Full Judgment Text
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PETITIONER:
THE COMMISSIONER OF INCOME-TAX, BOMBAY
Vs.
RESPONDENT:
THE PROVIDENT INVESTMENT CO., LTD.
DATE OF JUDGMENT:
15/05/1957
BENCH:
SARKAR, A.K.
BENCH:
SARKAR, A.K.
DAS, S.K.
BHAGWATI, NATWARLAL H.
MENON, P. GOVINDA
KAPUR, J.L.
CITATION:
1957 AIR 664 1957 SCR 1141
ACT:
Income Tax-Capital gains-Managing agent of company holding
shares therein-Agreement of sale of shares and Managing
Agency-Sale of shares-Rclinquishment of Managing Agency by
way of Resignation--if amounts to a sale or transfer of
Managing Agency-Agreed Statement of Case for reference to
High Court--Whether binding on the parties-Indian Income-tax
Act, 1922 (XI Of 1922), S. 12B.
HEADNOTE:
The respondent company was the managing agent of two other
companies holding certain shares therein. D wrote two
letters to the respondent on September 14, 1946, offering to
purchase some of those shares together with the managing
agency and agreeing to pay certain sums as earnest money on
the acceptance of the offer and to pay the balance after the
transfer of the managing agency was sanctioned by the
general body of shareholders. By a letter dated September
30, 1946, the respondent accepted the offer on condition of
a sum of Rs. 1 crore being paid out of the consideration as
compensation for the loss of the managing agency, and on
receipt of the letter, D paid the earnest money.
Subsequently, D wrote a letter on October 7, 1946, whereby,
in modification of the arrangement previously made, it was
agreed that instead of the managing agency being transferred
by the respondent, the latter would resign the office of
managing agents and certain individuals would be appointed
Directors of the two companies. Accordingly, the respondent
relinquished the managing agency and thereupon the balance
of consideration money was paid to it. The Income-tax
Officer considered that s. 12B of the Indian Income-tax Act,
1922, was applicable to the transaction and on the footing
that the managing agency, which was valued at Rs. 1 crore,
was a capital asset, he computed the capital gains at Rs.
81,81,900. The Income-tax Appellate Tribunal held that the
respondent, as the owner of the shares and the managing
agency, sold the shares to D and handed back the managing
agency to the managed companies, and that this handing back
constituted a transfer. On a reference to the High Court by
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the Tribunal, the agreed statement of the case proceeded on
the basis that the dispute between the parties was whether
the transaction with regard to the managing agency resulted
in capital gains and the High Court held that there was
neither a sale nor a transfer of the managing agency within
the meaning Of S. 12B of the Act. On appeal to the Supreme
Court by the Commissioner of Income-tax, it was contended
for him (1) that there was a concluded contract
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of sale as a result of the letters of September 14,
1946, and September 30, 1946, and a sale having taken place,
the letter of October 7, 1946, merely changed the mode of
performance of the contract and did not affect the true
legal character of the transaction which was a sale of the
managing agency, and (2) that as there was one indivisible
consideration for the whole transaction, including the sale
of the shares and of the managing agency, the sale of the
shares having taken place and the entire consideration
having been paid, there was a sale within the meaning of s.
12B of the Act and the transaction resulted in capital
gains.
Held (1) that on a true construction of the letters there
was originally only an agreement to sell the shares together
with the managing agency and before the sale could take
place the letter of October 7, 1946, substituted a new
contract, a contract of relinquishment rather than a
contract of sale, so far as the managing agency was
concerned, and (2) that it was not open to the appellant to
go behind the agreed statement of the case and raise a
question of law based on different facts and circumstances.
Accordingly, the transaction in question was a
relinquishment of the managing agency and was neither a sale
nor a transfer within the meaning of s. 12B of the Indian
Income-tax Act.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 179 of 1954.
Appeal from the judgment and order dated March 12, 1953, of
the Bombay High Court in Income-tax Reference No. 43 of
1952.
C. K. Daphtary, Solicitor-General of India, G. N. Joshi
and B. H. Dhebar, for the appellant.
N. A. Palkhivala, D. H. Dwarkadas, J. B. Dadachanji, S. N.
Andley and Rameshwar Nath, for the respondent.
1957. May 15. The Judgment of the Court was delivered by
S. K. DAS J.-This is an appeal on a certificate granted by
the High Court of Judicature at Bombay under sub-s. (2) of
s. 66A of the Indian Income-tax Act (hereinafter referred to
as the Act). The appellant is the Commissioner of Income-
tax, Bombay, and the respondent is the Provident Investment
Co., Ltd., Bombay, hereinafter referred to as the assesses
company.
The short question which falls for consideration in this
appeal is whether a particular transaction, details
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whereof we shall presently state, entered into by the
assessee company in 1946 resulted in capital gains within
the meaning of s. 12B of the Act. The question which was
referred to the High Court under s. 66(1) of the Act was
this: " Whether the assessee company made a capital gain
amounting to Rs. 81,81,900 within the meaning of s. 12B of
the Indian Income-tax Act?" The High Court answered the
question in the negative. The appellant being dissatisfied
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with the judgment and order of the High Court asked for and
obtained a certificate from the said High Court that the
case is a fit one for appeal to the Supreme Court.
The material facts may be very shortly stated. The assessee
company is a private limited company, the shares of which
were held by the then Maharaja Scindia of Gwalior and his
nominees. At the material time, the assessee company was
the managing agent of Madhowji Dharamsi Manufacturing Co.,
Ltd., hereinafter briefly referred to as the Dharamsi
Company, and Sir Shapurji Broacha Mills Ltd., briefly
referred to as the Shapurji Broacha Company. The assessee
company held all the " conversion " shares of the Dharamsi
Company and a substantial majority of the " conversion"
shares of the Shapurji Broacha Company. The Dalmia
Investment Company Limited, which will hereinafter be
briefly referred to as the Dalmia Company, wrote two letters
to the assessee company on September 14, 1946. In these two
letters, the Dalmia Company offered to purchase 28,328 "
conversion " shares of the Dharamsi Company at Rs. 500 per
share together with the managing agency, and also 75,212 "
conversion " shares of the Shapurji Broacha Company,
together with the managing agency. We are not concerned
with the other details mentioned in the two letters, except
this that the Dalmia Company made it clear that it would
purchase both the mills or neither, and a time limit till
September 23, 1946, 3 p. m. was imposed during which the
offer would remain open. This time limit was, however,
extended later up to September 30, 1946. The letter further
stated
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" On your accepting the offer, we will pay to you Rs. 20
lakhs in the case of the Dharamsi Company, Rs. 30 lakhs in
the case of the Shapurji Broacha Company
as and by way. of earnest money. You shall have to arrange
to get the transfer of the managing agency sanctioned by the
general body of the shareholders within a period of 40 days
from the date of acceptance. As Boon as the transfer is
sanctioned, we will pay the balance of the purchase price."
On September 26, 1946, there was a meeting of the Board of
Directors of the assessee company. At that meeting, the
Board considered the offers made by the Dalmia Company and
resolved to accept the offers. The Board further stated in
its minutes that out of the total amount received from the
sale of the shares, a sum of Rs. 1 crore should be paid to
the assessee company as compensation for’ the loss of the
managing agency of the two mills. On September 30, 1946,
the assessee company wrote to the Dalmia Company accepting
the offers made, subject to a condition which is not
material for our purpose. On the same date, the Dalmia
Company received the acceptance of the offers made by it and
sent two drafts, one for Rs. 20 lakhs and the other for Rs.
30 lakhs. On October 7, 1946, the Dalmia Company wrote a
very important letter to the assessee company. This letter
said inter alia:
" With reference to the interview our Solicitor Mr. Tanubhai
had with your Mr. Wadia, we beg to record that it is now
being agreed upon as follows in modification of the
arrangement previously made between yourselves and
ourselves:
(1)In our letters of offer which have been accepted by you,
it was arranged that the managing agency will be transferred
either to us or to our nominees. Now, instead of doing so
by you, you as the present managing agents will give their
(sic) resignation, so that at the time of delivery of the
shares and payment of moneys, your managing agency will have
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come to an end. In view of the above, it is not necessary
to obtain any sanction of general meeting.
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(2) 1. Mr. Shriyans Prasad Jain
2. Mr. Jaidayal Dalmia
3. Mr. Shanti Prasad Jain and
4. Mr. Vishnu Hari Dalmia
will be appointed Directors of both the Mills Companies and
thereafter all the present directors will tender their
resignation.
(3) Qualification shares in the names of the above proposed
Directors will be transferred by you and the balance of the
shares will be delivered to us along with the transfer deeds
duly signed against payment.
(4) You may communicate by a circular to the shareholders
that you have resigned the managing agency. You may further
mention in the circular that in accordance with the offer we
are prepared to take up the deferred shares held by the
shareholders which may be offered to us at the rate of Rs.
25 and Rs. 7-8-0 of Madhowji Dharamsi Manufacturing Co. Ltd.
and Sir Shapurji Broacha Mills Ltd. Mills respectively
within two months of the date of letter of offer which we
would also send."
The assessee company accepted the modified arrangement
suggested by the Dalmia Company, and on October 19, 1946,
the assessee company wrote to the Dharamsi Company and the
Shapurji Broacha Company that it had decided to resign the
office of the managing agency and accordingly tendered its
resignation on that date. The balance of the consideration
money was then paid to the assessee company, and it was not
disputed that the. value of the managing agency was computed
at Rs. 1 crore, nor was there any dispute that the managing
agency was a capital asset. Out of the said sum of Rs. 1
crore, the Income-tax Officer computed the capital gains at
Rs. 81,81,900 and asked the assessee company to pay tax
thereon. The Appellate Assistant Commissioner held that the
assessee company had sold the managing agency and therefore
the profits or gains arising from that sale were capital
gains within the meaning of s. 12B of the Act. The Income-
tax Appellate Tribunal, Bombay Bench ’A’, held, however,
that there was no sale of the managing agency, because the
original contract of
147
1146
purchase was varied by the new contract embodied in the
letter of October 7, 1946. The Tribunal, however,
held as follows:
" The assessee company was the owner of the shares and the
managing agencies. It sold the shares to the Dalmia Co. and
handed back the managing agencies to the managed companies.
This handing back, in our opinion, constitutes a transfer of
the managing agencies. "
On that footing the Tribunal held that s. 12B of the Act
applied. On an application by the assessee company, the
Tribunal on being satisfied that a question of law did arise
out of its order, referred the question which we have
already set out in an earlier paragraph of this judgment, to
the High Court of Bombay. The High Court answered the
question in the negative on the ground that there was
neither a sale nor a transfer of the managing agency within
the meaning of s. 12B of the Act.
The point for our consideration is whether the High Court
has correctly answered the question. We must first read
sub-s. (1) of s. 12B of the Act as it stood at the material
time. The sub-section, so far as it is relevant for our
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purpose, was in these terms:
" The tax shall be payable by an assessee under the head
’Capital gains’ in respect of any profits or gains arising
from the sale, exchange or transfer of a capital asset
effected after the 31st day of March 1946; and such profits
and gains shall be deemed to be income of the previous year
in which the sale, exchange or transfer took place. "
It is worthy of note that ’capital gains’ were charged for
the first time by the Income-tax and Excess Profits Tax
(Amendment) Act, 1947, which inserted s. 12B in the Act. It
taxed ’capital gains’ arising after March 31, 1946, and the
levy was virtually abolished by the Indian Finance Act,
1949, which confined the operation of the section to
’capital gains’ arising before April 1, 1948. The Finance
(No. 3) Act, 1956 (Act 77 of 1956) re-introduced the section
in wider terms so as to bring within ’capital gains’ any
profits or gains arising from the sale, exchange,
relinquishment or transfer of a
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capital asset effected after March 31, 1956, etc.’ We are
not, however, concerned with the question whether the
transaction under our consideration, which took place in
1946, resulted in capital gains within the meaning of s. 12B
as it stands after the enactment of the Finance (No. 3) Act,
1956 (Act 77 of 1956). The question before us is whether
the transaction under consideration resulted in capital
gains within the meaning of s. 12B as it originally stood.
Two other points must be stated at the outset in order to
clear the ground for a consideration of the relevant
arguments advanced before us. The first point is that there
is no question here of the assessee company trying to
circumvent the provisions of s. 12B of the Act by
deliberately modifying the original agreement (by its letter
dated October 7, 1946) so as to put the transaction outside
the scope of that section. The agreement was modified in
October, 1946, before even the insertion of s. 12B in the
Act. Therefore, no question of deliberate or fraudulent
evasion arises in this case. The second point is that in
construing fiscal statutes and in determining the liability
of a subject to tax, one must have regard to the strict
letter of the law and the true legal position arising out of
the transaction in question. The Bombay High Court has
referred to a large number of English decisions on this
point. We consider it unnecessary to examine those
decisions in the present case. The point was considered
very recently by this Court in A. V. Fernandez v. The State
of Kerala (1), where the following observations made are
very pertinent:
" If the Revenue satisfies the Court that the case falls
strictly within the provisions of the law, the subject can
be taxed. If, on the other hand, the case is not covered
within the four corners of the provisions of the taxing
statute, no tax can be imposed by inference or by analogy or
by trying to probe into the intentions of the legislature
and by considering what was the substance of the matter. We
must of necessity, therefore, have regard to the actual
provisions of the Act and the rules made thereunder before
we can come
(1) (1957] S.C.R. 837.
to the conclusion that the appellant was liable to
assessment as contended by the Sales Tax authorities." Those
observations were made in a case dealing with sales tax but
are equally applicable to the case under our consideration.
Two conditions must be fulfilled before the transaction
under our consideration can come within the purview of s.
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12B of the Act. The first condition is that the profits or
gains must arise from the sale, exchange or transfer of a
capital asset; and the second condition is that the sale,
exchange or transfer must be effected after March 31, 1946.
There is no doubt that the transaction before us was
effected after March 31, 1946. There is also no dispute
that the managing agency of the two mills which the assessee
company held was a capital asset. Therefore, the question
boils down to this-did the profits or gains, namely, the sum
of Rs. 1 crore which was computed as the value of the
managing agency, arise from the sale or transfer of the
managing agency ? The Income-tax authorities held that there
was a sale of the managing agency; but the Appellate
Tribunal held that there was no sale in the strict sense but
only a transfer of the managing agency to the managed
companies, that is, the Dharamsi Company and the Shapurji
Broacha Company. The High Court held that there was neither
a sale nor a transfer, because the letter of October 7,
1946, substituted a different contract for the original
contract entered into by the parties, and the true legal
position with regard to the substituted contract was that
the assessee company resigned the managing agency, or, in
other words, the managing agency was relinquished by the
assessee company.
The learned Solicitor-General, who has appeared for the
appellant, has contested the correctness of the view of the
Bombay High Court and has submitted a twofold argument
before us. His first argument is that there was a concluded
contract of sale as a result of the letters, dated September
14, 1946, and September 30,1946, exchanged between the
parties, and the sale having taken place, the letter of
October 7, 1946, which merely changed the mode of
performance of the
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contract, did not affect the true legal character of the
,transaction which was a sale of the managing agency. We
are unable to accept this argument. The true legal effect
of the letters dated September 14, 1946, and September 30,
1946, which contained an offer and an acceptance, was merely
this: the Dalmia Company offered to purchase (1) certain
shares in the two mills and (2) the managing agency, on
payment of a certain consideration, and the assessee company
accepted that offer. In law, this was merely an agreement
to sell and purchase the shares together with the managing
agency on payment of the consideration, etc. The two
letters did not by themselves amount to a sale of the shares
or the managing agency, in the sense of a transfer of the
property in them. Before any such sale could take place,
the agreement was modified by the letter of October 7, 1946,
and instead of " selling " the managing agency the assessee
company agreed to resign or relinquish the managing agency.
We are unable to agree with the learned Solicitor-General
that the letter of October 7, 1946, merely changed the mode
of performance, and did not constitute a now contract. In
our opinion, the Bombay High Court correctly held that
whereas under the original contract the Dalmia Company
wanted the managing agency to be transferred, which meant
that it wanted the benefit of that contract to be vested in
it and was also prepared to accept the burden of the
obligations that went with that contract, under the
substituted contract, the Dalmia Company did not want the
managing agency to be assigned to it; on the contrary, it
wanted the assessee company to relinquish its rights in the
managing agency of the two mills by resigning. On a true
interpretation, the letter of October 7, 1946, substituted a
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new contract, a contract of relinquishment rather than a
contract of sale, so far as the managing agency was
concerned.
The second argument of the learned Solicitor-General is that
there was one indivisible consideration for the whole
transaction, including the sale of the shares and of the
managing agency. So far as the shares were concerned, the
sale did take place and the entire
1150
consideration was paid; there was therefore a sale within
the meaning of s. 12B of the Act, and the consideration
being one and indivisible, the transaction did result in
capital gains within the meaning of that section. At the
first blush, the argument has an apparent merit of
plausibility, though it was not urged before the Bombay High
Court in the manner in which it has been urged before us.
On a closer scrutiny, however, it appears to us that this
argument is not really available to the learned Solicitor-
General. The parties and the Income-tax authorities,
including the Appellate Tribunal, proceeded on the footing
that part of the consideration, namely, the sum of Rs. 1
crore, was the consideration for the sale or relinquishment
of the managing agency, the Department contending that the
transaction was a sale or transfer and the assessee company
contending that it was neither a sale nor a transfer but a
mere relinquishment. In the agreed statement of the case,
it was stated :
" The value of the managing agencies was computed by the
assessee company at Rs. 1 crore and there is no dispute on
this point. The Income-tax Officer thereupon computed
capital gain at Rs. 81,81,900 and again there is no dispute
on this point. The question which the Tribunal had to
determine was whether the transactions between the Dalmia
Company and the assessee company resulted in a capital gain
of Rs. 81,81,900.
It is obvious that the entire assessment proceedings
proceeded on the basis that the sum of Rs. 1 crore was the
consideration for the sale or relinquishment of the managing
agencies, and the dispute between the parties was whether
the transaction with regard to the managing agencies, in its
true legal character, was a sale or transfer or
relinquishment. That being the position, it is not now open
to the learned Solicitor-General appearing for the Revenue
to go behind the agreed statement of the case and to ask us
to give an answer to the question of law raised in the case
on different assumptions or in a different set of circum-
stances. The answer must be given on the basis of
1151
the facts and circumstances as stated in the agreed
statement of the case.
We are of opinion that the answer was correctly given by the
High Court of Bombay. The transaction in its true legal
character was a relinquishment of the managing agency and
was neither a sale nor a transfer thereof. Therefore, the
High Court correctly answered, the question in the negative.
In the result, the appeal fails and is dismissed with costs.
Appeal dismissed.