AGARWALA, C.J. -
(1.) THREE questions have been referred to us under the Indian Income-tax Act of which only the following two have been pressed :-
(1) Whether, in the circumstances of the case, a change in the persons caring on the electric supply business occurred after the 1st of September, 1939 ?
If the answer be in the affirmative -
(2) Whether the provisions contained in Section 8 (3) or in Section 8 (5) of the Excess Profits Tax Act applied to the facts of the present case
(2.) IN 1935 a licence was granted to the firm of Chunilal Ganpatrai to supply electric current to the town of Ranchi. IN 1937 the licensee applied to Government for permission to transfer the licensee to the Ranchi Electric Supply Company, Limited. That company had not yet been formed, but on the 27th April, 1938, its memorandum of association was signed by a number of persons, including members of the firm of Chunilal Ganpatrai. The object of the formation of the company was stated to be to acquire the licence granted to Chunilal Ganpatrai and to take over the supplying of electric current to the town of Ranchi. A certificate of incorporation of the company was granted on the 13th July, 1938. The licensee again applied to Government for leave to transfer the licence to the company. While this was pending a draft agreement was drawn up between the licensee and the company on the 28th August, 1938, approved by the companys Board of Directors and sent to Government. The agreement provided for the purchase by the company from Chunilal Ganpatrai, of the licence and business of supplying electric current to Ranchi. It contained the following clause :-
The company shall take over from the vendors the said business and assets as aforesaid as from the 1st day of January, 1938.
On the 18th of November, 1939, Government sanctioned the transfer of the licence to the company. This sanction was not gazetted, however, until the 13th of March, 1940. The agreement between the licensee and the company was concluded on the 20th of July, 1940, and on the 29th of October the company obtained a commencement certificate from the Registrar of Joint Stock Companies. The concluded agreement between the licensee and the company contained a clause corresponding to the clause in the draft already cited, providing that the company should take over the business and assets as from the 1st of January, 1938. The questions that have been referred to us arise in relation to the assessment for excess profits tax for the period from the 1st of January, 1941, to the 31st of December, 1942, that is to say, the relevant chargeable accounting periods are the calendar years 1941 and 1942.
Section 4 (1) of the Act provides that, subject to its provisions, there shall, in respect of any business to which the Act applies, be charges, levied and paid on the amount by which the profits during any chargeable accounting period exceed the standard profits, a tax referred to as excess profits tax, which shall, in respect of any chargeable accounting period ending on or before the 31st of March, 1941, be equal to 50 per cent. of that excess, and shall, in respect of any chargeable accounting period beginning after that date, be equal to such percentage of that excess as may be fixed by the annual Finance Act. For the purposes of the Act Section 6 (1) provides the standard profits of the business in relation to any chargeable accounting period shall, subject to the provisions of sub-sections (3) and (4), be an amount bearing to the profits of the business during the standard period, if in respect of treat business a standard period is available, the same proportion as the chargeable accounting period bears to the standard period. Where there is a change in the persons carrying on the business, Section 8 (1) provides that as from the date of the change, the business shall, subject to the provisions of this section, be deemed for all the purposes of this Act except for the purposes of determining the amount of the statutory percentage to have been discontinued, and a new business to have been commenced. Sub-section (3), however, declares that a business shall not, for the purposes of the provisions of this Act relating to the computation of standard profits, be deemed to be discontinued by reason of any change occurring on or after the 1st of September, 1939, in the persons carrying it on, and the standard profits of the business in relation to any chargeable accounting period shall be computed accordingly. Sub-section (5) provides that, where, on or after the 1st of September, 1939, part of a business is transferred as a going concern by the person theretofore carrying it on to another person, the part transferred and the part not transferred shall each be deemed for the purposes of the provisions of this Act relating to the computation of standard profits to be a continuation of the original business, and the said provisions, including the provisions of the section relating to amalgamations, shall apply accordingly. But for the provisions of these two sub-sections were inserted in the Act. The contention of the assessee is that the business was transferred on the 1st of January, 1938, or at the latest on the 28th of August, 1938, when the draft agreement was approved by the companys Board of Directors and sent to Government, while on behalf of the revenue it is contended that the transfer was effected by the agreement concluded on the 20th of July, 1940. It has been contended on behalf of the assess that the company bought the business of the licensee on the basis of actual expenditure by the licensee after the 1st of January, 1938, and that the concluded agreement, like the draft, expressly provides that the company shall take over from the vendors as from that date. On behalf of the revenue, on the other hand, it is contended that this was merely an arrangement between the vendor and the vendor for purposes of accounting and cannot affect the question as to when the business was actually transferred to the company.
I am quite unable to understand how it can be considered that the business conducted by the licensee was transferred to the company before the agreement between them was concluded on the 20th of July, 1940. Apart from the fact that no agreement between the parties was signed before that date, Section 9(2) of the Finance Act, 1910, prohibits a licensee from assigning his licence or transferring his undertaking, or any part thereof, by sale, mortgage, lease, exchange, or otherwise, without the previous consent in writing of the Provincial Government. There was no consent of the Provincial Government either in writing or otherwise at the time that the draft agreement was approved by the companys Board of Directors. It was only on the 18th of November, 1939, that the Government gave its consent to the transfer. Sub-section (3) of Section 9 of the Electricity Act declares that any agreement relating to any transaction of the nature described in sub-section (2), unless made with or subject to the consent of the Provincial Government, shall be void. The assessee relies on a clause in the agreement which provides that within a month of the receipt of the order of the provincial Government conveying its consent to the propped transfer under Section 9 (2) possession of the premise shall, as far as practicable, be given to company in part performance of this contract, and the consideration shall be paid thereafter by allotment to the vendors of 3,600 fully paid up shares and Rs. 1,10,483-4-6 in cash and the vendors and all other necessary parties, if any, shall, at the expense of the company, when called upon to do, and at all times, execute and do all assurances and things for vesting the said lands, premises etc. more fully to and up to there company and giving to it the full benefit of the agreement. Assuming that this clause in the agreement renders the agreement. Assuming that this clause in the agreement renders the agreement subject to the Provincial Governments sanction so as to be governed by sub-section (3) of Section 9 of the Electricity Act, its only effect is that the agreement is not void. It does not convert the draft agreement into a valid transfer of the undertaking of the licensee to the company. Nor, until the Provincial Government had sanctioned the transfer, was it legal for the company to engage in carrying on the undertaking of the licensee. This is made clear by Section 28 (1) of the Electricity Act which provides : No person, other than a licensee, shall engage in the business of supplying energy except with the previous sanction of the Provincial Government and in accordance with such conditions as the Provincial Government may fix in this behalf, and any agreement to the contrary shall be void. This makes it clear not only that the company could not legally carry on the business of supplying energy until the Provincial Government had accorded its sanction, but also vis-a-vis the Government, renders void the provision in the agreement between the parties, that the company should take over from the vendors as from the 1st of January, 1938. Furthermore, as the company was not incorporated until the 13th of July, 1938, it was not possible for it to carry on the business of supplying electricity to the town of Ranchi legally prior to that date. To hold that the transfer took place on the 1st of January, 1938, would involve holding that as from that date a non-existent company was carrying on a business in the teeth of the prohibition contained in Section 28 (1). To hold that the transfer was effective from the 28th August, 1938, would involve holding that before the agreement was executed between the vendor and the vendee the latter was carrying on the business contrary to law. I can see no escape from the conclusion that there was no valid transfer until the 20th July, 1940, and would therefore, answer the first question in the affirmative. It follows that the second question must be answered in the affirmative.
The Income-tax Department will have its costs Rs. 250.
(3.) MEREDITH, J. - I agree.
Reference answered accordingly.;