Taxability of pre-vesting profits of an acquired undertaking attached to the Government company under the acquisition scheme.

Profits earned by an acquired undertaking before vesting in a Government company remained taxable in the hands of the notified company. The statutory scheme allowed vesting in a Government company where the section 9(1) notification so directed, and section 9(3) applied the provisions relating to profits and liabilities as if references to the Central Government were references to that company. On that construction, the pre-vesting profits and the corresponding tax liability travelled with the undertaking to the assessee, and the amount could not be treated as an exempt capital receipt merely because it was routed through the Government.

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Issues: Whether the sum of Rs. 10,62,970, representing profits earned by the acquired undertaking before vesting in the Government company, was taxable in the hands of the assessee in view of the acquisition provisions and the government notification.

Analysis: The statutory scheme provided for transfer of the undertaking to the Central Government, but also enabled vesting in a Government company where the notification under section 9(1) so directed. By section 9(3), the provisions dealing with profits and liabilities were to apply to the Government company as if references to the Central Government were references to that company. On that construction, the profits earned by the undertaking for the relevant prior period and the corresponding liability to tax travelled with the undertaking and became the liability of the assessee as the notified Government company. The amount could not be treated as an exempt capital receipt merely because it was routed through the Government.

Conclusion: The inclusion of Rs. 10,62,970 in the assessee's income was justified and the Revenue's contention succeeded on this issue.

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