwands Goenka 1 share of ₹ 1,000. Director. 4. Basantilal Bhagwandas 62 shares of ₹ 1,000 each, i.e., ₹ 62,000. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kar Rao, the liquidator wrote the following letter to the Express Company: I am the liquidator of the Free Press of India (Madras) Limited (in voluntary liquidation). I find that you have been negotiating for purchase of the assets at the value noted in the director's letter of August 31, 1946, and signified your acceptance in yours of September 1, 1946. I confirm the said transaction. I also find that you are to collect the book-debts and advances and pay the liabilities and the cash and bank balance have been taken over by you. As a result of all these transactions your company is due to the vendor company shareholders, ₹ 19,36,000 being the amount due to the two directors as per details given overleaf. The two directors who were the only shareholders of the vendor company agree to this sum being credited in your accounts and to this effect, I enclose herein their letter of consent. Please credit the above amount as follows in your books: Rs. Mr. Ramnath Goenka 11,78,000 Mr. Mahadeolal Dalmia 7,5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time to time. The Income-tax Officer acted upon the return and ultimately made an assessment on the Free Press Company on February 28, 1950, on a total income of ₹ 6,44,702 which included a profit of ₹ 2,13,990 under the proviso to section 10(2)(vii) of the Act and capital gains amounting to ₹ 3,94,576. The assessment order, notice of demand etc., were then served on the auditor, who in turn forwarded them to Ramnath Goenka. Ramnath Goenka, however, returned the papers to the Income-tax Officer on March 27, 1950, on the ground that they had been wrongly served on him and repudiated the liability to pay the tax. 12. The Income-tax Officer who made the assessment was then transferred and a new Income-tax Officer took his place. He with the approval of the Commissioner of Income-tax, as required by section 34(1) of the Act, issued a notice to the Express Company on April 4, 1951, under section 34(1) read with section 26(2) of the Act. The notice was addressed to the Express Newspapers Limited, successors to the Free Press of India (Madras) Limited. The Express Company denied its liability to be assessed. 13. On April 4, 1951, the Income-tax Officer passed an or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 3,94,576 accrued to the Free Press of India (Madras) Limited, as a result of the transfer of its asset to the Express Newspapers Limited, and are liable to tax under section 12B of the Income-tax Act? 17. The case was then referred by the President to himself under section 5A(7) of the Act. He held that the proceedings under section 34 read with section 26(2) were rightly initiated against the Express Company. He also held that the capital gains of ₹ 3,94,576 were liable to tax. In doing so, he felt that he was bound by the decision of the Madras High Court in the case of Sri Kannan Rice Mills Limited v. Commissioner of Income-tax the interpretation of the third proviso to section 12B(1) that the capital gain, namely, ₹ 3,94,576, was not liable to tax. 18. All the contentions of the Express Company, except the contention relating to the business profit of ₹ 2,14,090 were not accepted by the Appellate Tribunal for the reasons recorded by it in its order, a copy of which is annexure A and forms part of the case. The Tribunal held that the surplus of the cost price over the written-down value of the plant and machinery transferred by the Free Press ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 951, is annexure B . The assessment order, dated July 17,1951, is annexure C and the Appellate Assistant Commissioner's order is annexure B . C. S. Rama Rao Sahib and S. Ranganathan, for the Commissioner R. Venkataraman, for the assessee JUDGMENT The judgment of the court was delivered by RAMACHANDRA IYER, J.- Free Press of India (Madras) Ltd., a private limited company (hereinafter referred to as the Free Press Company) was carrying on business as printers and publishers of certain newspapers, namely, the Indian Express, Dinamani and Andhra Prabha at Madras, and Eastern Express and Bharat at Calcutta. During the course of the year 1946, the company also acquired rights in respect of Sunday Standard and Morning Standard at Bombay. There were only two shareholders in the company, and their holdings were as follows: 1. Ramnath Goenka (managing director) 242 share of ₹ 50 each. ₹ 12,100 2. Mahadeolal Dalmia (director) 2,489 shares of ₹ 50 each. ₹ 1,24,450 On April 22, 1946, another private limited company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wspapers from September, 1, 1946. The staff and management continued as before. Mr. Ramnath Goenka was the managing director of both the concerns. He had a dominating If not, the sole voice in the management of the two concerns. Nearly two months after the lease of the machinery etc., on October 31, 1946, there was a general body meeting of the Free Press Company. It was resolved that the company should be wound up voluntarily. Mr. N.V.B. Sankar Rao, an advocate practising at Madras, was appointed the liquidator and he was invested with all the powers as such liquidator, in addition to those granted under clauses (b), (e) and (b) of section 179 of the Indian Companies Act. One of the resolutions passed on that date stated: Resolved further that the liquidator shall not carry on business for any purpose and that the business of the Free Press of India (Madras) Ltd., be and the same is hereby discontinued with effect from this day. Mr. Sankar Rao, who appears to have taken charge immediately wrote a letter to the Express Company on the following day (November 1, 1946) thus: I am the liquidator of the Free Press of India (Madras) Ltd. (in voluntary liquidation). I find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether the Free Press Company which went into liquidation had a manager, and whether that manager had any authority to received or accept notices under Section 22(2) or to appoint an auditor. The liquidator, who was in charge of the affairs of the company, did not submit a return, though he was bound to do so. Nor was any notice under section 22(2) served upon him. But, on January 3, 1948, Mr. Ramnath Goenka Submitted a return on behalf of the Free Press Company, disclosing a profit of ₹ 2,50,818. The return specifically referred to the fact that the company was in voluntary liquidation, but there was no indication therein that Mr. Goenka had the authority to submit the return. The return was prepared by auditors, Messrs. Subrammania Iyer and Co., who had been engaged in connection with the assessment proceedings. The assessment proceedings appear to have undergone several adjournments at the request of the auditors, and the enquiry was completed in April, 1948. The liquidation proceedings had, however, been duly communicated to the Income-tax Officer by the manager of the Free Press Company on September, 15, 1947. There was another communication by the Express Company to have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g made up of the three heads mentioned above. In doing so, the officer purported to act under section 34 read with section 26(2) of the Act, as the income of the former company had escaped assessment. The assessee, the Express Company, appealed to the Appellate Assistant Commissioner against the two orders, viz., that relating to the initiation of the proceedings under section 26(2) as well as that in regard to assessment under section 34. The appeals failed. There were further appeals to the Appellate Tribunal. Various contentions were raised before the Tribunal. They were: (1) The Express Company did not succeed to the business of the Free Press Company. (2) The notice issued under section 34 of the Act to the Express Company was invalid, inasmuch as the assessment made by the Income-tax Officer on the Free Press Company on February 28, 1960, was subsisting. (3) The second proviso to section 10(2)(viii) of the Act did not apply to the case, and, therefore, the potion of the profit, viz., ₹ 2,44,000, should not be treated as the business profit of the Free Press Company, (4) The capital gains made by the Free Press Company, namely ₹ 3,94,576, on the transfer of its ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (5) Whether the capital gain of ₹ 3,94,576 is not liable to tax in view of the third proviso to section 12B(1) of the Act? (6) Whether the capital gain made by the Free Press Company is liable to be assessed in the hands of the Express Company under section 26(2) of the Act? The questions referred substantially, fall under three groups. Questions 1 to 3 cover practically the same ground, namely, the validity of the initiation and final assessment under section 34 read with section 26(2). Question 4, raised at the instance of the Department, relates to the assessability of the sum of ₹ 2,14,090 under the second proviso to section 10(2)(vii). Questions 5 and 6 relate to the taxability of the capital gain made by the Free Press Company as against the successor, the Express Company. That the Express Company, the assessee, succeeded to the business of the Free Press of India (Madras) Ltd., is no longer in dispute. There was, however, some controversy on the question as to what exactly was the date of succession, the contention for the assessee being that the succession was only on November 1, 1946, a day after the sale of the machinery and assets; this matter does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22(2) served on him or the company, submit a return would depend on his authority to do so either under the Companies Act or under any power expressly reserved to him by the general body or delegated to him by the liquidator. Section 208A sub-clause (2) of the Indian Companies Act (VII of 1913) stated: On the appointment of a liquidator all the powers of the directors shall cease, except so far as the company in general meeting, or the liquidator, sanctions the continuance thereof. The resolution of the Free Press Company dated October 31, 1946, which effected a voluntary winding up of the company, does not indicate that any power was reserved with a director or managing director to act on behalf of the company. Nor is it the case of the assessee that there was a delegation of any power by the liquidator in favour of Mr. Ramnath Goenka. But Mr. Karkhanis has stated in his order thus: Before the return filed by Sri R.N. Goenka could be said to be an invalid one it must be found as a fact that the liquidator had not sanctioned the continuance of the powers of Sri R.N. Goenka for the purpose of filing the return. This is purely a question of fact. On going through the reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would refer to the course of any assessment and that the words at the time of making an assessment in section 26(2) would mean in the course of the process of assessment . A public notice under section 22(1) was, therefore, claimed as the starting point of an assessment, so as to render all assessments as properly initiated and once there was a proper assumption of jurisdiction, it was contended, subsequent illegality of the assessment would entail only a fresh assessment under section 23 and not warrant proceedings under section 34 as if there had been an escape of assessment. The two assumptions on which the argument was based are (1) that assessment proceedings with respect to an individual commence with the publication of a public notice under section 22(1), and (2) that once there has been a proper assumption of the jurisdiction to assess, any illegality in the final order of assessment could only invalidate that portion of the assessment proceedings so as to entitle the officer to start the assessment over again and not to initiate proceedings under section 34, whatever be the nature of the illegality. We shall consider the validity of these assumptions seriatim. It ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been in this case a proper initiation of the assessment proceedings either by reason of the service of notice under section 22(2) or the submission of a voluntary return. We have held earlier in this judgment that there has been no proper return which could be said to be a voluntary return on behalf of the Free Press Company. The learned counsel for the assessee contended that, there having been an issue of a notice under section 22(2), that notice would give sufficient jurisdiction to the Income-tax Officer to make the assessment that he did on February 28, 1950. That notice, as we have already stated, was not served on the liquidator. Nor was it proved that the manager of the Express Company, who accepted the notice, had the authority of the liquidator. There can be no proper assumption of jurisdiction, unless there is a service of notice on the assessee; a mere issue of notice would not be sufficient. It may be that the procedure relating to the assessment of an individual can be said to commence from the time of issue of the notice. But service of notice being an essential prerequisite for an authority to assess an individual to tax, the absence of such service would nullif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies, and it could not be valid. The contention on behalf of the assessee was then directed to the procedure to be adopted in case the assessment was found to be invalid. It was said that the Department should first get the Free Press Company restored to the register of companies, and start assessment proceedings afresh; and if, on account of the law of limitation or otherwise, that could not so be done, there was no remedy for the Department. As a basis for the argument, reliance was placed on Sir Rajendranath v. Commissioner of Income-tax [1934] 2 I.T.R. 71. In that case, Messrs. Burn Co. had submitted a return of their income for a certain year. The Income-tax authorities thought that M/s. Martin and Co. had purchased Burn Co., and made assessment on Martin and Co. in respect of the income of not merely of that company but of Burn and Co. as well. In the subsequent proceedings against the assessment of Martin and Co., it was held that the two companies should have been separately assessed, with the result that the income of Burn and Co. was eliminated from that of the assessable income of Martin and Co. Subsequently, proceedings were started under section 34 against Bur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ength of these decisions, it was contended that the effect of the finding that tile assessment was invalid would not necessarily mean that there had been an escape of assessment. It is, however, unnecessary, for the purpose of the present case, to consider the principle laid down in the cases mentioned above, in view of the fact that a fresh assessment is not possible on the original return, as tile company itself had ceased to exist. Further the proceedings initiated in this case is against the successor company, and its liability depends on the terms of section 26(2), to which we shall presently refer. It is undisputed that there has been a succession to the business of the Free Press Company, by the Express Company and if there is Succession Section 26(2) would come into operation. Section 26(2) states: Where a person carrying on any business, profession or vocation has been succeeded in such capacity by another person, such person and such other person shall, subject to the provisions of sub-section (4) of section 25, each be assessed in respect of his actual share, if any, of the income, profits and gains of the previous year: Provided that, when the person succeeded in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o could not be found notwithstanding the fact that its members exist, on the date of the notice under section 22(2), the Free press Company was in existence, though in liquidation. When, however, it was struck off the register, it had ceased to exist, and the only person on whom the assessment could be made, or should be made under section 26(2), was the Express Company. This was, however, not what was done on February 28, 1950. The Income-tax Officer proceeded to assess the predecessor company contrary to the mandatory provisions of section 26(2) proviso, whereunder the assessment is to be made only on the successor. The successor, thus, escaped assessment. The learned counsel for the assessee contended that the Income-tax Officer had no jurisdiction to set aside his own order of assessment made on February 28, 1950, and initiate proceedings under section 34. According to the learned counsel, the Department should have set aside the order of assessment by taking appropriate proceedings under section 33 and 33A, before starting proceedings under section 26(2), and that, in any event, the office could not himself proceed on the basis that his earlier assessment order was inval ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is allowed as a deduction; per contra where the sale results in an excess over the written-down value, that excess up to the limit of the cost price would be taxed as a profit. The allowance or assessment is subject to the condition laid down in section 10(2)(vii). That provisions, as it existed during the year of assessment, runs as follows: (1) The tax shall be payable by an assessee under the head 'profits and gains of business, profession or vocation' in respect of profits or gains of any business, profession or vocation carried on by him. (2) Such profits or gains shall be computed after making the following allowances, namely:...(vii) in respect of any machinery or plant which has been sold or discarded, the amount by which the written down value of the machinery or plant exceeds the amount for which the machinery or plant is actually sold or its scrap value: Provided that such amount is actually written off in the books of the assessee: Provided further that where the amount for which any such machinery or plant is sold exceeds the written down value, the excess shall be deemed to be profits of the previous year in which the sale took place. The res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only to collect the rents. This, is was contended, would not amount to the carrying on of the business. Reference was made to the decision in Narain Swadeshi Weaving Mills. v. Commissioner of Excess Profit Tax [1954] 26 I.T.R. 765, to show that letting out of plant and machinery by an assessee could not be held to fall within the definition of the term business under section 2(5). That may be so. But in the present case the sale of the machinery took place during the year of account, and it was used by the Free Press Company for at least a part of the year. This would be sufficient to attract the liability. The learned counsel for the assessee is on a firmer ground when he contended that the sale being made in process of windings up of the company section 10(2)(viii) will not apply. The second proviso to section 10(2)(vii) would be invoked only where the sale was one made in the course of business carried on by the predecessor. Where the sale is a closing down sale, that profit could not be brought to tax. In Liquidators of Pursa ltd. v. Commissioner of Income-tax [1954] 25 I.T.R. 265, the Supreme court held that where in a case the sale of machinery and plant was a step in the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enged before the Tribunal. Question No. 6 is, no doubt wide enough to cover this point as well. It is, however, unnecessary to pursue this matter, as admittedly succession is the result of the seal, being conterminous with it. The profit arose by reason of succession. It is contended, however, that the only profits the could come in for assessment under section 26(2) is the profit of the business for the previous year of the business transferred, and not any other kind of profit. On the other hand, the case for the Department is that the words income, profit and gains occurring in section 26(2) comprise not only those taxable under that head, but also any other income of the profession, all those intimately connected with or related to it, e.g., the capital gains. Under section 6 of the Act, the income of an assessee is classified under six heads according to the character of the source. Income from business, profession or vocation is a distinct head of income dealt with therein. When, therefore, section 27(2) refers to income dealt business profession over vocation, it should prima facie be held to relate to that head of income, i.e., that which is referred to in section 6(iv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as business, and the interest earned on the securities which constituted the stock-in-trade of that business would include the profits and income made in connection with that activity, i.e., the business under whatever head the same might have to be shown. This decision is relied on as supporting the view that the term profits of business employed in section 26(2) would comprehend all other profits connected with the business, though such profits might fall under different heads for charge. The learned counsel for the assessee, however, criticized the judgment of the Bombay High Court as running contrary to the principles laid down in Kothari v. Commissioner of Income-tax [1951] 20 I.T.R. 579, and in United Commercial Bank Ltd. v. Commissioner of Income-tax [1957] 32 I.T.R. 688. It is, however, not necessary, for the purpose of this case, to consider whether that case was right decided. Commissioner of Income-tax v. Chugandas and Co.***, was concerned with the interpretation of section 25(3) of the Indian Income-tax Act in the a case where the purchase or sale of securities was as much the assessee's business as earning interest on the securities which constituted part of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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