THE COMMISSIONER OF INCOME-TAX, TAMIL NADU versus CITY MILLS DISTRIBUTORS (P) LTD .

Citation: [1996] 2 S.C.R. 109 · Decided: 05-02-1996 · Supreme Court of India · Bench: J.S. VERMA · Disposal: Disposed off

Judgment (excerpt)

-
THE COMMISSIONER OF INCOME-TAX, TAMIL NADU 
A 
v. 
CITY MILLS DISTRIBUTORS (P) LTD. 
FEBRUARY 5, 1996 
[J.S. VERMA, S.P. BHARUCHA AND SUJATA V. MANOHAR, JJ.] 
Income Tax Act, 1961 : 
S.257-Ref ere nee to Supreme Cowt-Pre-incorporation profit of Com-
pany-Jncludibility of in the assessment of the Company after i11c01pora-
tion-H eld, a Coinpany becomes a legal entity in the eye of law only when it 
is inc01porated--Company did not exist when tlu! said income was 
eameti-Hence not inc/udible in its assessment. 
B 
c 
For the assessment year 1974-75, the respondent-assessee filed its D 
return disclosing an income of Rs. 1, 79,690. The Income Tax Officer found 
that the promoters of the assessee-Company had carried on business on 
behalf of the Company prior to its incorporation and had received a sum 
of Rs. 80,534. After allowing the expenses in this behalf, the Income Tax 
Officer arrived at a figure of Rs. 24, 862 and included it as pre-incorpora-
tion profit, as according to him the promoters had acted and carried on 
business on behalf of the assessee-Company, which had accepted the act 
of the promoters after its incorporation. 
The assessee's appeal to the Commissioner of Income Tax (Appeals) 
E 
was dismissed, and the assessee preferred an appeal before the Tribunal, F 
which allowed the appeal and held that in law, the promoters and the 
assessee-Company were different legal persons and that the income ac-
crued prior to the incorporation of the assessee company was earned by 
the promoters. 
The present reference under S.257 of the Inrome-tax Act has been G 
made by the Tribunal, direct to this Court in view of the different views 
taken by the Allahabad and Calcutta High Courts upon the same issue. 
The reference relates to the includibility of the pre-incorporation profits 
of the assessee-Company, in its assessment for the assessment year 1974-
75. 
II 
109 
110 
SUPREME COURT REPORTS 
(1996] 2 S.C.R. 
A 
Answering the question in favour of the assessee, this Court 
B 
HELD : 1.1. A company becomes a legal entity in the eye of law only 
when it is incorporated. Prior to its incorporation, it simply does not exist. 
The assessee company did not exist when the income was earned. It is, 
therefore, not the assessee company which earned the income when it 
accrued and it is not liable to pay tax thereon. [114-C] 
. 1.2. A company can enter into an agreement only after its incorpora-
tion. It is only after incorporation that a company may decide to accept 
that its promoters have carried on business on its behalf and appropriate 
C the income thereof to itself. The question as to who is liable to pay tax on 
such income cannot depend upon whether or not the company after 
incorporation so decides. It is he who carried on the business and received 
the income when it accrued who is liable to bear the burden of tax thereon. 
[114-D-E] 
D 
2. It may be that the transaction of appropriation by a company to 
itself of income earned by its promoters before its incorporation is also 
subject to tax; that is not in issue in this reference. Hence no view. is 
expressed. [114-F] 
· 
Commissioner of Income-Tax, U.P. and Ajmer-Me1wara v. The Bijli 
E Cotton Mills Ltd.1 Agra, 23 I.T.R. 278; Commissioner of Income-tax, Bombay 
v. Abudaker Abdul Rehman, 7 I.T.R. 139; Commissioner of Income-tax, 
Bombay v. T1Ustees of Sir Cwrimbhoy Ebrahim Baronetcy T1Ust, A.I.R. 
(1932) Born. 106 and Security P1inters of India (P) Ltd. v. Commissioner of 
Income Tax, U.P., approved. 
F 
a· 
Commissioner of Income-tax, Bengal v. Tea Producing Co. of India 
Ltd., 48 I.T.R. 200, disapproved. 
Commissioner of Income-tax v. Dewan Bahadur Dewan IV-is/ma 
Ki,shore, 9 I.T.R. 695, referred to. 
CIVIL APPELLATE JURISDICTION : Tax Ref. Case No. 11 of 
1982. 
(Under Section 257 of the Income Tax Act, 1961.) 
H 
J. Ramamurthy, R. Satish and S.N. Terdol for the Appellant. 
--
' . 
C.I.T. v. CITY MILLS DISTRIBUTORS PVT. LTD. [BHARUCHA,J.] 111 
The Judgment of the Court was Delivered by 
BHARUCHA, J. This is a reference under Section 257 oft~ Income 
Tax Act, 1961, made by the Income-Tax Appellate Tribunal directiy to this 
Court in view of the difference in the views taken by the Allahabad and 
Calcutta High Court upon the same issue. The question to be answered 
reads thus : 
"Whether, on the facts and in the circumstances of the case, the 
Appellate Tribunal was right in holding that the pre-incorporation: 
profits of Rs. 24,862 cannot be included in th

Excerpt shown. Read the full judgment & AI analysis in Lexace.