1991 (4) TMI 110 - HC - Income Tax

Court rules profits from Pakistani cement factories taxable to applicant-company under Income-tax Act Section 60.

The High Court held that profits from two cement factories in Pakistan for specific years were taxable in the hands of the applicant-company. The Court ... Diversion By Overriding Title, To Whom Income Accrues Issues Involved:1. Taxability of profits arising from the working of two cement factories situated in Pakistan for the assessment years 1964-65 and 1965-66.2. Interpretation and application of the agreement between the assessee-company and the purchaser regarding the transfer of profits.3. Application of Section 60 of the Income-tax Act, 1961, concerning the transfer of income without the transfer of assets.Detailed Analysis:Issue 1: Taxability of ProfitsThe primary issue was whether the profits arising from the working of two cement factories in Pakistan for the years October 1, 1962, to September 30, 1963, and October 1, 1963, to September 30, 1964, were taxable in the hands of the applicant-company. The Tribunal held that these profits were taxable in the hands of the assessee-company. The Tribunal found that the profits actually accrued to the assessee-company and could not be retrospectively attributed to the purchaser, Mr. Maneckji, or his nominee. The Tribunal stated that the agreements did not retrospectively make Mr. Maneckji or his nominee the owners of the factories or bring about the accrual of the profits in their favor.Issue 2: Interpretation of the AgreementThe agreement dated July 24, 1962, and the supplemental agreement dated November 2, 1962, were crucial in determining the taxability of the profits. Clause 3 of the supplemental agreement stated that the profit and loss arising from the operation of the company during the period subsequent to September 30, 1962, shall be to the account of Mr. Maneckji, provided the sale transaction was completed. However, the sale deed was not executed until September 30, 1964. The Tribunal concluded that the profits accrued to the assessee-company because the business operations and control remained with the assessee-company until the completion of the sale transaction. The Tribunal also referenced the decision in Western States Trading Co. P. Ltd. v. CIT [1971] 80 ITR 21 (SC), which held that an agreement could not alter the actual state of affairs retrospectively.Issue 3: Application of Section 60 of the Income-tax ActThe Tribunal declined to accept the Department's contention that Section 60 applied to the case. Section 60 states that all income arising to any person by virtue of a transfer, where there is no transfer of the assets from which the income arises, shall be chargeable to income-tax as the income of the transferor. The Tribunal reasoned that Section 60 would only apply if the income had actually accrued to Mr. Maneckji or his nominee, which it did not. The Tribunal also noted that Section 60 relates to an arrangement where both the transfer of income and the retention of the ownership of the assets form part of one scheme, which was not the case here.The High Court, however, disagreed with the Tribunal's interpretation of Section 60. The Court held that Section 60 was applicable because the transfer of assets had not taken place until September 30, 1964. Therefore, any income arising before this date was chargeable to income-tax as the income of the transferor, i.e., the assessee-company.ConclusionThe High Court concluded that the profits arising from the working of the two cement factories situated in Pakistan for the years October 1, 1962, to September 30, 1963, and October 1, 1963, to September 30, 1964, were taxable in the hands of the applicant-company. The Court's decision was based on the accrual of profits to the assessee-company and the applicability of Section 60 of the Income-tax Act. The references were answered in the affirmative, confirming the Tribunal's decision that the profits were taxable in the hands of the assessee-company.