Citation Codes

Equivalent Citations

citation codes

Case Number

I.T.R 73-A and I.T.R 74 OF 1979

Advocates

Mr. Satyen Sethi, Adv.
Mr. R.D Jolly with Ms. Premlata Bansal, Adv.

Judges

Arijit Pasayat, C.J
D.K Jain, J.

Acts

Section 16(1) of the General Insurance Business Nationalisation Act 1972 (hereinafter referred to as the Nationalisation Act)
Section 3(10) of the General Insurance (Emergency Provisions) Act 1971 (hereinafter referred to as the 1971 Act).
Sections 256(1) of the Income- tax Act, 1961 (hereinafter referred to as the Act)
SECTION 2 INSURANCE ACT
company.6. Sub-section (2) of Section 170
SECTION 44 INCOME TAX ACT 1961
Act, 1938 (in short the Insurance Act).
provisions of Section 28(ii)(d)
provisions of Section 170(2)
Section 6(1) of the 1971 Act

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Smart Summary

Summary of Opinion — Arijit Pasayat, C.J. (Oral)

Factual and Procedural Background

For assessment year 1972-1973, the assessee (Oriental Fire and General Insurance Co. Ltd., the transferee company) was assessed as successor in business of M/s Bharat General Re-Insurance Co. Ltd. (the "Old Company"). The Old Company carried on general insurance business until 13 May 1971, when management vested in the Central Government under Section 3(10) of the General Insurance (Emergency Provisions) Act, 1971. The Central Government provided compensation to insurers for such vesting (under Section 6(1) of the 1971 Act), and subsequently framed a merger scheme (Oriental Fire and General Insurance Co. Ltd. (Merger) Scheme 1973) operative from 1 January 1974 under the General Insurance Business Nationalisation Act, 1972. Clause 4(1) of that Scheme provided that from 1 January 1974 the undertaking of every merged company stood transferred to and vested in the transferee company; in this case the Old Company was the merged company and the assessee the transferee.

The Assessing Officer applied Section 170 of the Income-tax Act, 1961 and assessed the assessee as successor to the Old Company. The Appellate Assistant Commissioner of Income-tax affirmed that view. The Tribunal, however, held that the crucial date of succession was 1 January 1974 and that the assessee did not become successor before that date; the Tribunal also held that a sum of Rs. 2,85,838 paid as management compensation was includible in the assessee's total income for 1972-1973 under Section 22(b). Both Revenue and assessee were aggrieved by the Tribunal's order and applications for reference under Section 256(1) were made; three questions were referred to this Court for opinion.

Legal Issues Presented

Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessment made on Oriental Fire and General Insurance Co. Ltd. in respect of the income for the assessment year 1972-1973 as a successor of M/s Bharat General Insurance Corpn. Ltd. was bad in law?
Whether on the facts and in the circumstances of the case, the sum of Rs. 2,85,838/- being the amount of management compensation, was includible in the total income of the insurance company for the assessment year 1972-1973 u/s 28(ii)(d) of the Income-tax Act, 1961?
Whether in view of Section 44 of the Income-tax Act, 1961 and the First Schedule thereto, the provisions of Section 28(ii)(d) would not be applicable to the management compensation of Rs. 2,85,838/- in computing the income of the assessee insurance company?

Arguments of the Parties

Revenue's Arguments

Relied on Section 170 of the Income-tax Act, 1961 and, specifically, Section 170(2) to contend that the assessee should be treated as a successor at least from 13 May 1971.

Assessee's Arguments

Contended that the merger scheme and its operation became effective only from 1 January 1974, and that the assessee became the transferee company from that date.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Reynold Sons & Co. Ltd. v. Ogston, (1930) 15 Tax Cases 501	Test for succession: need for a very close identity between the predecessor's business and the successor's business when measuring the successor's income by the past history of the business.	The Court cited the case to support the proposition that succession requires substantial identity and continuity of the business; mere management arrangements do not suffice to establish succession.
Commissioner Of Income Tax, Madras v. K.H Chambers, Madras [(1965) 55 ITR 674]	Tests of change of ownership, integrity, identity and continuity of a business to establish succession.	The Court relied on this authority to reiterate that the recognised connotation of succession involves end of one entity and replacement by another that continues the business as a going concern; these tests were applied to conclude succession did not occur prior to 1 January 1974.

Court's Reasoning and Analysis

The Court analysed Section 170 of the Income-tax Act, 1961, especially subsection (2). Section 170(2) provides that when a predecessor cannot be found, the assessment for the relevant previous years shall be made on the successor "in like manner and to the same extent" as on the predecessor, and that the other provisions of the Act shall apply so far as may be. The Court emphasised that succession connotes the end of an entity carrying on the business and its replacement by an entirely new entity that continues the business with substantial identity and continuity.

The Court applied established tests (identity, continuity, change of ownership, integrity) drawn from cited authorities (Reynold Sons & Co. Ltd. v. Ogston and Commissioner Of Income Tax, Madras v. K.H Chambers) and concluded that the provisions of Section 170 come into operation only when there is an effective transfer of ownership of a business. The Court held that mere management of a business on behalf of another (an agency arrangement) does not amount to transfer of ownership and is insufficient to attract Section 170.

On the facts of this case, the Court accepted the Tribunal's positive finding that succession took place on 1 January 1974 when the Scheme became operative and the undertaking vested in the transferee company. Accordingly, prior arrangements under which the Central Government managed the Old Company's undertaking (from 13 May 1971) did not constitute succession for the purposes of Section 170, and therefore the Assessing Officer's treatment of the assessee as successor for assessment year 1972-1973 was not sustainable.

Holding and Implications

Holding: The Court answered the question referred at the instance of the Revenue in the affirmative, and ruled in favour of the assessee and against the Revenue — i.e., the Tribunal was justified in holding that the assessment made on Oriental Fire and General Insurance Co. Ltd. as successor for assessment year 1972-1973 was bad in law.

Implications:

The assessment treating the assessee as successor for the assessment year 1972-1973 (on the basis of succession prior to 1 January 1974) was held unsustainable.
The Court declined to answer the questions referred at the instance of the assessee concerning inclusion of the management compensation in income, observing those questions had become academic.
References are accordingly disposed of. The opinion did not purport to lay down any broader novel precedent beyond application of established tests for succession and the conclusion that management on behalf of another does not amount to transfer of ownership for Section 170 purposes.

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Oriental Fire & General Insurance Co. Ltd. & Other v. Commissioner Of Income-Tax Delhi (Central). & Other.

Arijit Pasayat, C.J (Oral)— These two references under Sections 256(1) of the Income- tax Act, 1961 (hereinafter referred to as the Act”) are closely inter-linked and are disposed of by this common judgment.

2. Both the assessee and the Revenue felt aggrieved by the order of Income-tax Appellate aggrieved by the order of Income- tax Appellate Tribunal, Delhi Bench ‘A’, Delhi (hereinafter referred to as the “Tribunal”) and moved for reference. The following questions have been referred for opinion of this Court:—

(i) Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessment made on Oriental Fire and General Insurance Co. Ltd. in respect of the income for the assessment year 1972-1973 as a successor of M/s Bharat General Insurance Corpn. Ltd. was bad in law?”

(ii) Whether on the facts and in the circumstances of the case, the sum of Rs. 2,85,838/- being the amount of management compensation, was includible in the total income of the insurance company for the assessment year 1972-1973 u/s 28(ii)(d) of the Income-tax Act, 1961?

(iii) Whether in view of Section 44 of the Income-tax Act, 1961 and the First Schedule thereto, the provisions of Section 28(ii)(d) would not be applicable to the management compensation of Rs. 2,85,838/- in computing the income of the assessee insurance company”.

The first question was referred at the instance of the Revenue while rest were referred at the instance of the assessee.

3. The factual position as indicated in the statement of the case is as follows:—

For the assessment year 1972-1973, assessee was assessed as successor in business of M/s. Bharat General Re-Insurance Co. Ltd. (hereinafter referred to as the “Old Company”). Old Company was carrying on business of general insurance until and before 13th May 1971. On and w.e.f 13th May 1971, management of the Old Company vested in the Central Government in terms of Section 3(10) of the General Insurance (Emergency Provisions) Act 1971 (hereinafter referred to as the “1971 Act”). The Old Company held licence issued under the Insurance Act, 1938 (in short the “Insurance Act”). Pending appointment of a custodian of the undertaking of the Old Company, persons incharge of the management of that undertaking immediately before 13th May 1971, were to be incharge of management of the undertaking for and on behalf of the Central Government. So far as the period from 13th May 1971 onwards was concerned, in terms of Section 6(1) of the 1971 Act every insurer was given by the Central Government compensation for the vesting in it, under Section 3 of the Act of the management of the undertaking of the Old Company insurer. The rate of compensation payable varied depending on whether the insurer was one referred to in clause (a) of sub-section (9) of Section 2 of the Insurance Act or one referred to in clause (b) of sub-section (9) of Section 2 of the said Act. In the latter case rates varied depending on whether the insurer concerned had or had not declared dividend during atleast one of the three calendar years 1967, 1968 and 1969. A scheme was framed by the Central Government under Section 16(1) of the General Insurance Business Nationalisation Act 1972 (hereinafter referred to as the “Nationalisation Act”) The said scheme was operative from 1st January 1974 and described as the Oriental Fire and General Insurance Co. Ltd. (Merger) Scheme 1973 (hereinafter referred to as the “Scheme”). As provided under Clause 4(1) of the Scheme, on and from 1st January 1974 the undertaking of every merged company stood transferred to and vested in the transferee company. In the instant case, Old Company was the merged company, and assessee was the transferee company.

4. By applying Section 170 of the Act assessment was made by the Assessing Officer holding that assessee was a successor of the Old Company. The assessment was assailed before the Appellate Assistant Commissioner of Income-tax (in short “AAC”), who affirmed views of the Assessing Officer. The matter was carried in appeal before the Tribunal which held that crucial date was 1st January 1974 and only with effect from that date, the Assessee came to the picture. Merely because at an earlier point of time, there was management arrangement on behalf of the Central Government, that did not render the assessee a successor to bring in Application under Section 170 of the Act. While holding so Tribunal observed that a sum of Rs. 2,85,838/- paid as management compensation was includible in the total income of the Assessee for the assessment year 1972-1973 under Section 22(b) of the Act. Being aggrieved by the order of the Tribunal, both Revenue and assessee filed Applications for reference and as indicated at the outset, questions have been referred for our opinion.

5. Section 170 of the Act on which reliance has been placed by learned counsel for the Revenue, so far as relevant reads as follows:

170. Succession to business otherwise than on death.

(1) Where a person carrying on any business or profession (such person hereinafter in this section being referred to as the predecessor) has been succeeded therein by any other person (hereinafter in this Section referred to as the successor) who continues to carry on that business or profession -

(a) the predecessor shall be assessed in respect of the income of the previous year in which the succession took place up to the date of succession;

(b) the successor shall be assessed in respect of the income of the previous year after the date of succession.

(2) Notwithstanding anything contained in sub-section (1), when the predecessor cannot be found, the assessment of the income of the previous year in which the succession took place up to the date of succession and of the previous year preceding that year shall be made on the successor in like manner and to the same extent as it would have been made on the predecessor, and all the provisions of this Act shall, so far as may be, apply accordingly.

Section 170(2) has been referred to contend that atleast from 13.5.1971, assessee was to be treated as a successor. Learned counsel for the assessee on the other hand submitted that the operation of the scheme as referred to above became operative only with effect from 1.1.1974, and from that date assessee became the transferee company.

6. Sub-section (2) of Section 170 postulates that notwithstanding anything contained in sub-section (1) when the predecessor cannot be found the assessment of income of the previous year in which the succession took place to the date of succession and of the previous year preceding that year shall be made on the successor in like manner and to the same extent as it would have been made on the predecessor and all the provisions of the Act so far as may be applicable shall be so done. Succession implies that there is end of an entity carrying on the business, and its place has been taken by an entirely new entity to run in continuity and as a going concern, the same business. Substantial identity and continuity of the business must be preserved. In Reynold Sons & Co. Ltd. v. Ogston, (1930) 15 Tax Cases 501, Lord Hanworth M.R concurred with Rowlatt J. to observe that following was the true test:

“You want to measure the income of the successor by a past history of the business, it is therefore essential that there should be a very close identity between the business in the former proprietorship and the business in the present proprietorship.”

Succession has a recognised connotation. The tests of change of ownership, integrity, identity and continuity of a business have to be satisfied before it can be said that a person “succeeded” to the business of Commissioner Of Income Tax, Madras v. K.H Chambers, Madras [(1965) 55 ITR 674]. Section 170(1) of the Act prescribes not merely for liability to tax, but also the process of computation of tax. Alongwith the recording of a finding regarding identity of predecessor and successor, assessing officer has to record the date from which succession has come into effect and also indicate reason for such conclusion. The provisions of Section 170(2) override those contained in Section 170(1) upon happening of the prescribed condition, viz, that after the succession having been effected, the predecessor cannot be found. provisions of section 170 come into operation only when there is an effective transfer of ownership of a business. Mere agreement to effect a transfer is not enough, Managing a business on behalf of another dose not involve transfer of ownership. It involves concept of agency. That is not sufficient to attract application of Section 170 of the Act.

7. In the instant case, the crucial date to bring in Application of Section 170 of the Act is the date of succession i.e 1.1.1974 Prior to that date there was no succession and merely because assessee is stated to be in management, that is of no consequence and does not after the date of succession. That being the position the assessment as made for the assessment year 1972-73 was clearly unsustainable. Tribunal has recorded positive findings that succession took place on 1.1.1974 and, in our opinion, rightly. We answer the question referred at the instance of the Revenue in the affirmative, and in favour of the assessee and against Revenue. So far as questions referred at the instance of the assessee are concerned, it is conceded that they have become academic in nature. That being the position we decline to answer them.

8. References are accordingly disposed of.

Oriental Fire & Gene... v. Commissioner Of Inco...