# COMMISSIONER OF INCOME·TAX, MYSORE, BANGALORE v. THE BANGALORE TRANSPORT COMPANY, LTD., BANGALORE

- **Citation:** [1967] 3 S.C.R. 393
- **Court:** Supreme Court of India
- **Decided:** 1967-04-03
- **Bench:** J. C. Shah, S. M. S!Kri, V. Ramaswami
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-mysore-bangalore-v-the-bangalore-transport-company-4059
- **Pages:** 6

## Headnote

Indian Income-tax Act, 1922 (Act 11 of 1922)-Business carrk?d for a
part of year, if profits taxah/eTbe undertaking and business of the assessee-company were taken over
by the Government and the assessee \Vas paid compensation.
The assessee sub mitt~. a return, claiming that it had earned no income from its
business, since it was taken over by the Government.
The Income-tax
Officer brought to tax a certain sum. disclosed by the assessee's audited accounts as its taxable business income during that part of the year before it
closed the business.
This 9rder was upheld by the Assistant Commissioner
and the Appellate Tribunal with certain reduction in the amount.
On re·
ference the High Court answered the question against the Revenue. In
appeal to this Court :-
HELD : The assessee was liable to be taxed.
Under S. 10(1) of the Income-tax Act, tax is payable by an assessee
under the head "Profits aud gains of business, profession or vocation" in
respect of profits or gains of any business, profession or vocation carried
on by him.
There is nothing in the Act which supports the assessee's
argument that for profits of the business to be taxable, the business must
be actively earried on for the whole of the previous year, or till the end
of the previous year. Under the ocheme of the Act, whenever an assessee
receives in the course of his business money or money's 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 ovetall income, the charge does not crystallize, because
there is no income on which the charge of tax may settle.
[39SF-H]
Turner Morrison &; Cotnpany Ltd. v. Co1nn1issioner of
Income-ta~ ·
West Bengal, 23, I.T.R. 152, followed.
· '
Con11nissioner o( lnco1ne-tax, Gujarat v. Ashokhhai Cltimanhhai rt965]
1 S.C.R. 758. explained.
The Dep~ent ·v.:as not seeking to tax either the whole o·r any part of
~e compe!lsation ~ece1ved by the assessee and the discussion as to what the
in ~:11~t~~ rec~iv~d by assessee was. intended to replace was not relevant
prior to its cl~s':.ree ofe~h~hi.;.r:;~~. w~~'9~~~~led or arose to the asses..ee
196~IYIL APPELLAT!! JURISDICTION:
Civil Appeal No. 435 of
Feb~~~a~9byl~eJia~ lthav]Jrom the. judgment and order dated
Referred Ca~e No. I~ of e196~~ore High Court in
Income-tax.
the :p~ll~::.ai, A. N. Kirpal, S. P. Nayyar and R.H. Dhebar, for
ChaTud. hV .. ~iswahnath Iyer, K. Rajind~r Chaudh11ri
d K
urz, ior t e respondent.
an
· R.

## Text

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COMMISSIONER OF INCOME·TAX, MYSORE,
BANGALORE
v.
THE
BANGALORE TRANSPORT COMPANY,
LTD.,
BANGALORE
April 3, 1967
(J. C. SHAH, S. M. S!KRI AND V. RAMASWAMI, JJ.]
Indian Income-tax Act, 1922 (Act 11 of 1922)-Business carrk?d for a
part of year, if profits taxah/eTbe undertaking and business of the assessee-company were taken over
by the Government and the assessee \Vas paid compensation.
The assessee sub mitt~. a return, claiming that it had earned no income from its
business, since it was taken over by the Government.
The Income-tax
Officer brought to tax a certain sum. disclosed by the assessee's audited accounts as its taxable business income during that part of the year before it
closed the business.
This 9rder was upheld by the Assistant Commissioner
and the Appellate Tribunal with certain reduction in the amount.
On re·
ference the High Court answered the question against the Revenue. In
appeal to this Court :-
HELD : The assessee was liable to be taxed.
Under S. 10(1) of the Income-tax Act, tax is payable by an assessee
under the head "Profits aud gains of business, profession or vocation" in
respect of profits or gains of any business, profession or vocation carried
on by him.
There is nothing in the Act which supports the assessee's
argument that for profits of the business to be taxable, the business must
be actively earried on for the whole of the previous year, or till the end
of the previous year. Under the ocheme of the Act, whenever an assessee
receives in the course of his business money or money's 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 ovetall income, the charge does not crystallize, because
there is no income on which the charge of tax may settle.
[39SF-H]
Turner Morrison &; Cotnpany Ltd. v. Co1nn1issioner of
Income-ta~ ·
West Bengal, 23, I.T.R. 152, followed.
· '
Con11nissioner o( lnco1ne-tax, Gujarat v. Ashokhhai Cltimanhhai rt965]
1 S.C.R. 758. explained.
The Dep~ent ·v.:as not seeking to tax either the whole o·r any part of
~e compe!lsation ~ece1ved by the assessee and the discussion as to what the
in ~:11~t~~ rec~iv~d by assessee was. intended to replace was not relevant
prior to its cl~s':.ree ofe~h~hi.;.r:;~~. w~~'9~~~~led or arose to the asses..ee
196~IYIL APPELLAT!! JURISDICTION:
Civil Appeal No. 435 of
Feb~~~a~9byl~eJia~ lthav]Jrom the. judgment and order dated
Referred Ca~e No. I~ of e196~~ore High Court in
Income-tax.
the :p~ll~::.ai, A. N. Kirpal, S. P. Nayyar and R.H. Dhebar, for
ChaTud. hV .. ~iswahnath Iyer, K. Rajind~r Chaudh11ri
d K
urz, ior t e respondent.
an
· R.
The Judgment of the Court was delivered by
394
SUPllBMB COURT llBPOllTS
(1967] 3 S.C.ll,
Shah, J, The Bangalore Transport Company Ltd. hereinafter
called 'the Company'-operated a public motor transport service
in the town of Bangalore for several years. The Legislature of
the State of Mysore enacted the Bangalore Road Transport Service
Act, 1956 (Mysore Act VIII of 1956) with a view to provide for
the acquisition of the unde.rtaking of the Company. By virtue
of s. 3 of the Act the undertaking, assets and documents of the Com·
pany vested in the Government of Mysore, on October l, 1956, and
the Company was paid Rs. 15,50,000/ • as compensation for loss
of its undertaking, assets and documents.
In respect of the previous year ending March 31, 1957, the
Company submitted a return under the Income-tax Act, claiming
that it had earned no income from its business, since its undertak·
ing and business was taken over by the Government of Mysore
on October l, 1956. The Income-tax Officer, Urban Circle, Ban·
galore, brought to tax Rs. 4,01,954/· disclosed by the Company's
audited accounts as its taxable business income. This order was
confirmed by the Appellate Assistant Commissioner in appeal. The
Income-tax Appellate Tribunal modified the order of assessment
and allowed Rs. 97,208/· as development rebate for the previous
year and after making certain adjustments brought to tax an amount
of Rs. 3,16,439/· as taxable income of the Company in the pre·
;ious year.
At the instance of the Company, the following question was
submitted by the Appellate Tribunal to the High Court of Mysore
under s. 66(1) of the Income'tax Act, 1922 :
"Whether the sum of Rs. 3,16,439/· was income and
liable to tax on the assessee for the year 1957-58 ?"
The High Court answered the question in the negative. Against
that order, this appeal is preferred with special leave.
The High Court was of the opinion that it was for the Revenue
to establish that out of Rs. 15,50,000/· received by the Company
as compensation for loss of its undertaking, assets and documents,
Rs. 3,16,439/· were paid towards profits earned by the Company
during the period April 1, 1956 to September 30, 1956. The
High Court observed that even if the compensation paid to the
Company was .worked out as a multiple of profits earned in one
or more years, that circumstance was not sufficient to prove that
any compensation or any part thereof was received by the Company
in lieu of the profits earned by it, and that the nature of the pay·
ment was decisive of its character and "not the method of payment
or measure". The High Court accordingly held that there was no
material on the record from which it could be reasonably held that
any portion of the compensation paid repr~ented replacement of
profits earned during April l, 1956 to September 30, 1956. In
our judgment the High <:ourt erred in assuming that the ~h~cter
of the compensation received by the Company was determmattve of
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C.l.T. v. BANGALORE TRANSP. CO. (Shah, J.)
395
the question submitted by tho TribulljlJ. It was tho 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 tax either the whole 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 determining whether the profits which accrued or arose to the
Company during the period April 1, 1956 to September 30, 1956
were taxable.
Counsel for the Company conceded that he was unable to support the reasoning adopted by the High Court in recording their
answer to the question submitted.
Counsel however contended
C that during the previous year no profit had accrued or arisen to the
Company, and no profit was received by the Company; therefore
the Company incurred no liability to pay tax. Counsel in expounding his theme said that under the Income-tax Act liability to pay
tax arises only at the end of the previous year and not before, and
if during the course of the previous year the assessee closes his
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business or is compulsorily deprived of his undertaking and assets,
and on that account the assessee is unable to carry on his business,
in law no profit can arise or accrue to or be received by the assessee
even if during a part of the year the assessee has received payments
in the course of his business. According to counsel for the Company in order that income from business may become taxable in
the hands of the assessee, it must be shown that the business was
carried on till the end of the previous year, and if before the conclusion of that year the business is closed, no profit may in law be
deemed to accrue to the assessee.
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There is no warrant for this argument in the scheme of the
Income-tax Act. Under s. 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 th6 previous
year. Under the scheme of the Income-tax Act, whenever an assessee
receives in the course of his business money or money's 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 crystallize, because there is no income on which the
charge of tax may settle.
In Turner Morrison & Company Ltd. v.
CommiSsioner of Income-tax, West-Bengal('), this Court in
dealing with a case of a business of selling salt in India observed
atp. 160:
(I) 1! l.f.R. Bi.
396
SUPRBME COURT IUIPORTS
[1967] 3 S.C.R.
''There can . . . . be no question that when the gross
sale proceeds were received by the Agents in India t~ey
necessarily received wha.tever income, p_rofits .and ga1?s
were lying dormant or hidden or otherwise embedded m
them. Of course, if on the taking of accounts it be found
that there was no profit during the year then the questi?n
of receipt of income, profits and gains would not anse
but if there were income, profits and gains, then the proportionate part thereof attributable to the sale proceeds
received by the Agents in India were income, profits and
gains received by them at the moment the 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.
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.
Counsel for the Company relied upon a recent decision of this
Court in Commissioner of Income-tax, Gujarat v.
Ashokbhai
Chimanbhai(') 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
T!eoeivte 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
I 955-56, there was a partition in the family arid the entire share
in the profiis of the firm was, under the partition agreement, nllotted to the managi>r.
The Incoma-tax Officer in proceedings for
(I) (1965} I S.C.R. 758.
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p.
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C.I.T. v. BANGALullE TRANSP. CO. (Slulh, J.)
397
assessmenr to tax sought to. apportion the pro!i.ts r.ceived by ~
manager between the Undivided family and the IllllllJlger In his
indivi.duRI 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 unJivided family at any time in the year of
account prior to the date of dissolution. It was observed in
Ashokbhai Chimanbhars case(') at p. 46 :
"In the gross receipts of a business Clay after day or
from tran9action 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 import-
~nce, for it is only on the right to receive profits or
mcome, 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 nght of the family to a share in
the profits was divested, no income accrued or arose to the family.
(~ t~e p~esent case the profits directly arose to the Company de
~ze, zn deem, and could be ascertained by the method of accountmg. adopted by the Company at the end of the year or when the
busmess was closed.
The question whether the amount of profits assessed were actually shared by the Company within the meanh1g of s. 26(2) of
the Indian Income-tax Act does not need consideration. By sub-~.
(2) of. s. 26 where a person carrying on any business, profession or
vocahon has been succeeded in such capacity by another person,
such pers?n and such other person shall, each be assessed in respect of his actual share, if any, of the income, profits and gain~
(I) (1965] I $.C.R. 7,11.
398
SUPREME COURT RBPORTS
[1967] 3 s.c.R.
af the previous year. The question whether the ptofits:of the Com·
pany 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 s. 26(2) of the Income-tax Act
liable to be taxed.
The answer recorded by the High Court will therefore be discharged and there will be an. answer in the affirmative.
The appeal is allowed. The Company will pay the costs of
the Commissioner in this Court and the High Court.
Y.P.
Appeal allowed.
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