In the earlier issue we have discussed on section 41 of the Companies Act, 1956 which deals with the definition of Member and in the present issue we shall proceed with Section 46 of the Companies Act, 1956 which deals with Contracts and deeds, investments, seal, etc and also with section 47 which deals with Bills of Exchange and Promissory Note.
Query # 1: It is only after incorporation that a company may decide to accept that its promoters have carried on business on its behalf and appropriated income thereof to itself; whether the company is liable to pay tax on pre-incorporation profit earned from business carried on its behalf?
Decided Case Law: CIT v. City Mills Distributors (P.) Ltd. [1996] 86 Comp. Cas. 546 (SC)
Facts of the case: Where Income Tax Officer (ITO) while assessing total income of the assessee-company included a sum as the assessee-company’s pre-incorporation profit. The question was whether the company is liable to pay tax on such profits.
Clarification: Held that the assessee-company did not exist when the income was earned and, therefore, was not liable to pay tax on that income. It is only after incorporation that a company may decide to accept that its promoters have carried on business on its behalf and appropriate the income thereof to itself. The question as to who is liable to pay tax on such income earned prior to Incorporation cannot depend upon whether or not the company after incorporation so decides. It is the Promoter who carried on the business and received the income when it accrued, and is liable to bear the burden of tax thereon.
Conclusion: A company becomes a legal entity in the eyes of law only when it is incorporated. Prior to its incorporation, it simply does not exist. As such there is no question of company paying tax on its pre-incorporation profits earned from business carried on its behalf.
Query # 2: Where articles provide for delegation of powers to endorse bills of exchange, etc., whether assignee is entitled to presume that assignor has necessary authority, even if no delegation is made in favour of assignor?
Decide case law: Surve Kedarappa v. Bhimappa [1960] 30 Comp. Cas. 131 (Mys.)
Facts of the Case: The articles of association of company U authorised the managing director to draw, accept and endorse the bills of exchange and promissory notes, etc. The articles also empowered the managing director to delegate this power to the managers, but in fact, no such delegation had been made by him.
M, the manager of a branch office of the company, accepted a promissory note from X and assigned it in favour of the plaintiff. The question was whether the plaintiff, the holder, in due course, could proceed against X and U when the manager had no authority to assign the promissory note.
Clarification: Held that in view of the decision in Dey v. Pullinger Engg. Co. and section 118* of the Negotiable Instruments Act the plaintiff was entitled to presume that M had the requisite authority and the assignment of the promissory note was valid against the company as well as X.
*Section 118 of Negotiable Instruments Act, 1881: Presumptions as to negotiable instruments- Until the contrary is proved, the following presumption shall be made:
118(g): Until the contrary is proved, it shall be presumed that the holder of a negotiable instrument is the holder in due course. Every holder of a negotiable instrument is presumed to have paid consideration for it and to have taken it in good faith. But if the instrument was obtained from its lawful owner by means of an offence or fraud, the holder has to prove that he is a holder in due course.