Case: Commissioner Of Income-Tax, Mysore Vs. Bangalore Transport Co. Ltd

gross sale proceeds were received by them in India and that being the position the provisions of Section 4 (1) (a) were immediately attracted and the income, profits and gains so received became chargeable to tax under Section 3 of the Act."The same principle applies to receipts in the course of business of a transport operator.7. The Company carried on the business of a transport operator between April 1, 1956 and September 30, 1956 and the audited accounts of the Company disclosed that embedded in the gross receipts was a net profit of Rs. 4,01,954 during that period. That profit reduced by outgoings properly allowable in the computation of the total taxable income became subject to a charge to tax. The total taxable profits may under the scheme of the Act be determined at the end of the previous year but it does not follow therefrom that to profits earned during the year, the charge of tax does not attach. Assuming that the business of the Company was closed on October 1, 1956 when its undertaking and assets were taken over by the Government of Mysore, it was, for reasons stated earlier, still liable to be taxed in respect of its profits which accrued or were received by the Company prior to the date of the closure of the business.8. Counsel for the Company relied upon a recent decision of this Court in Commissioner of Income-tax, Gujarat v. Ashokbhai Chimanbhai, 1965-56 ITR 42 = (AIR 1965 SC 1343 ) and contended that profits of a business which are liable to tax under the Income-tax Act, can only accrue at the end of the previous year and not before. But that case lays down no such proposition. Under an agreement of partnership, the manager of a Hindu undivided family who was a partner was to receive a share in the profits of the firm. The accounts of the firm were to be adjusted at the end of every calendar year. Before the expiry of the previous year relevant to the assessment year 1955-56, there was a partition in the family and the entire share in the profits of the firm as, under the partition agreement, allotted to the manager. The Income-tax Officer in proceedings for assessment to tax sought to apportion the profits received by the manager between the undivided family and the manager in his individual capacity. This Court held that the right to receive the share of profits of the firm for the previous year 1955 arose on the settlement of accounts of the firm, and not before, and on that date the manager alone was the owner of the share of profits and the family had no right therein and it was not liable to be taxed in respect of any part of the income. It is clear on a bare perusal of the statement of facts of that case that no income or profits had accrued to the Hindu undivided family at any time in the year of account prior to the date of dissolution. It was observed in Ashokbhai Chimanbhais case, 1965-56 ITR 42 at p. 46 = (AIR 1965 SC 1343 at p. 1345):"In the gross receipts of a business day after day or from transaction to transaction lies embedded or dormant profit or loss; on such dormant profit or loss undoubtedly taxable profits if any of the business will be computed. But dormant profits cannot be equated with profits charged to tax under Sections 3 and 4 of the Income-tax Act. The concept of accrual of profits of a business involves the determination by the method of accounting at the end of the accounting year or any shorter period determined by law. If profits accrue to the assessee directly from the business the question whether they accrue de die in diem or at the close of the year of account has at best an academic significance, but when upon ascertainment of profits the right of a person to a share therein is determined, the question assumes practical importance, for it is only on the right to receive profits or income, profits accrue to that person. If there is no right, no profits will be deemed to have accrued."The Hindu undivided family became entitled to a share in the profits of the firm only at the end of every calendar year, and not before. If before that date the right of the family to a share in the profits was divested, no income accrued or arose to the family. In the present case the profits directly arose to the Company de die in diem, and could be ascertained by the method of accounting adopted by the Company at the end of the year or when the business was closed.9. The question whether the amount of profits assessed were actually shared by the Company within the meaning of Sec.26 (2) of the Indian Income-tax Act does not need consideration. By sub-section (2) of sec. 26 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, each be assessed in respect of his actual share, if any, of the income, profits and gains of the previous year. The question whether the profits of the Company held taxable by the Income-tax Officer represented the actual share of the Company in the profits and gains of the previous year was never raised before the Income-tax Appellate Tribunal and has not been decided. Counsel for the Company merely contended that the amount sought to be charged was not liable to be taxed, because it was not profit of the Company. Counsel has also not contended before us that for the profits received by the Company the State of Mysore is, by virtue of Section 26 (2) of the Income-tax Act, liable to be taxed.10. The answer recorded by the High Court will therefore be discharged and there will be an answer in the affirmative.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]6. There is no warrant for this argument in the scheme of the Income-tax Act. Under Section 10 (1) of the Income-tax Act, 1922, tax is payable by an assessee under the head "Profits and gains of business, profession or vocation" in respect of the profit or gains of any business, profession or vocation carried on by him. There is nothing in the Act which supports the argument that for profits of the business to be taxable, the business must be actively carried on for the whole of the previous year, or till the end of the previous year. Under the scheme of the Income-tax Act whenever an assessee receives in the course of his business money or moneys worth, income embedded therein accrues or arises to him, and becomes subject to an ambulatory charge. If at the end of the previous year, on making up accounts there is no overall income the charge does not crystallise because there is no income on which the charge of tax may settle.The Company carried on the business of a transport operator between April 1, 1956 and September 30, 1956 and the audited accounts of the Company disclosed that embedded in the gross receipts was a net profit of Rs. 4,01,954 during that period. That profit reduced by outgoings properly allowable in the computation of the total taxable income became subject to a charge to tax. The total taxable profits may under the scheme of the Act be determined at the end of the previous year but it does not follow therefrom that to profits earned during the year, the charge of tax does not attach. Assuming that the business of the Company was closed on October 1, 1956 when its undertaking and assets were taken over by the Government of Mysore, it was, for reasons stated earlier, still liable to be taxed in respect of its profits which accrued or were received by the Company prior to the date of the closure of thethat case lays down no such proposition. Under an agreement of partnership, the manager of a Hindu undivided family who was a partner was to receive a share in the profits of the firm. The accounts of the firm were to be adjusted at the end of every calendaris clear on a bare perusal of the statement of facts of that case that no income or profits had accrued to the Hindu undivided family at any time in the year of account prior to the date ofHindu undivided family became entitled to a share in the profits of the firm only at the end of every calendar year, and not before. If before that date the right of the family to a share in the profits was divested, no income accrued or arose to the family. In the present case the profits directly arose to the Company de die in diem, and could be ascertained by the method of accounting adopted by the Company at the end of the year or when the business washas also not contended before us that for the profits received by the Company the State of Mysore is, by virtue of Section 26 (2) of the Income-tax Act, liable to be taxed.10. The answer recorded by the High Court will therefore be discharged and there will be an answer in theour judgment the High Court erred in assuming that the character of the compensation received by the Company was determinative of the question submitted by the Tribunal. It was the claim of the Revenue that in the previous year the Company had earned taxable profit amounting to Rs. 3,16,439 and that profit was subject to tax in the hands of the Company. The department was not seeking to taxle or any part of the compensation received by the Company and the discussion as to what the compensation received by the Company was intended to replace was not relevant in determiningts which accrued or arose to the Company during the period April 1, 1956 to September 30, 1956 were taxable.