Legal Case Summary

Case Details
Case ID 0c290e70-5e37-45e3-b0af-791be7194d69
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Case Number Tax Reference Case No. 11 of 1982
Decision Date Feb 05, 1996
Hearing Date
Decision The Supreme Court held that the assessee-company did not exist at the time the pre-incorporation profits were earned, thus it was not liable to pay tax on the income accrued before its incorporation. The court clarified that a company becomes a legal entity only upon incorporation, meaning that any income earned prior to this, by promoters, does not fall under the company’s tax liabilities. The case also highlighted the distinction between legal and beneficial ownership concerning tax liabilities.
Summary In the landmark case Tax Reference Case No. 11 of 1982, decided on February 5, 1996, the Supreme Court of India addressed the issue of pre-incorporation profits and their tax implications under the Income Tax Act, 1961. The court ruled that a company is considered a legal entity only upon its incorporation. Therefore, any income accrued before this point is not taxable under the company’s name, but rather falls under the promoters who conducted business on behalf of the company prior to its establishment. This decision emphasizes the importance of establishing a clear timeline regarding income accrual and the legal status of a company. The ruling has significant implications for corporate law and tax liability, particularly in understanding the relationship between promoters and the companies they form. It underscores that tax obligations relate to the entity that legally exists at the time income is earned. This case serves as a crucial reference for legal professionals navigating corporate taxation and the complexities of income assessment for newly formed entities.
Court Supreme Court of India
Entities Involved COMMISSIONER OF Income Tax, CITY MILLS DISTRIBUTORS (P.) LTD
Judges J. S. VERMA, S. P. BHARUCHA, SUJATA V. MANOHAR
Lawyers J. Ramamurthy, Senior Advocate, R. Satish, Advocate, S.N. Terdol, Advocate
Petitioners COMMISSIONER OF Income Tax
Respondents CITY MILLS DISTRIBUTORS (P.) LTD
Citations 1997 SLD 42, 1997 PTD 400, (1996) 219 ITR 1
Other Citations CIT v. Tea Producing Co. of India Ltd. (1963) 48 ITR 200 (Cal.), CIT v. Bijli Cotton Mills Ltd. v. CIT (1970) 78 ITR 766 (All.), Security Printers of India (P.) Ltd. (1953) 23 ITR 278 (All.), CIT v Abubaker Abdul Rehman (1939) 7 ITR 139 (Bom.), CIT v Dewan Bahadur Dewan Krishna Kishore (1941) 9 ITR 695 (PC), CIT .v. Trustees of Sir Currimbhoy Ebrahim Baronetcy Trust AIR 1932 Born. 106
Laws Involved Income Tax Act, 1922, Income Tax Act, 1961
Sections Not available