Case: The Commissioner Of Income Tax, Punjab Vs. The Lahore Electric Supply Co

1. The respondent is a company incorporated in 1912. The immediate object of the Company was to acquire from the Peoples Bank of India Ltd. the licence. it had obtained from the Government for the supply of electricity to Lahore city. The Company acquired that licence in 1913 and the necessary plants and machinery for the generation and supply of electricity. Between 1923 and 1939 it acquired licences for similar purposes in regard to various other places in different parts of India. All these licences were however either terminated or disposed of one by one and in 1942 the only licence which the Company possessed was that in respect of the city of Lahore. About the end of 1942 or beginning of 1943, the Government of the then Province of Punjab acquired the Companys undertaking in regard to the supply of electricity to the city of Lahore and on September 5, 1946, the Company delivered its aforesaid undertaking with all assets to the Government. It was agreed that the Company would pay to the Government half of the net profits of the Lahore electric supply undertaking arising between November 27, 1942 and September 5, 1946. On September 5, 1946, the Company received from the Government a part of the moneys payable to it in respect of the Lahore electric supply undertaking leaving a large amount due which was to be paid after the listing and valuation of its assets. Besides this sum the Company also possessed considerable assets not appertaining to the Lahore electric supply undertaking. All these funds were invested by the Company in Government and other securities and shares and the income from these investments appears to have been the sole income of the Company after September 5, 1946.2. In its assessment to income-tax for the year 1948-1949 and 1949-1950 the Company claimed deduction of various amounts under S. 10 (2) (xv) of the Income-tax Act, 1922 on the basis that it had been carrying on business in the accounting years concerned and the expenses had been incurred solely for the purpose of that business. This contention was rejected by the Income-tax Officer. On Appeal by the Company to the Appellate Assistant Commissioner, certain deductions were allowed but that authority did not accept the contention that the Company was carrying on business so as to come within S. 10 of the Act. The Company then took the matter up in further appeal to the Income-tax Appellate Tribunal. The Tribunal accepted he Companys contention and granted it large deduction under S. 10 (2) (xv) of the Income-tax Act. The appellant Commissioner of Income-tax requested the Tribunal to state a case to the High Court but that request was rejected. The appellant Commissioner thereafter on August 20, 1958 obtained an order from the High Court of Punjab directing the Tribunal to refer the following two questions to the High Court for its opinionWhether on the facts and in the circumstances of the case the conclusion of the Appellate Tribunal that the assessee company had not ceased to carry on business during the relevant accounting period is, in law, correct.2. If the answer to the first question be in the affirmative, whether all the expenses which the Tribunal has allowed are admissible under Section 10 (2) of the Income-taxAccordingly the Tribunal stated a case to the High Court in regard to these two questions. The High Court answered both the questions in the affirmative. Hence the present appeals by the Commissioner of Income-tax.

Reasoning:
In our opinion, none of the grounds mentioned in the preceding paragraph leads to the conclusion that the Company intended to carry on business. The facts found make it abundantly clear since 1942 the only business of the Company was to work the Lahore electric supply licence. It stopped that business on September 5, 1946 when the undertaking was taken over by the Government. Thereafter, during the accounting years concerned namely, 1947-48 and 1948-49 it had not started any other business. The mere fact that the Company had not gone into liquidation would not establish that it had the intention to do business. If it were not so, then in the case of all trading companies it had to be held that they were always doing business. There is neither authority nor principle to support such a proposition. There was further no question of the Companys going into liquidation in the accounting years, for during that time it had not received from the Government the entire amount due to it as compensation for the acquisition of its Lahore electric supply undertaking. At the relevant time the Company was not possessed of any commercial undertaking. What we have quoted earlier from the Directors report would show that what was in the contemplation of the Directors was the purchase of a new concern. The Directors however had not stated that they did intend to do so. What they said was that they were considering whether they would do so or not. That does not express an intention to resume business. It is unnecessary to go into the question whether an expression of an intention to resume business in vacuo would amount to carrying on business. It is sufficient for the purpose of this case to state that even an intention to resume business has not been established.7. It would, therefore, appear that the business was closed and the Company had not established an intention to resume it. That would he enough to show that no business was carried on and it would be irrelevant to enquire whether the business was permanently closed. We may add that we do not understand what was meant by saying that the Company did not sell its undertaking as a going concern. The only going trading concern that it possessed was the Labour electric supply undertaking and that it sold; it had no other commercial undertaking. After the sale of the Lahore electric supply concern all it did was to invest its moneys and the Tribunal has not found this activity to be a business.8. The facts that the Company had to pay the Government half share of the profits between November, 27, 1942 and September 5, 1946 and that it had to return the consumers the deposits made by them would not indicate that it was carrying on a business. It would be laying down strange law to hold that where a business has in fact ceased to be run, it must be deemed as continuing because the outstanding liabilities of that business had not been liquidated. The question whether the Company was carrying on business arises only because if it was, it would be entitled under S. 10 to deductions from its business income in regard to certain expenses incurred by it for the purpose of that business. Business as contemplated by that section is an activity capable of producing a profit which can be taxed. Payment of outstanding liabilities is not an activity which can ever produce such a result. It cannot be said therefore, that because liabilities of a closed business were outstanding, it has to be held that either the business was continuing or that an intention to resume business must be inferred: see Commissioners of Indian Revenue v. Anglo Brewing Co. Ltd., (1925) 12 Tax Cas 803are unable to hold that Lord Sumner intended to lay down that a business which is closed down is deemed to be carried on so long as its outstandings are being collected. South Behar Railways case, (1924) 12 Tax Cas 657 (712), was concerned with a financing company whose only activity after the finances had been furnished was to receive from the Government by way of profits of the financing activity, earlier a certain proportion of the net earnings of the undertaking financed which was being managed by the government and later a fixed sum and to receive from the Government the finance supplied when the Government acquired the undertaking as it intended to do. All that Lord Sumner intended to say was that the receipt of the moneys was the business of the company and its only business after the financing had been completed. He was not concerned with the case of a closed business whose outstandings were being collected.10. The Tribunal did not hold that the Company was in fact doing business or that anything that it did amounted to carrying on business. The onus of showing this was clearly on the Company. All that it did was to refer to the sale of its Lahore electric supply undertaking to the Government and the listing of the assets of that undertaking and valuing it as the carrying on of business. This contention was rightly rejected by the Tribunal on the ground that the sale of the undertaking though within its memorandum was not its business which was really the working of that undertaking. It also seems to us that the condition of the country immediately following the partition is by itself irrelevant for deciding whether the Company was doing business.Learned counsel for the respondent contended that the Income-tax Officers order showed that in one of the assessment years, the Company had received a certain amount as a result of a business of dealing in investments.The Tribunal however did not find this as a fact. Neither does it seem to us that the Income-tax Officer considered this income as business income though it described it as such, for he held that the company was not doing any business at all.