Executors Of The Estate Of J.K. Dubash vs Commissioner Of Income Tax, Bombaycity

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. CV of 1949

Decision Date: 21 December 1950

Coram: Hiralal J. Kania, M. Sastri, Patanjali Das

The appeal titled Executors of the Estate of J.K. Dubash versus Commissioner of Income Tax, Bombay City was decided by the Supreme Court of India on 21 December 1950. The judgment was authored by Justice Hiralal J. Kania, who also presided as Chief Justice. The bench was composed of Chief Justice Kania, Justice M. Sastri, Justice Patanjali Das, and Justice Sudhi Ranjan. The petitioners were the executors appointed under the will of the deceased J.K. Dubash, while the respondent was the Commissioner of Income Tax for Bombay City. The case is reported in 1951 AIR 111 and 1950 SCR 969, with citator references R 1958 SC 269 (10) and RF 1986 SC 376 (21). The statutory provision under consideration was Section 25 of the Indian Income-Tax Act (XI of 1922), as amended in 1939, dealing with the death of a person carrying on a business and the effect of the executors continuing that business as a going concern under the terms of the will.

According to the facts, the deceased had operated a business on which tax had been levied under the Income-Tax Act of 1918. He died on 9 April 1942, leaving a will that authorised his executors to continue the business as a going concern, effectively as absolute owners but without bearing liability for any loss, for a period not exceeding twelve months. During that period, any of his nephews could purchase the business, and the business was in fact sold to one of the nephews on 1 January 1943. The central question was whether, for the purposes of Section 25(4) of the Income-Tax Act, the succession to the business occurred on the date of the testator’s death, 9 April 1942, or on the date of the sale, 1 January 1943. The Supreme Court affirmed the Bombay High Court’s decision that the business vested in the executors at the moment of the testator’s death. Because the executors carried on the business within the meaning of Sections 3 and 10 of the Act, they became personally liable as assessors, resulting in a change of the assessee. Consequently, a succession to the testator “in such capacity” was deemed to have taken place on the date of death, even though the executors operated the business under the will’s terms and for the benefit of the estate rather than for their own benefit. Justice Patanjali Sastri, delivering a separate opinion, explained that the expression “succeeded by another person” in Sections 26(2) and 25(4) includes both inter- vivos succession and succession on death. While a transfer of ownership is usually involved in such successions, it is not an essential element. The words “in such capacity” in those provisions simply refer to the capacity of a person who carries on the business in the same manner as the predecessor, that is, with the liability to be taxed on its profits and gains.

The Court observed that a person who continues a business in exactly the same manner as the predecessor does so with the same liability to be taxed on the profits and gains of that business. The principle had been referred to in Commissioner of Income-Tax, Bombay v. P. E. Polson, (L.R. 7 I.A. 196) and had been explained in Jupuli Kesava Rao v. Commissioner of Income-Tax, Madras (59 Mad. 377). The present appeal, designated Civil Appeal No. CV of 1949, arose from a judgment of the Bombay High Court rendered by Chief Justice Chagla and Justice Tendolkar on 19 March 1948. That judgment was itself delivered on a reference made by the Income-Tax Appellate Tribunal under section 66(1) of the Indian Income-Tax Act, identified as Income-Tax Reference No. 26 of 1947. Counsel for the appellant was Sir N. P. Engineer, assisted by R. J. Kolah, while the respondent was represented by M. C. Setalvad, Attorney General for India, and G. N. Joshi. The appeal was heard on 21 December 1950, and the judgment was pronounced by Chief Justice Kania, who noted that the case concerned an appeal from the High Court decision arising out of the Tribunal reference under the Income-Tax Act.

The material facts set out by the Court showed that the assessors-appellants were the executors of the will of Mr. J. K. Dubash, who had died on 9 April 1942, having executed his last will a day earlier on 8 April 1942. Probate of the will had been granted to the executors on 10 August 1942. During his lifetime, the deceased had conducted the business of shipping agents. Clause 13 of his will contained specific directions for the continuance of that business until its eventual disposal. The clause empowered the executors to operate the business as a going concern after the testator’s death, authorising them to enter into new contracts, to discharge existing and future liabilities, and to exercise all ordinary and necessary powers, except where special circumstances, in the executors’ opinion, rendered it expedient to sell the business earlier. The will stipulated that the business should be carried on for a period not exceeding twelve months, during which the executors were to determine whether any of the testator’s nephews were prepared to purchase the undertaking. To facilitate a potential sale, the testator directed that the executors obtain a valuation of the undertaking as soon as possible after his death. The valuation was to encompass the testator’s interest in the premises, goodwill, stock-in-trade, plant, furniture and similar assets, but it expressly excluded securities for money and cash held in the bank account of the undertaking. If, before the expiry of one year from the testator’s death, the executors concluded that none of the nephews were willing or able to purchase the business, or if the undertaking remained unsold at the end of that year, the executors were instructed, whichever event occurred first, to sell the undertaking to a third party on such terms and at such price as they deemed appropriate. The business was subsequently sold to one of the nephews on 1 January 1943, giving rise to the dispute over the date of succession for taxation purposes.

The will contained a terminating clause that concluded with the following language: “I expressly declare that in carrying on the said undertaking my trustees shall, in addition to all powers, discretion and authorities vested in them by law, have power to carry on or discontinue 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.” According to the factual record, the business was transferred to one of the testator’s nephews on 1 January 1943. The respondents, who were the appellants in this matter, maintained that, for the purposes of section 25(4) of the Indian Income-Tax Act, the legal succession to the business occurred on that date of sale, 1 January 1943. The tax authorities, on the other hand, argued that succession should be deemed to have arisen on 9 April 1942, the date of the testator’s death. The first question referred to the High Court concerned precisely this dispute over the appropriate date of succession. A second question was also referred, which dealt with the propriety of a payment made by the executors to the testator’s widow; the High Court decided this second question against the appellants. The counsel for the appellants indicated that they would not challenge the High Court’s ruling on that payment, thereby limiting the present appeal to the first question only. Section 25 of the Indian Income-Tax Act, 1939, provides certain concessions where tax has previously been paid by the person who was carrying on a business under the 1918 Act. Sub-clause 4 of section 25 reads: “Where the person who was at the commencement of the Indian Income-Tax (Amendment) Act, 1939 (VII of 1939), carrying on any business, profession or vocation on which tax was at any time charged under the provisions of the Indian Income-Tax Act, 1918, is succeeded in such capacity by another person …” The overall scheme of section 25, read together with section 26(2), is intended to relieve persons who were conducting business in 1921 and who had been taxed on their income under the 1918 Act, but who, because of the amendment enacted in 1922, would otherwise have faced a double levy of tax on the income of the year 1921-22. The relief sought under these provisions is therefore directed against the imposition of tax twice on the same income. The parties advanced opposing contentions on this point. The appellant, identified as the assessee, argued that, pursuant to clause 13 of the deceased’s will, the executors were engaged only in the limited task of winding up the deceased’s business, and that no legal succession to the business occurred at the moment of death within the meaning of section 25(4) of the Income-Tax Act. It was submitted that the clause merely directed the executors to keep the business operating for the purpose of either (a) selling it within one year to one of the nephews, or (b) …

In this case the Court examined the effect of clause 13 of the deceased’s will, which directed that the business should be sold either to a nephew within a year or, failing that, to another purchaser as a going concern at the end of the year. The Court observed that every instruction contained in the clause, including the authority to enter into contracts, was intended solely to keep the business alive rather than to allow it to cease operating, because the business represented a valuable asset whose goodwill could be transferred to a buyer. Consequently, the Court noted that the succession to the business, for the purpose of the Income-Tax Act, occurred only on 1 January 1943, the date on which the executors actually sold the business to a nephew pursuant to the terms of the will.

The substantive dispute thus centered on whether the executors were entitled to claim the exemption from income-tax provided by section 25(4) of the Indian Income-Tax Act for the profits earned during the brief period from 1 April 1942 to 9 April 1942, or for the longer interval from 1 April 1942 to 1 January 1943. The High Court had answered this question against the executors, and the Supreme Court affirmed that decision. The Court explained that, when a business is transferred by sale or gift, succession within the meaning of section 25(4) occurs only on the date of that transfer, and the tax exemption therefore terminates on that date. The Court further clarified that if the testator placed his business in trust, succession would be deemed to take place on the day the trust was created, and if the testator died intestate, the heir-at-law would succeed on the date of death.

Addressing the appellants’ argument that clause 13 precluded any “succession in such capacity” because the executors were merely preserving the business for sale, the Court rejected this contention. It held that at the moment of the testator’s death, the entirety of the estate, including the business, vested in the executors. By continuing the business, the executors fell within the definition of an “assessee” under sections 3 and 10 of the Act, thereby assuming personal liability for tax. This change in the identity of the assessee constituted a succession in the sense contemplated by section 25(4). The Court also observed that even if the testator had transferred the business to a trustee—although the trustee would not enjoy beneficial ownership—the law would still recognize a succession to another person under section 25(4). Hence, the Court concluded that the executors’ ownership and operation of the business after the testator’s death satisfied the statutory requirement of succession, making the tax exemption inapplicable for the period before the actual sale on 1 January 1943.

In this matter the Court observed that when a legal estate passes by operation of law to an executor, the transfer must be treated as a succession of the estate to another person within the meaning of section 25(4) of the Indian Income-Tax Act. The expression “in such capacity” that appears in the statutory provision clarifies that the distinction between legal ownership and beneficial ownership is immaterial for the purpose of the provision. Accordingly, the Court rejected the argument that the executors were merely carrying on the business as a going concern for the benefit or loss of the testator’s estate, because that contention was irrelevant to the question posed by section 25(4). The only issue for consideration, the Court held, was whether a succession to another person occurred in respect of the business. Since section 25(4) was enacted to provide relief, the scope of that relief must be interpreted according to the language of the Act itself. After examining the facts, the Court concluded that a succession did indeed take place, and that the appropriate date of such succession was the date of the testator’s death, namely 9 April 1942. Consequently, the appeal was dismissed and costs were awarded.

The Court further noted that the material facts had already been set out in the judgment previously delivered, leaving only the question of the correct date on which the testator, who had been engaged in the business of shipping agency and land contracting, was “succeeded in such capacity by another person” under section 25(4). Two dates were in dispute: 9 April 1942, when the testator died and the executors assumed control of the business, and 1 January 1943, when the executors sold the business as a going concern. The business was undeniably subject to tax under the Income-Tax Act, 1918. If succession were deemed to have occurred only on the sale date, the profits earned from 1 April 1942 to 1 January 1943 would not be taxable, whereas if succession were recognized as having arisen on the testator’s death, only the profits accruing between 1 April 1942 and 8 April 1942 would be exempt. The Court explained that the relief embodied in section 25(4) originated from the change in the basis of taxation effected by the 1922 Act, which had caused the profits of the year 1921-22 to be assessed twice—once under the 1918 Act and again as income of the “previous year” under the 1922 Act, as discussed in Commissioner of Income-Tax, Bombay v. P.E. Poison. That relief was originally confined to discontinued businesses, but was later extended by the Income-Tax (Amendment) Act, 1939, which amended section 26(2) and introduced section 25(4) to address the hardship of double taxation in cases of succession occurring after the amendment. The Court therefore affirmed that the predecessor was to receive the same relief as if he had discontinued the business on the date of succession.

The legislation that dealt with discontinued businesses had earlier provided that, until 1938, only the successor was liable to tax on the entire profits of the preceding year, even those profits that had been earned by the predecessor before the succession took place. The Indian Income-Tax (Amendment) Act, 1939 (referred to as the amending Act) altered this rule by amending section 26(2) so that, where a succession occurred in a business, profession or vocation, both the predecessor and the successor were to be assessed separately, each in respect of his actual share of the profits of the previous year. Consequently, the relief that had previously applied only to discontinued businesses was extended by the enactment of section 25(4) to cover successions that happened after the commencement of the amending Act. The purpose of this extension was the same as in the case of discontinuance: to alleviate the hardship created by the double charging of income for the year 1921-22. In effect, the predecessor received the same relief as if he had discontinued the business on the date of succession. This shows that section 25(4) was a consequence of the amendment to section 26(2), and that the interpretation of the phrase “succeeded in such capacity by another person” in section 26(2) must also determine its scope in section 25(4). A preliminary issue that arose from the wording of the amended section 26(2) was whether the provision applied only to inter-vivos successions. Although some arguments suggested that the subsection could not contemplate testamentary or intestate succession because there was no provision for assessing profits earned by a deceased person in the hands of his representatives, the Court found no sufficient basis to exclude successions on death, especially since section 24B dealt with such situations. Moreover, proviso (c) to section 24(9) referred to a person “succeeded in such capacity by another person otherwise than by inheritance,” indicating that the term “succession” in the Act also encompassed devolution on death. The next point concerned the meaning of the expression “in such capacity.” In the Madras High Court decision Jupudi Kesava Rao v. Commissioner of Income Tax (Madras) (1), a Full Bench held that the phrase meant “in the capacity as owner,” meaning that a person who succeeds another must, by such succession, become the owner of the business that the predecessor carried on and must continue to carry it on in that ownership capacity. Applying this test, the Court concluded that the sole surviving member of a Hindu undivided family did not, within the meaning of section 26(2), succeed to the family business.

The Court observed that the predecessor had been a part-owner of the business and that no conveyance of ownership had occurred. While it was acknowledged that a transfer of ownership usually accompanies a succession under section 26(2) or section 25(4), the Court held that such a transfer could not be treated as an indispensable element of succession within the meaning of those provisions. The Income-Tax Act, the Court noted, is primarily concerned with the person who receives the income, profits or gains, rather than with the person who owns or enjoys them. Accordingly, section 2(2) defines the “assessee” as the person by whom the income-tax is payable, and section 10 provides that tax is payable by an assessee who carries on a business, profession or vocation. Thus, the statute attaches the liability to pay tax on the profits earned to the person who carries on the business, irrespective of how the profits are disposed of or enjoyed. The Court further pointed out that, on several occasions, persons who possess no proprietary or other right in the taxed income are nonetheless made liable to pay tax solely for the convenience of assessment and collection. Such instances are found in the proviso to section 26(2), section 18(7), section 23-A(3), section 25-A and section 42(1). Quoting Lord Cave in Williams v. Singer & Others, the Court reiterated that “the person charged with tax is neither the trustee nor the beneficiary as such, but the person in actual receipt and control of the income, which it is sought to reach.” Consequently, there was no justification to insist that a transfer of ownership be the decisive test of “succession” under section 26(2) or section 25(4), just as there was no justification to require ownership of the business by the person carrying on the business for the purposes of section 10. The Court clarified that this view did not extend to clerks or agents who merely manage a business; some form of title must exist, though it need not be of a beneficial character, nor need it be of the same quality in the predecessor and the successor. The essential enquiry, the Court held, is whether the person who has stepped in is carrying on the business as a principal. If that is so, the revenue looks to that person and makes him liable for payment of tax. The expression “in such capacity” in sections 25(4) and 26(2) therefore signifies simply the capacity of a person who carries on the business in the same manner as the predecessor, with a liability to be taxed on its profits and gains. Applying these principles to the case at hand, the Court was clearly of the opinion

The Court held that the testator, who had been carrying on the business in question, was succeeded in the same capacity by the appellants when he died on 9 April 1942, and that the testator’s estate consequently vested in the appellants. It was noted that the testator had expressly authorised the appellants to continue the business as a going concern for a period of one year after his death, and had also given them the power to enter into fresh contracts and to discharge both past and future liabilities. Accordingly, the appellants were characterised as an “association of persons” carrying on the business, and, being assessable in that capacity in respect of the profits and gains of the business under section 10 read with section 3 of the Act, they were liable to be taxed on the profits earned after 9 April 1942. An objection was raised that, because the appellants were assessable as representatives of the testator under section 24-B for the profits earned by him during the accounting year, they could not simultaneously be treated as successors assessable under section 26(2) for the profits earned during the remainder of that year, the argument claiming that such apportionment would be meaningless since the same interest—the testator’s estate—would bear the tax incidence in either case. The Court rejected this line of argument as fallacious, observing that it failed to distinguish between the executors’ position vis-à-vis the Revenue and their position vis-à-vis the testator’s estate. The Court reiterated that the liability to pay tax on the profits earned after the testator’s death arose under section 10(1) and, as the liability of assessors carrying on the business, was personal to the appellants, although they could be indemnified by the estate for any tax paid. By contrast, the liability to pay tax on the profits earned during the testator’s lifetime arose under section 24-B, was limited to the extent that the testator’s estate could meet the charge, and therefore did not render an apportionment under section 26(2) meaningless, even if in practice it might have little effect where the estate was solvent. The Court consequently agreed with the Chief Justice, dismissed the appeal, and recorded that counsel for the appellant and counsel for the respondent had been heard.