Oriental Fire & General Insurance ... vs Cit Delhi (Central)
2000 Latest Caselaw 473 Del

ORDER

Arijit Pasayat, CJ.

1. 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 1972-73 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 1972-73 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 1972-73, 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 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 at least 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 Nationalization Act, 1972 (hereinafter referred to as the "Nationalization 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 "ACC"), 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 1972-73 under Section 22(b) of the Act. Being aggrieved by the order of the Tribunal, both Revenue and assessee filed Application 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:

Succession to business otherwise that on death.

170. (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 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 and Co. Ltd. Vs. 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 another (See C.I.T. Vs. K.H./Chambers [(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 does 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 alter 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. Reference are accordingly disposed of.