1. SALEEM AKHTAR, J.--Applicant No. 1 entered into an agreement dated 24-7-1962 with Dalmia Cement Ltd., whereby Dalmia agreed to sell to applicant No. 1 all its properties and assets in Pakistan comprising of two cement factories situated at Karachi and Dandot. In terms of the agreement option was given to applicant No. 1 that the agreement or the subject-matter could be transferred to any body corporate formed and controlled by applicant No. 1, if so desired, and in that case Dalmia shall transfer it to such a body corporate. The main agreement was modified by a further agreement dated 2-11-1962 in which clause (3) provided that the profits and losses arising from the operation of the cement factory subsequent to 30-9-1962 would in the event of completion of the sale transaction be to the account of applicant No. 1. The sale-deed was executed on 30-9-1964 between Dalmia as vendor and Pakistan Progressive Industries Ltd., as vendee being the nominee of applicant No. 1 and applicant No. 1 as the confirming party. The Pakistan Progressive Industries (hereinafter called `the company') filed a return of income on 7-8-1965 showing profit of Rs. 28,58,844 for the period from 1-9-1962 to 31-7-1964. It was subsequently revised and the profit was reduced to Rs. 25,49,898 for the period from 1-10-1962 to 30-9-1964.
2. The Income-tax Officer, however, issued notice under section 34 of the Income---tax Act to the Promoter of the company namely, applicants Nos. 1 and 2 in respect of the assessment for the period from 1-10-1962 to 18-10-1964.
3. The applicants filed return showing Nil income and denied that they are liable to pay any tax on the ground that they were Promotors of the company and the profits belonged to the company and not to them. This plea was rejected and the applicants were charged to profit in their hand from 1-10-1962 till the date of incorporation of the company. The applicants filed appeal against the order before the Appellate Assistant Commissioner who rejected it by the order dated 5-10-1971. The applicants then appealed to the Income-tax Appellate Tribunal which by order dated 9-7-1971 dismissed the appeal. The applicants have filed this application directly under section 66(1) of the Income-tax Act, 1922 as amended in 1972 raising the following question for our opinion: "Whether in the facts and circumstances of the case the Income-tax Appellate Tribunal was justified in holding that the applicants and not the company were liable to pay the tax prior to the incorporation of the company?"
4. For the purposes of this question 3 dates namely 1-10-1972, 18-4-1964 and 30-9-1964 are relevant. The first date 1- 10-1962 is relevant as the main agreement as modified on 2-11-1962 incorporated clause (3) which reads as follows: "3. The profit and loss arising from the operation of the company during the period subsequent to 30th September, 1962 shall, in the event of the completion of the sale transaction in accordance with the said agreement, be to the account of Mr. Maneckji. The operation of the Company's factories and business in Pakistan shall, however, continue to remain under the full and undisturbed control, and discretion of the Company as hitherto, and nothing stated herein shall be construed as permitting in any manner interference on the part of Mr. Maneckji with the conduct of the business and operation of the factories until the same are transferred to Mr. Maneckji on the completion of the transaction."
5. The second date 18-4-1962 is relevant as on this date the company was incorporated, and on 30-9-1964 sale- deed in favour of the company was registered and transfer was made by Dalmia in favour of the company. The question therefore, is whether the applicants were liable to pay income tax in respect of the income between 1-10- 1962 to 30-9-1964 when the sale-deed was registered. The question has reference to the date of incorporation of the company which does not correctly portray the real question which arises from the order of the Tribunal. The real question is whether the applicants could be charged to tax in respect of income accruing between 1-10-1962 to 30-9-1964.
6. So far as the agreement, formation of the company and the execution of the sale-deed are concerned there is no dispute about them. The controversy arises in respect of interpretation of the two agreements namely the main agreement dated 24-7-1962 and supplementary agreement dated 2-11-1962. Clause 20 reads as follows: "20. This agreement and/or the subject-matter thereof may be transferred to any body corporate formed and controlled by Mr. Maneckji, if so required and the Company shall be bound to effect the transfer as if such body corporate were a party hereto."
7. Clause 3 of the supplementary agreement has already been reproduced above. According to Mr. Khalid Anwar the learned counsel for the applicants Dalmia carried on business till such time the sale-deed was executed in favour of the company and as the factory, mill, business and assets were not transferred to the applicants, but to the company, the applicants cannot be deemed to have carried on the business and never had the income in their hands and as such they cannot be subjected to income tax. The first agreement for purchasing the factory was executed between applicant No. 1 and Dalmia. It contemplates the sale of all the assets, business, properties to applicant No. 1 but it has given an option as contained in clause 20 to the effect that the agreement or the subject-matter of the agreement can be transferred to a body corporate formed by applicant No. 1 and if applicant No. 1 so requires Dalmia shall be bound to transfer in favour of such a corporate body. Therefore, after the execution of this agreement it was left open to applicant No. 1 that if he chooses, he may form a body corporate under his control and significantly on his assent Dalmia was to transfer the entire agreement to such a corporate body. Dalmia had no position to refuse. Therefore, basically the agreement was between Dalmia and applicant No. 1. This agreement was amended on 21-1-1962 but this part was not touched upon. Clause (3) of the supplemental agreement relates to the distribution of profits and accounts of the company during the intervening period that is subsequent to 30-9--1962 and upto the completion of the sale agreement. It clearly provides that during this period the profits and loss arising from the operation of Dalmia shall be to the account of Maneckji, applicant No. 1. This could be done only in case the sale transaction was completed. Therefore, the pre-condition was that as and when sale transaction is completed in accordance with the agreement the entire profit and loss for running the business during the period 1-10-1962 to the date of completion of the sale transaction shall be in the account of Maneckji, applicant No. 1. These profits and accounts were not to be in the account of Dalmia Cement Factory nor in the account of the company or- body corporate which could be formed and in whose favour the transfer could have been made.
8. Mr. Khalid Anwar the learned counsel for the applicants has contended that in clause 3 the rights of the applicants were contingent in the event of completion of the sale transaction. The agreement provided that either the factory could be purchased by Maneckji or any company incorporated by him having controlling shares and also Dalmia to transfer it in its favour. Therefore, the transfer could be made either in the name of Maneckji or in the name of such company. In either case completion of sale transaction in terms of agreement would have been achieved.
9. And it is on completion of sale transaction in either manner that the profit and loss account from 1-10-1962 upto the date of completion was to be in the account of Maneckji.
10. Mr. Khalid Anwar the learned counsel for the applicant has referred to Nishat Textile Ltd. v. Commissioner of Income-tax 1974 PTD 54 in which the view expressed in CIT U.P. v. The Bijli Cotton Mills Ltd. Agra (1953) 23 ITR 278 was dissented. In Nishat Textile Mills case the assessee firm entered into an agreement on 17-3-1958 with Abdul Aziz acting on behalf of a company for sale of the firm's business. At that time the company was in the process of formation and was actually incorporated on 16-11-1959. On the next day the company adopted the agreement dated 17-3-1958. The agreement provided that the sale would operate from 1-3-1958 and from that date the business of the vendor shall be deemed to be carried on for the benefit of the Company. The assessee firm contended that the profits of pre-incorporation period from 1-3-1958 belonged to the company and not the assessee firm. While dissenting from Bijli Cotton Mill's case it was observed that the scheme of the Income-tax Act was ignored. After analysing the definition of `assessee' and `person' and also referring to charging section 3 and sections 4 to 9 of the Income-tax Act which classify the nature of income .It was observed as follows:-- "We have referred to the relevant provisions of the Income-tax Act, 1922 to emphasise the point that a person is liable to assessm ent for income---tax in respect of the total income, subject to the provisions of the income-tax Act, which has accrued to him or which has been received by him. Income, profits and gains in do not accrue, nor are they receivable, in vacuum. There would be some person to whom the income, profits or gains have accrued, or who has received such income, profits or gains. A person who is not in existence, who is not yet born, cannot be said to have income, profits or gains accrued to him or received by him. As has been rightly pointed out in the Lahore case, Haripur Rosin & Turpentine Factory Ltd., Lahore v. The Commissioner of Income-tax, North Zone (West Pakistan), Lahore, a Company comes into existence upon its incorporation only, and not before. Therefore, during the pre---incorporation period, the Company cannot be said to have carried on any business, nor can it be seriously maintained that, during this pre---incorporation period, any income, profits or gains accrued to the Company or were received by it. The Company was not yet born, and therefore there can be no question of accrual or receipt of any income, profits or gains to or by the Company. During the pre-incorporation period, the assessee-firm carried on the business and was in effective control thereof and of its income, profits and gains and was, in effect, the legal owner of the business. It may be that there was fiduciary relationship between the assessee firm and the Company when it came into existence upon its incorporation. But that is a matter between the assessee-firm and the Company and the relationship between them is of no consequence as far as assessm ent to income-tax is concerned for the re-incorporation period ................................................................................... .......................................................................................................................................................................................................................................................According to the Allahabad view the income profits and gains for the pre-incorporation period are not assessable to tax in the hands of the promotors, as such income, profits and gains belong to the Company, which is yet to come into existence, and, if the Company refuses to adopt the agreement of sale, then in whose hands the income, profits and gains would be assessed to tax? Perhaps the answer may be that, in such a case, one will have to turn back to the promotors to bring the income, profits and gains in their hands to tax. If so, then the decision whether income, profits and gains should or should not be taxed in the hands of the promotors shall have to be postponed until such time as the Company comes into existence by incorporation and then refuses to adopt and ratify the agreement of sale, but such a procedure would, to say the least, be inconsistent with the scheme of the Income- tax Act. 1922. Section 3 of the Income-tax Act provides that income-tax shall be charged in respect of the total income of the previous year of every person. If we were to follow the Allahabad view, then the determination chargeable with income-tax will be dependent on the decision of the Company, when it comes into existence, to adopt or to refuse to adopt the agreement of sale and such a decision may not be forthcoming even within reasonable time. There may possibly be a case where a Company becomes incorporated, say after three years of the agreement of sale of a business by the promotors, and adopts and ratifies this agreement upon its incorporation, will the income, profits and gains for these three years be chargeable to tax in the hands of the Company? It may be contended, in such a case, that the Company is not the person to whom income, profits and gains have accrued during the previous year, or previous years within the meaning of Section 3 of the Income-tax Act or that during such previous year or previous years the Company did not carry on the business within the meaning of section 10 of the Act. In such a case, the income, profits and gains would be taxable neither in the hands of the promotors, nor in the hands of the Company. But such a situation is not contemplated by the Income-tax Act, 1922. As we have said, income, profits and gains accrue to or are received by a person or persons.
11. The vendors of the business, who have agreed to transfer the business to a Company upon its incorporation, remain the legal owners of the business until such incorporation, and until the adoption of the agreement by the Company, notwithstanding any provision in the agreement of sale that, until the incorporation of the Company the vendors shall carry on the business for the benefit of the Company. It is the vendors, as legal owners, who are the persons to whom the income, Profits and gains of the business would accrue, or be received by them.. We may acid herd that the Allahabad view has not found favour in the Indian jurisdiction itself, and, in this connection, we would refer the Calcutta decision. The Commissioner of Income-tax, West Bengal v. Tea Producing Co. Of India Ltd., (1963) 48 I.T.R. 200."
12. It has, therefore, been held that during the pre-incorporation period company cannot earn profit or gain nor it can be said to carry on business during that period. The company was incorporated on 17-4-1964 but it did not get any right, title or interest till 30-9-1964 when sale deed was registered in its favour. In view of the observations in the Nishat Textile Mill's case for purposes of Income Tax Act the company would not be entitled to the income and profit of the pre---incorporation period. Therefore, only question which remains to be considered is whether during this period the income was to accrue to the applicant or Dalmia. In this regard Mr. Shaikh Haider has referred to various clauses of the agreement between Dalmia and the applicant which show that the intention was that Dalmia should wash its hands off on 30-9-1962 and should retain its control till the sale transaction under the agreement is completed and for that reason clause 3 of the supplemental agreement provides that if the sale transaction is completed the profit and loss, shall go in the account of the applicant.
13. Nishat Textile Mill's case is distinguishable as Abdul Aziz acting on behalf of a company which had not been incorporated entered into agreement to purchase the business. At that time the company did not exist and therefore in spite of the agreement the business could not be transferred and or deemed to be transferred in the name of non-existent company. In the present case Maneckji had entered into an agreement in his own name and not on behalf of the company. He himself was the purchaser. The fact that registration of sale-deed could be made in the name of the Maneckji's nominee company cannot lead to the conclusion that the agreement was on behalf of the company or that there was any vacuum because in terms of agreements from 1-10-1962 the business was to be run in the account of Maneckji.
14. Mr. Khalid Anwar has contended that the entire control and management was in the hands of Dalmia. A perusal of the agreements will show that the factory was run and business was conducted on account of Maneckji. We have also noted that the Income-tax Officer and the Tribunal have found that the factory was run by the officers of the company for the benefit and in the account of Maneckji. This finding of fact has not been challenged by the applicants. The question as, framed accepts the finding of fact.'
15. We answer the question in the affirmative.