Patna High Court
Commissioner Of Income-Tax vs Gaya Sugar Mills Ltd. on 22 August, 1985
Equivalent citations: [1986]160ITR933(PATNA)
JUDGMENT Uday Sinha, J.
1. This is a reference under Section 256(1) of the Income-tax Act, 1961 (hereinafter called " the Act "). The following questions have been referred to us for the opinion of this court :
" 1. Whether, on the facts and in the circumstances of the case, the Tribunal were justified in law in excluding the sums of Rs. 75,000 and Rs. 50,000 from the total income of the assessee for the assessment years 1965-66 and 1966-67, respectively ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal were justified in holding the assessee to be a company in which the public were substantially interested within the meaning of Section 108 ?"
2. In this reference, we are concerned with the assessment years 1965-66 and 1966-67. A consolidated statement of the case has been forwarded to us by the Income-tax Appellate Tribunal, Patna Bench, Patna (hereinafter called "the Tribunal"). The assessee is an incorporated company. The assessee runs a sugar mill. In the years in question, the company was under liquidation. The order for compulsory liquidation had been passed at the instance of the shareholders. A financial liquidator was appointed by this court on February 1, 1952. The company remained idle till December 5, 1952. On December 6, 1952, the financial liquidator, with the permission of the High Court, gave the sugar mill on lease to Guraru Co-operative Development and Cane Marketing Union Ltd. (hereinafter referred to as " the CDCM "). The lease was operative till December, 1954. Thereafter, the factory and its machineries were leased out to S. K. G. Sugar Ltd. In 1958, S. K. G. Sugar Ltd. was granted another term lease for 7 years. In terms of the lease of the machineries to Guraru CDCM, the Co-operative Society was to pay Rs. 20,000 or 40 per cent, of the net profit, whichever was higher, to the lessor. In terms of the second lease in favour of S.K.G. Sugar Ltd., the lessee was to pay Rs. 1,50,000 per year to the lessor which lease was, however, terminated prematurely by an order of the High Court and the mills and its property were sold to the Government of Bihar on Octobers, 1961. The transfer of the sugar factory and its machinery, in fact, took place at the end of 1962.
3. During the accounting year relevant to the assessment year 1965-66, the company received a sum of .Rs. 75,000 as arrears of lease rents for the period ending January 15, 1952, from S. K. G. Sugar Ltd. Similarity, during the accounting year relevant to the assessment year 1966-67, the assessee received Rs. 50,000 from the Guraru CDCM. These sums along with interest thereof were assessed by the Income-tax Officer while passing the orders of assessment for the two assessment years. It is worthwhile mentioning here that these sums along with the interest were kept in the suspense account in the balance-sheet of the company. This was so done as there was a dispute regarding the payment of lease money to the assessee. The High Court in the liquidation proceeding had held that the two sums were payable to the company and that they were to be deposited in a court to be given thereafter to the financial liquidator. S.K.G. Sugar Ltd. moved the High Court with a prayer that the order of the High Court should remain suspended until the matter was decided by the Supreme Court. The Supreme Court ultimately upheld the order of the High Court. It held that the lease money and the interest thereon had been rightly ordered to be paid to the assessee company.
4. The stand of the assessee before the Income-tax Officer was that as the High Court had suspended its disbursement and had ordered that the amount was to be treated as deposit till the decision of the Supreme Court, the aforesaid sums were not taxable in that year. The stand of the assessee did not find favour with the Income-tax Officer nor was the stand of the assessee accepted by the Appellate Assistant Commissioner.
5. On behalf of the assessee, it was also contended before the Appellate Assistant Commissioner that the amount in question should not be taxed as they had been received by the assessee after the factory had ceased to do business. Another contention, however, on behalf of the assessee was that assuming that it was taxable, the amounts received must be treated as income from " business " and not from " other sources ". The Appellate Assistant Commissioner, in this regard, held that the aforesaid sums received were incidental to winding up of the affairs of the company and, therefore, it had to be treated as income from " other sources " and not from " business ". The Appellate Assistant Commissioner had also held that since the company had been placed under liquidation, a moratorium had been placed on transfers of shares and, therefore, it was not a company in which the public were substantially interested.
6. The appeal before the Appellate Assistant Commissioner thus failed. In appeal before the Tribunal, the assessee contended that since the company was following the cash system of accountancy and since the factory had been sold to the Govt. of Bihar in 1962, the sums received thereafter during the assessment years in question were not taxable. The decision of N.A. Mody v. S.A.L. Nary anan Row [1966] 61 ITR 428 (SC) was pressed into service. The Department, on the other hand, took up the stand that although the company had ceased to do business and although the factory and its assets had been sold in 1962, the amounts received by the company were revenue in nature and were, as such, assessable under the provisions of the Income-tax Act and since the business had ceased, the sums received by the company during the relevant years must be held to be income under the head " Other sources ".
7. The Tribunal found as follows :
(i) The company was throughout following the cash system of accountancy and not the mercantile system as held by the Appellate Assistant Commissioner.
(ii) The income of the company through its official liquidator from the lease of its assets had been held in the past to be business income and, therefore, it had to be treated as business income.
(iii) The assessee did not continue its business in the accounting year ending in September, 1962, and thereafter.
(iv) Since the company had ceased to do business after September, 1962, the arrears of lease rent received during the assessment years were not liable to be assessed on the authority of the case of N.A. Mody [1966] 61 ITR 428 (SC). The sums of Rs. 75,000 and Rs. 50,000 received by the company during the assessment years 1965-66 and 1966-67, respectively, were not chargeable as income of the assessee. The interest, however, received upon those amounts was held to be taxable as income from " other sources ".
8. The Tribunal also held that the stand of the Revenue that it was not a company in which the public were substantially interested was untenable.
9. The Revenue being aggrieved by the order of the Tribunal has got the questions mentioned earlier referred to this court for our opinion. Before us, Mr. B.P. Rajgarhia, learned senior standing counsel, contended as follows :
(i) The company was not one in which the public were substantially interested as moratorium had been placed on transfer of shares by the High Court and, therefore, it was not entitled to the benefit of the provisions of Section 108 of the Act.
(ii) The company having leased out its factory, lock, stock and barrel, the income received by it should not be treated as income from business on the authority of the decision of the Supreme Court in New Savan Sugar and Gur Refining Co. Ltd.'s case [1969] 74 ITR 7.
(iii) The income having been received by the company, it was liable to be taxed as income from " other sources ", although the factory had ceased to work.
10. It would be convenient to dispose of the first submission urged on behalf of the Revenue here and now. An incorporated company is one in which the public at large holds shares. The public thus acquires substantial interest in the company. The fact that there is a restraint on the transfer and registration of shares does not derogate from its essential character of an institution in which the public has substantial interest. The restraint placed by the High Court during the liquidation proceeding on the transfer of shares did not reduce the character of the company as one in which the public were substantially interested. Transferability does not affect the interest of the public. Every shareholder on the books of the company had interest even after the passing of the order of liquidation and, therefore, it would be idle to contend that the company was not one in which the public had substantial interest. The second question referred to us is concluded by the decision of the Supreme Court in Shree Krishna Agency Ltd. v. CIT[1971] 82 ITR 372. That was a case in which a submission similar to the one urged before us was advanced on the footing that articles 3 and 37 of the articles of association empowered the directors to refuse registration. The Supreme Court held that such a power did not derogate from the essential nature of the company in which the public wore substantially interested. The ratio of that decision applies with full force to the instant case as well. The order for liquidation and the restraint on transfer of shares did not extinguish the interest of the public at large. The submission thus urged on behalf of the Revenue must, therefore, be rejected and the second question referred to us by the Tribunal must be answered in the affirmative, in favour of the assessee and against the Revenue.
11. I shall now take up the first question referred to UK for our opinion. The question is whether the amount received by the assessee during the two assessment years was liable to tax. It is not in controversy that the company had ceased its business activity in 1962 itself. The question is, if it had ceased to do business in 1962, whether sums received by it in 1965-66 on account of business done prior to 1962 is liable to tax. Learned counsel for the assessee in this connection placed reliance upon Nalinikant Ambalal Mody v. S.A.L. Narayan Row [1966] 61 ITR 428. On the basis of that decision of the Supreme Court, it has been contended that the two sums received during the two assessment years were not liable to tax. Learned senior standing counsel has contended that the case of N. A, Mody [1966] 61 ITR 428 (SC), has no more relevance now after the enactment of the 1961 Act and the changes introduced in the law. In the case of N. A. Mody [1966] 61 ITR 428 (SC), the facts were that the assessee, a judge of the Bombay High Court, had received certain sums of money for work done as an advocate before elevation to the Bench. That was sought to be assessed as income under Section 10 of the 1922 Act. Section 10 provided that tax shall be payable by an assessee under the head "Profits and gains of business, profession or vocation" in respect of the profits or gains of any business, profession or vocation carried on by him. That was also a case of maintenance of accounts on cash basis. The Department contended in that case that since the assessee had given up the profession of a lawyer to become a judge, he had ceased to follow his profession, the income received by him while he was a judge could not be taxable as income from profession and as it could not be assessed as Income from salary--not being so--it could be taxable as income from other sources in terms of Section 6(v). This stand of the Revenue did not find favour with the Supreme Court. Their Lordships observed that under the Act what was chargeable was heads of income and in order to be exigible to tax, an income had to fall within one or the other head. The various heads, according to the majority judgment of the Supreme Court, were mutually exclusive. The submission urged on behalf of the Revenue in that case was that the receipts had to be included in the total income stated in Section 4 and as income received by a judge for work done as lawyer before elevation did not fall under the exceptions mentioned in Section 4, it must be liable to tax and naturally under the residual head. The Supreme Court rejected this stand of the Revenue as ill-founded. The Supreme Court observed as follows (headnote) :
" Income which comes under the fourth head, that is, professional income, can be brought to tax only if it can be so done under the rules of computation laid down in Section 10. If it cannot be so brought to tax, (it cannot be brought under the residual head 'Income from other sources and) it will escape taxation even if it be included in the total income under Section 4. ......The receipts in the present case, as we have shown, can only be computed for chargeability to tax, if at all, under Section 10 as income under the fourth head. If they cannot be brought to tax by computation under that section, they would not be included in 'total income' as that word is understood in the Act for the purpose of chargeability. That all income included in total income is not chargeable to tax may be illustrated by referring to income from the source mentioned in the third head in Section 6, namely, ' income from property '. "
12. Their Lordships also considered whether the income could be brought into the net by Section 12 of the 1922 Act.
13. Their Lordships held that it could not be so done. If the law had remained as it was when the case of N.A. Mody [1966] 61 ITR 428 (SC) was decided, the question before us would not have been res Integra, The law, however, has now changed. Under the 1922 Act, Section 6 reads as follows :
"6. Heads of income chargeable to income-tax.--Save as otherwise provided by this Act, the following heads of income, profits and gains, shall be chargeable to income-tax in the manner hereinafter appearing, namely:--
(i) Salaries.
(ii) Interest on securities.
(iii) Income from property.
(iv) Profits and gains of business, profession or vocation.
(v) Income from other sources.
(vi) Capital gains. "
14. Under the 1961 Act, Section 14 reads as follows;
" 14. Heads of income.--Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income:--
A.--Salaries.
B.--Interest on securities. C.--Income from house property. D.--Profits and gains of business or profession. E.--Capital gains.
F.--Income from other sources. "
15. A marked change has been brought about by the phraseology in Section 14. Whereas under the old Act, heads of income had been made chargeable under the new Act quoted above, all incomes were classified under the six heads of income. Section 56 of the 1961 Act in this connection throws a flood of light. Section 56(1) reads as follows :
"56. Income from other sources.--(1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head ' Income from other sources', if it is not chargeable to income-tax under any of the heads specified in Section 14, items A to. E"
16. From the above, it would be seen that whatever is not charge able to income-tax under the heads A to E was made chargeable to income-tax under the head " Income from other sources ". Section 14 read with Section 56 of the 1961 Act has thus brought about a significant change from the 1922 Act. In my view, therefore, the case of N.A. Mody [1966] 61 ITR 428 (SC) cannot govern the present case. The conjoint effect of sections 14 and 56 of the 1961 Act is that although business had been discontinued, it would be deemed to be income from " other sources ".
17. The stand of the Revenue before the Tribunal was that as the assessee had ceased to do business, the sums received by it in the relevant years must be held to be income from other sources and not as income from business. Learned senior standing counsel, however, contended before us that the present case would squarely fall within the ambit of New Savan Sugar and Gur Refining Company Ltd. [1969] 74 ITR 7. I regret, the submission has no substance. The submission is untenable, firstly, for the reason that this stand was not taken before the Tribunal. The contention urged on behalf of the Revenue, therefore, does not arise from the order of the Tribunal. It cannot, therefore, be entertained. If the Revenue had raised such a contention, it would have been open to the assessee to produce the lease deed to show that the assessee had leased out the factory as a commercial asset and not the whole business. In the absence of the lease deed from the record, it is not possible to hold that the assessee had leased out the entire business. This submission, however, loses all significance in view of my conclusion above that in terms of Sections 14 and 56, the income received by the assessee during the relevant years would be income from other sources.
18. For the reasons stated above, I am of the view that the Tribunal was not justified in excluding the sums of Rs. 75,000 and Rs. 50,000 from the total income of the assessee for the assessment years 1965-66 and 1966-67, respectively. This question, therefore, is answered in favour of the Revenue and against the assessee. Question No. 2, however, is answered in favour of the assessee and against the Revenue. Since the company has gone under liquidation, there shall be no order as to costs.
Nazir Ahmad, J.
19. I agree.