EXECUTORS OF THE ESTATE OF J. K. DUBASH versus COMMISSIONER OF INCOMETAX, BOMBAY CITY

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S.C.R.

SUPREME COURT REPORTS

969

EXECUTORS OF THE ESTATE OF ] . K. DUBA.SH v. COMMISSIONER OF INCOMETAX, BOMBAY CITY. [SHRI HARILAL KANIA C.J., PATANJALI SASTRI and DAS JJ.]

Indian Inrom•-tax Act (XI of 1922), s. 25 (4)-Succmion D~rith of person carrying on business-Executors ca.•rrying on busi· it ~tnder ter111s of u•ill-Whether ness as going concern for selling ' succeed in su!:h capacity" to testator-Date of succession·

1

A person who carried on a business on which tax had been levied under the Income-tax Act of 1918 died on the 9th of April, 1942, leaving a will by which he authorised his executore to carry ou his business as a going concern, as if they were absolute owners but without being responsible for looe, for • period not exceeding 12 months during which if any of his nephews wanted to purchaee the husinese, they might sell it to him or them. The husineee was sold to one of the nephews on the let January, 1943. The ques tion being whether for the purposee of s. 25 (4) of the Income-tax Act of 1922 as amended in 1939 the succeseion to the business took place on the 9th April, 1942, when the testator died or on the 1st January, 1943, when the business was sold:

Held, affirming the decision of the Bombay High Court, that inaemuch as the business got vested in the executors on the death of the testator and the executors carried on the business within the meanin~ of ss. 3 and 10 of the Act, and as such become per sonally liable as assessees and there wa.s thus a. change in the assesses, a. succession to the testator "in such capacity" took place on the date of the death of the assessee, even though the executors carried on the business as a going concern under the terms of the will and the business was also being carried on not for the benefio of the executors but for the benefit of the estate of the testator.

Per PATANJALI SASTRI J.-The expression "succeeded by another person" in s. 26 (2) and s. 25 (4) of the Act includes not only cases of succession inter vivos but also cases of succession on death.

While it is true that a transfer of ownership is ordir.ari!y involved in cases of succession falling wi.thin s. 26 (2) ands. 25 (4), it is not an essential element of succession within the meaning of those provisions.

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The words "in such capacity " in s. 26 (2) and s. 25 (4) mean nothing more than the capacity of a person who carries on the ~ business as the predecessor was carrying it on, that is, with a ·

liability to be \~xed on its profibs ~ud g&ius.

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Execu!ors 01 th• Estate of J. K. Dubash v.

970

SUPREME COURT REPORTS

[1950]

1950

Commissioner of Income-tax, Bombay v. P. E. Polson (L-R. 72

I-A. 196) referred to-

Ju,pu(li Kesava Rn,o v. Commi5sioner of Income-tax, Madraf

(59 Mad. 377 ! explained.

APPEAL (Civil Appeal No. CV of 1949) from a com,,•issioner of Judgment of the Bombay High Court (Chagla C.J. and Incomc-taz, Tendolkar J.) dated March 19, 1948, in a reference Bomb•y Cit11- made by the Income-tax Appellate Tribunal under section 66 (1) of the Indian Income-tax Act (Income tax Reference No. 26 of 1947).

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Kania o. J.

Sir N. P. Engineer (R. ]. Kolah, with him) for the

appellant.

M. C. Setalvad, Attorney-General for India, (G. N.

Joshi, with him) for the respondent.

1950. December 21. The Court delivered Judgment

as follows:

KANIA C.J- --This is an appeal from a judgment of the High Court at Bombay delivered on a reforence by the Income-tR.x Appellate Tribunal under the Indian Income-tax Act. The material facts are these. The assessees (appellants) are the executors of the will of Mr. ]. K. Dul>ash who died on the 9th of April, 1942, having made his last will on the 8th of April, 1942. Probate of the will was issued to the executors on the 10th of August, 1942. During his life-time, the testator carried on the business of shipping agents. Clause 13 of the will contains directions about carrying on this business of the testator till its disposal. It directs the executors to carry on the business as a going concern after his death with power to make fresh contracts and discharge the existing and future liabilities and all other usual and necessary powers, unless special circumstances arose which, in the opinion of the exe cutors, made it expedient to sell the business earlier. This business was to be carried on for a period not exceeding twelve months during which time the exe· cutors were to ascertain whether or not any of his nephews was willing to purchase the said undertaking. For this purpose and generally for sale purposes, he directed that the executors shall, as soon as possible,

S.C.R.

SUPREME COURT REPORTS

971

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If the executors OommiSBionor of

after his death, have a valuation made of the said undertakir1g. The undertaking was to be sold so as to Executors of include all hlS interest in the premises, the goodwill, the Estat• of the stock-in-trade, plant, furniture etc. but excluding J. K. Dubash securities for rfl.oney and cash in the bank to the credit of the account of that undertaking. were satisfied before the expiration of one year from ;" 00bm•·~~· the testator's death that the said undertaking would '•· not be sold to his nephews because none was willing or Kania o. J. able to purchase it or if it remained unsold, at the end of a year, to any of the nephews then (whichever event first happened) the executors were directed to sell the undertaking to such third person on such terms and at such price as they thought proper. The clause ended with the following words:-' 'l expressly declare that in carrying on the said undertaking my trustees shall, in addition to all powers, discretion and authorities vest- ed in them by law, have power to carry on or discon- tinue any part of the said undertaking or to augment or diminish the capital employed and generally to act as absolute owners without being responsible for any loss." The business was sold to one of the nephews on the 1st of January, 1943. The appellants contended that within the meaning of section 25 (4) of the Indian Income· tax Act the succession to the business took place on the 1st of January, 1943, while the taxing authorities contended that the succession was on the 9th of April, 1942, when the testator died. The first question submitted for the High Court's opinion re- lated to this dispute.

The second question referred to the High Court for its opinion was in respect of an amount paid by the executors to the widow of the testator. That question was answered against the appellants by the High Court. Learned counsel appearing for the appellants intimated that he did not want to contest the High Court's decision on the point. The appeal therefore is limited to the first question only.

Section 25 of the Indian Income.tax Act, 1939, gives certain concessions in respect of a business where tax had been paid by the person carrying the business

972

SUPREME COURT REPORTS

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under the provisions of the Indian Income-tax Act, 1918. The material part of sub-clause 4 of section 25

E•ocutora of is in these terms : - the Estate of J. K. Dubash

- v, 0 ••nm"" 0 ;;~~:;·i;;~. sion or vocation on which

" Where the person who was at the commence- ment of the Indian Income-tax (Amendment) Act, " " of 1939 (VII of 1939), carrying on any business, profes tax was at any time charged under the provisions of the Indian Income tax Act, 1918, is succeeded in such capacity by another person ............ "

Kania o . .r.

The scheme of section 25 read with the provisions of section 26 (2) appears to be to give relief, inter alia, to persons who were carrying on business in 1921 and had been taxed on their income under the Income-tax Act of 1918. By a change effected by the Income tax Amendment Act of 1922 they were subjected to taxation twice on the income of 1921-22. The relief is intended against this levy of tax twice over.

The rival contentions urged on behalf of the parties are these. The assessee contends that on the death of the testator under clause rn of the will of the deceased, the executors were carrying on the business of the deceased only for the purpose of winding it up, and there was no succession to the business on the death of the deceased within the meaning of section 25 (4) It is _argued that the clause of the Income-tax Act. provides for nothing else than a direction to carry on the business with a view either (a) to sell it within a year to one of the nephews, or (b) to sell it to someone It was else at the end of the year as a going concern. pointed out that all directions in the clause permitting contracts to be made etc. were for the purpose of keeping the business alive and not allowing it to die so that the business which was a valuable asset of the deceased could be sold as a going concern with its goodwill. It was therefore argued that the succession to the business took place only on the 1st of January, 1943, when the business was sold by the executors to one of the nephews in terms d clause 13 of the will. Jn actual money, the contest is whether the executors

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973

are entitled to get the benefit of the exemption from income-tax in respect of the profits earned only for the Executors oi nine days between the 1st of April and the 9th of April, the Estate of 1942, or between. the 1st of April, 1942, and 1st of J. K. Du•ash January," 1943, under section 25 (4) of the Indian In. v • come· tax Act. The High Court has answered the Commissioner of question agams t e assessee.

Income.tax, Bombay City,

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.Kania a. J.

In our opinion, the conclusion of the High Court is correct. It cannot be disputed that in the event of a sale or gift of the business by the original owner the succession within the meaning of section 25 (4) will take place· only on the date of such sale or gift and the exemption from liability to tax will be for a period terminating on that day. It cannot again be seriously disputed that if the testator settled his business on trust under a deed of settlement there will be a suc- cession to the business by another person on the day of the settlement. Similarly in the event of his death intestate his heir-at-law will succeed to the business on the date of his death. The argument advanced on behalf of the appellants that in the present case having regard to · the terms of clause 13 of the will there has been "no succession in such capacity to another person" because the executors were carrying on the business only with a view to sell it as a going concern, cannot be accepted because on the day of the death of the deceased the estate including the business got vested in the executors and the executors carried on the business within the meaning of section 3 read with section IO of the Act and as such became person- ally liable as assessee. Thus there came about a change in the assessee and therefore " a succession in such capacity" took place within the meaning of section 25 (4) of the Income-tax Act. It seems clear that if the testator had transferred the business to a trustee, although the trustees will not be the beneficial owners, in law there will be a succession of the business to ano. ther person within the meaning of section 25 (4) of the If in such a case that result Indian Income· tax Act. follows there appears no reason why when the legal estate is transferred by operation of law to an executor

974

SUPREME COURT REPORTS

[1950]

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K

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1950

there should not be considered a succession to the estate by another person within the meaning of the ~:·;;,;:;; :: same section 25 (4). The words "in such capacity" in that clause further make the position clear. It makes J. K. Duba•I• the distinction of legal and beneficial owner:;hip irre. v. Comm;,,;ontr •/levant. The contention that the business was to be car ried on by the executors as such, as a going concern Inncome-ta"' Bombay C>ty. or that it was being carried on for the benefit or loss · 0 J of the testator's estate is not ·relevant for the present discussion. The only relevant question under sec. tion 25 (4) of the Indian Income-tax Act is whether in respect of the business there is a succession to another person. This is a provision to give relief and the scope of the relief must be governed by the words used in the Act. In our opinion the answer to this question, on the facts of the present case, must be in the affirmative and the date of such succession must be considered to be the death of the testator, which was on the 9th of April, 1942. The result is that the appeal fails and is dismissed with costs.

Patanjali Sastri J.

PATANJALI SASTRI J.-I agree

that this appeal

should be rejected.

The l)laterial facts have been set out in the judgment which has just been delivered. The only question now remaining for decision is : on what date was the test ator, who was carrying on the business of shipping agent and land contractor "succeeded in such capacity by another person" within the meaning of section 25 (4) of the Act-on the 9th April, 1942, when the testa tor died and the appellants as the executors took over the business and carried it on or on the 1st January, 1943, when the business was sold by them as a going concern?

The business being admittedly one which was charged to tax under the Income-tax Act, 1918, if there was no succession within the meaning of section 25 (4) until the sale took place, as the appellants contend, the profits and gains 9f the period from 1st April, 1942, to !st January, 1943, would not be liable to tax, whereas, if the testator could be said to have been "succeeded"

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975

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f 1918

Pato•iali Sast•il.

l•com•·taz, Bambay City.

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Executor& of the Estate of J. K. Du'ash v.

by the appellants, the profits of the much shorter period between 1st April, 1942, and 8th April, 1942, alone would be exempt from taxation. The reason for this relief is to be found in the change of the basis of taxa- tion when the Act of 1922 was passed which resulted in the profits of the year 1921-22 being assessed twiceGommiss;on" of over once in that year as the income thereof ''on d . ' " a iustrnent un er t e le next year as the income of the "previous year" under the Act of 1922 [see Commissioner of Income.tax, Bombay v. P. E. Polson(')]. The relief was,. however, confined to discontinued businesses, as, m cases of succession till 1938 the successor alone was assessed to tax on the whole of the profits of the previous year including those earned by his predecessor before the succession occurred. But the Income-tax (Amendment) Act, 1939, (hereinafter referred to as the amending Act). having amended section 26 (2) so as to provide, in the case of a succession in business, pro- fession or vocation, for the assessment of the predeces- sor and the successor, each in respect of his actual share of the profits of the previous year, the relief was extended, by enacting section 25 (4), to cases of succession occurring after the commencement of that Act, with the same object as in the case of discon the hardship of the to redress tinuance, namely, business having been charged twice over on the income of 1921-22. In other words, the predecessor is given the same relief as if he had discontinued the business . It will thus be seen that on the date of succession. the enactment of section 25 (4) is consequential on the amendment of section 26 (2), and the scope and meaning of the expression "succeeded in such capacity by another person" in section 26 (2) must determine also its scope and meaning in section 25 (4).

Indian

The first question which arises on the language of the amended section 26 (2), which speaks of " the person succeeded" being "assessed" and of his not being "found", is whether the sub.section should be construed as applicable only to cases of succession

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976

SUPREME COURT REPORTS

[1950]

v.

1960

tax, Income- 0 ity. Bombay

inter vivas. Whatever force there may have been in that the sub-section could not have the sug,,"'estion Ex:eutors of the Estate of contemplated cases of intestate testamentary or J. K. Dubash succession if there was no provision for the assessment of profits earned by a deceased person in the hands of Commissioner 0/his representatives, there seems to be no sufficient reason for excluding from the scope of the sub-section d f cases o t e pro- vision ih section 24B. On the other hand, proviso (c) to section 24(2), which ref~rs to a person "succeeded in such capacity by another person otherwise than by inheritance'', would seem to imply that "succession", as that term is used in the Act, includes devolution on death.

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eat i m view o

Patanjali saotr• J.

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The next question is what is the meaning to be attributed to the phrase " in such capacity "? A Full Bench. of the Madras High Court in jupudi Kesava Rao v. Commissioner of Income tax, Madras('), held that the expression meant" in the capacity as owner", so that " the person who succeeds another must, by such succession, become the owner of the business which his predecessor was carrying on and which he, after the succession, carries on in such capacity, that is. the capacity as owner". Applying that test they held that the sole surviving member of a Hindu undivided family did not succeed to the business of the family within the meaning of section 26(2), as he was pre viously a part-mvner of the business and there was no tranSfer of ownership. While it is undoubtedly true that a transfer of ownership is ordinarily involved in cases of succession falling within section 26 (2) or section 25(4), it cannot, in my opinion, be regarded as an es.sential element of succession within the meaning of those provisions. The Income.tax Act directs its attention primarily to the person who receives the income, profits or gains rather than to the ownership or enjoyment thereof. The assessee is defined in sec. tion 2 (2) as the person by whom the income-tax is payable and by section 10 the tax is payable by an assessee who carries on the business, profession or

11) I.L.R. ~9 M•d. 377.

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977

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1950

vocation. The statute thus fastens on the person who carries on the business, etc., the liability to pay the Executors of tax on the profits earned by him regardless of their th• Estat• of destination or enjoyment. It is also worthy of note J. EL Dubash that in several instances persons who have no proprie- tory or other right in the income charged to tax are Oommissionor of made liable to pay tlie tax for no other reason than t e convemence o assessmen an h instances are to be found in section 26(2) proviso, section 18 (7), section 23-A (3), section 25-A and section 42(1). As observed by Lord Ca'\e in Williams v. Singer & Others(') "the fact is that, if the Income-tax Acts are examined, it will be found that the person charged with tax is neither the trustee nor the bene- ficiary as such, but the person in actual receipt and control of the income, which it is sought to reach".

Income-tax, S h Bombay Oil!/. · Pata•jali SastriJ.

co ec 10n.

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There seems to be no warrant, therefore, to insist on a transfer of ownership as the decisive test of 'succes sion' within the meaning of section 26(2) or section 25(4) any more than for insisting on the ownership of the business by the person carrying on a business, for the purposes of section 10. I Jo not of course wish to be understood to say that a clerk or an agent in manage ment of a business would be an assessee liable to be taxed in respect of its profits and gains. Some kind of title there must be, though not of a beneficial character. Nor need it be of the same quality in the predecessor and the successor. The question in each case must be: Is the person who has come in carrying on the busi ness as a principal? If so, the Revenue looks to him and makes him liable for payment of the tax. The words "in such capacity" in sections 25 (4) and 26 (2) mean nothing more than the capacity of a person who carries on the business as the predecessor was carrying it on, that is, with a liability to be taxed on its profits and gains.

Applying these principles to the present case, I am clearly of opinion that the testator who was carrying on the business in question was succeeded in such

(I) (1921] I A.O. 65,

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978

SUPREME COURT REPORTS

(1950]

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capacity by the appellants when the former died on 9th April, 1942, and his. estate vested in them. As Executor!J of tho Estate of already stated, the testator expressly authorised the J, K. Dubash appellants to carry on the business as a going concern for one year after his death and gave them power to Oommi,,ioner 0/enter into fresh contracts and to discharge liabilities Incom•·taz, past and future. They are thus an "association of b Bomb•Y G>ty. persons carrymg on usmess, an , emg assessa e as such in respect of the profits and gains of the business carried on by them under section 10 read with sec· tion 3 of the Ac.t, they are liable to be taxed on the profits earned after the 9th April, 1942.

Patani••• Sastri J.

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It was objected that the appellants being assessable as the representatives of the testator under sec tion 24-B in respect of the profits earned by him in the accounting year, they could not be treated as sue. cessors assessable under section 26 (2) in respect of the profits earned during the rest of that year, as such apportionment would be meaningless, the same interest, namely, the testator's estate, having to bear the inci dence of the tax in either case. It was accordingly suggested that unless there was a break in the contin. uity of the interest represented by the executors, there could be no real apportionment such as is contemplated by section 26 (2) and, therefore, no succession within the meaning of that section or of section 25 (4) where the same expression is used. The argument is, in my opinion, the distinction between the position of the executors vis a vis the Revenue and their position vis a vis the testator's estate. As already pointed out, their liability to pay the tax on the profits earned after the testator's death arises under section 10 (1) and, being that .of assessees carrying on the business, is personal to them, although as between them and the estate they would be <mtitled to be indemnified in respect of the tax paid; while their liability to pay tax on the profits earned during the testator's life. time arises under section 24-B and, being that of legal representatives of the testator, is limited "to the extent to which the testator's estate is capable of meeting the charge". It is therefore not correct to

It overlooks

fallacious.

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S.C.R.

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979

say that an apportionment under section 26 (2) would be meaningless, though, if the testator's estate was sufficiently solvent, it would have no practical significance.

DAS J.-I agree with the Chief Justice.

Appeal dismissed.

Agent for the appellant: R. S. Narula. Agent for the respondent: P. A.Mehta.

!950

Etttcutors of the Estaf4 of J. K. Dubt:uh •• Commissioner of Income-ta:t, Bombay City.

Patanjali Saatri J.

1950

Dae. 21.

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PANNALAL JANKIDAS v. MOHANLAL AND ANOTHER. (SHRr'HARILAL KANIA C.J ., PATANJALI SASTRI and DAs JJ.]

Contract-Damages-Remoteness of damage-Agent neglecting ta inwre goads against fire-Goads destroyed by explosian-Liabi· lity al agent-Bombay Explosion (Compensation) Ordinance, 1944, ss. 14, 18-0rdinance granting compensation for damage by explo sion-Loss by explosioii not covered by policy-Loss of compensation undu Ordinance by failure to insttre-Whetlwr direct or remote damage-Claim by principal against agent, whet/wr barred by Ordin· ance-Indian Contract Aot, 1872, s. 212.

The plaintiffs who were commission agents purchased piece goods according to defendant's instructions and storsd a portion of the goods in a godown in Bombay pending receipt of a permit from the Government authorities for consigning the same to the defendants. Before the goods could be despatched,a big explosion occurred in the Bombay Harbour and the goods stored were des troyed either by the fire or the explosion. A few months later the Governor-General promulgated the Born bay Explosion (Compensa· tion) Ordinance, 1944, which provided, inter alia, (i) that the Govern ment shall pay a compensation of 50 per cent. of the damage caused in respeet of uninsured goods, and the entire damage in reepect of insured goods; and (ii) that no person 8hall have or be deemed ever to have bad, otherwise than under the Ordinance any right whether in contract or in tort or otherwise to any compensation for damage to or loss of property arising out of the explosion and no suit or other legal proceeding for any such compensation or damage shall be maintaiDable in any civil court. The plaintiffs received GO per cent. of the value of the destroyed goods as \hey