Full Judgment Text
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 9
PETITIONER:
COMMISSIONER OF INCOME TAX, HYDERABAD
Vs.
RESPONDENT:
M/S. MOTOR AND GENERAL STORES (P.) LTD.
DATE OF JUDGMENT:
02/05/1967
BENCH:
RAMASWAMI, V.
BENCH:
RAMASWAMI, V.
SHAH, J.C.
SHAH, J.C.
SIKRI, S.M.
SHAH, J.C.
SIKRI, S.M.
CITATION:
1968 AIR 200 1967 SCR (3) 876
CITATOR INFO :
R 1969 SC 812 (6)
RF 1970 SC1212 (16)
F 1987 SC 500 (44)
ACT:
income-tax Act, 1922 s. 10(2) (vii)-Assessee selling
’cinema’ and ,other assets in exchange for shares in another
Company-Whether transaction one of ’sale’ or ’exchange’-
Therefore whether difference between book-value of assets
and exchange consideration taxable-Determining the substance
rather than form of transaction in revenue
matters--Conditions for.
HEADNOTE:
The respondent private Limited Company owned a cinema house
and at a meeting of its Board of Directors on September 9,
1955, it was resolved that the Managing Director may be
authorised to negotiate with a buyer for the sale of the
entire concern with all its equipment and machinery etc. for
a consideration of Rs. 1,20,000. After an agreement had
been concluded to effect a sale and had been confirmed at an
extraordinary general meeting of the company on October 4,
1955, an "exchange deed" was entered into on February 21,
1956 and the consideration was received by the assessee
company in the shape of transfer of certain shares of the
face value of Rs. 1,20,000 -owned by the buyer in another
company.
In the course of its assessment to tax for the year 1956-57,
the Income-tax Officer computed the respondent’s profits
under s. 10(2)(vii) by including an amount of Rs. 43,568 on
account of the excess amount realised over the written down
value of the assets sold. The order of the Income-tax
Officer was confirmed, in appeal, by the Appellate Assistant
Commissioner and substantially also by the Tribunal.
However, upon a reference under s. 66(2) of the Act the High
Court answered the question in favour of the respondent.
In the appeal to this Court it was contended on behalf of
the appellant that the money consideration for the assets
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 9
was fixed at Rs. 1,20,000 and the mode of payment was by
transfer of shares so that the transaction was really a sale
and not transfer by way of exchange; that the resolution of
the Board of Directors and of the shareholders reproduced in
the preamble of the exchange deed showed clearly that what
was authorised was the sale of the entire concern; and that
in revenue matters it was the substance of the transaction
which must be looked at and not the form in which the
parties have chosen to clothe the transaction.
HELD : The Income-tax authorities were not entitled to treat
the transaction as a sale and to apply the provisions of s.
10(2)(vii) of the Income-tax Act, 1922. In essence the
transaction was one of exchange and there was no sale of the
properties described in the exhcange deed. There was no
price paid or promised to be paid for the transfer of the
properties but there was only a consideration in the shape
of transfer of shares in another company by the buyer.
[883E-G]
It was clear from the operative part of the exchange deed
that there was an exchange of the properties described in it
for the shares of a
877
company. Neither the recital in the preamble nor the
resolutions could control the language of the operative
portion of the deed or its legal effect. [883D-E]
Madam Pillai v. Badrakali Ammal, I.L.R. 45 Madras 612,
referred to.
The contention that in the present case it was the substance
rather than the form of the transaction which should be
looked at must be rejected. There was no suggestion on
behalf of the appellant of bad faith nor was it alleged that
the particular form of the transaction was adopted as a
cloak to conceal a different transaction. In the absence of
any such suggestion the true principle is that the taxing
statute has to be applied in accordance with the legal
rights of the parties to the transaction. When the
transaction is embodied in a document, the liability to tax
depends upon the meaning and content of the language used in
accordance with the ordinary rules of construction. [883H;
884B]
Bank of Chettinad Ltd. v. C.I.T. Madras, 1940 I.T.R. 522;
Duke of Westminster’s- case,, 19 T.C. 490; and Commissioner
of Inland Revenue
v. Wesloyan and General Assurance Society. 30 T.C. 11,
referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 819 of
1966.
Appeal by special leave from the judgment and order dated
October 30, 1964 of the Andhra Pradesh High Court in case
Referred No. 6 of 1963.
D. Narsaraju T. A. Ramachandran and R. N. Sachthey for
the appellant.
P. Rain Reddy and A. V. V. Nair, for the respondent.
The Judgment of the Court was delivered by
Ramaswami, J. This appeal is brought, by special leave, on
behalf of the Commissioner of Income-tax, Hyderabad from the
judgement of the Andhra Pradesh High Court dated October 30,
1964 in a case Referred No. 6 of 1963.
The respondent (hereinafter referred to as the (’assessee-
company’) is a private limited company owning a cinema house
called "Sree Rama Talkies", at Bobbili. It was being taxed
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 9
on the profits made by exhibition of films therein. At a
meeting of its Board of Directors held on September 9, 1955,
it was resolved that the Managing Director, the Raja of
Bobbili may be authorised to negotiate with the Zamindar of
Chikkavaram or his nominee for the sale of the entire
concern with all its equipment and machinery, fittings etc.
for a consideration of Rs. 1,20,000/-. An agreement was
concluded to effect a saLe and this was confirmed by the
assessee-company at an extra-ordinary general body meeting
held on October 4, 1955. Pursuant thereto a deed called the
"exchange deed" was brought into existence on February 21,
1956 and the consideration was received by the assessee-
S78
company in the shape of transfer of 5% tax-free cumulative
preference shares in Sri Rama Sugar and Industries Ltd.,
Bobbili. of the face value of Rs. 1,20,000/- held by the
Zamindar and Zamindarini of Chikkavaram. Separate valuation
was given for the immovable property and for the movables
etc. and goodwill, each being valued at Rs. 60,000/-. For
the assessment year 1956-57, the assessee-company submitted
a return of income showing a sum of Rs. 9,823/- as profits
derived from the transaction. The Income-tax Officer found
that the value realised exceeded the written down value by
Rs. 43,568/- and accordingly computed the profits under S.
10(2)(vii) of the Income-tax Act, 1922 and included the
amount in the taxable income of the assessee-company. The
order of the Income-tax Officer was confirmed by the
Appellate Assistant Commissioner in appeal and by the
Income-tax Appellate Tribunal except for allowing a sum of
Rs. 5,0001- as representing the cost of the goodwill. As
directed by the High Court, the Appellate Tribunal stated a
case under s. 66(2) of the Income-tax Act, 1922 on the
following question of law:
"(1) Whether the transaction dated 21-2-1956
amounts to a sale within the purview of the
second proviso to section 10(2) (vii) of the
Indian Incometax Act; alternatively,
(2)Whether the consideration for the sale is
not the market value of the shares as on the
date of the transaction, namely, Rs. 95/- per
share, but the face value of the shares."
After hearing the reference the High Court answered the
question in favour of the assessee-company and against the
Commissioner of Income-tax.
Section 10(2)(vii) of the Income-tax Act’, 1922 provides as
follows :
"10. Business. (2) Such profits or gains
shall be computed after making the following
allowances,
namely ............................
(vii) in respect of any such building,
machinery or
plant which has been sold or discarded or
demolished or destroyed, the amount by which
the written down value thereof exceeds the
amount for which the building, machinery or
plant, as the case may be, is actually sold or
its scrap value :
Provided that such amount is actually written
off in the books of the assessee :
879.
Provided further that where the amount for
which any such building, machinery or plant is
sold, whether during the continuance of the
business or after the cessation thereof,
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 9
exceeds the written down value, so much of the
excess as does not exceed the difference
between the original cost and the written down
value shall be deemed to be profits of the
previous year in which the sale took place:
It is only if there is a sale of the cinema house and the
other assets that the taxable profits and gains are to be
computed in the present case under s. 10(2) (vii) as the
amount by which the written down value exceeds the amount
for which the assets are actually sold. The words "sale" or
"sold" have not been defined in the Income-tax Act, 1922.
Consequently, these words have to be construed by reference
to other enactments. Section 54 of the Transfer of Property
Act defines ’sale’ as a transfer of ownership. in exchange
for a price paid or promised or part paid and part promised.
Section 54 of the Transfer of Property Act reads as. follows
:
"Sale’ is a transfer of ownership in exchange
for a price paid or promised or part-paid and
part-promised."
There is no definition of the word ’price’ in this Act. But
it is, well-settled that the word ’price’ is used in the
same sense in this section as in s. 4 of the Sale of Goods
Act, 1930 (Act III of 1930) (See the decision of a Full
Bench of the Madras High Court in Madam Pillai v. Badrakali
Ammal) (1). Section 4 of the Sale of Goods Act reads as
follows :
"(1) A contract of sale of goods is a contract
whereby the seller transfers or agrees to
transfer the property in goods to the buyer
for a price. There may be a contract of sale
between one part-owner and another.
(2)A contract of sale may be absolute or
conditional.
(3)Where under a contract of sale the
property in the goods is transferred from the
seller to the buyer, the contract is called a
sale, but where the transfer of the property
in the goods is to take place at a future time
or subject to some condition thereafter to be
fulfilled, the contract is called an agreement
to sell.
(4)An agreement to sell becomes a sale when
the time elapses or the conditions are
fulfilled subject to which the property in the
goods is to be transferred."
(1) I.L.R. 45. Madras, 612.
880
Section 2(10) of the Sale of Goods Act defines "price" as
meaning the money consideration for a sale of goods. The
presence of money consideration is therefore an essential
element in a transaction of sale. If the consideration is
not money but some other valuable consideration it may be an
exchange or barter but not -a sale. Section 118 of the
Transfer of Property Act defines .exchange’ as follows:
"When two persons mutually transfer the owner-
ship of one thing for the ownership of
another, neither thing, or both things being
money only, the transaction is called an
’exchange’.
A transfer of property in completion of an
exchange can be made only in manner provided
for the transfer of such property by sale."
Section 119 provides :
"If any party to an exchange or any person
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 9
claiming through or under such party is by
reason of any defect in the title of the other
party deprived of the thing or any part of the
thing received by him in exchange, then,
unless a contrary intention appears from the
terms of the exchange, such other party is
liable to him or any person claiming through
or under him for loss caused thereby, or at
the option of the person so deprived, for the
return of the thing transferred, if still in
the possession of such other party or his
legal representative or a transferee, from him
without consideration."
The definition of exchange in s. 118 of the Transfer of
Property Act is not limited to immovable property but it
extends also to barter of goods. It is clear therefore that
both under the Sale of ,Goods Act and the Transfer of
Property Act, sale is a transfer of property in the goods or
of the ownership in immovable property for a money
consideration. But in exchange there is a reciprocal
transfer of interest in the immovable property, the
corresponding transfer of interest in the movable property
being denoted by the word ’barter’. "The difference between
a sale and an exchange is this, that in the former the price
is paid in money, whilst in the latter it is paid in goods
by way of barter." (Chitty on Contracts 22nd Edn., Vol. II
page 582).
The question presented for determination in this case is
whether the transaction of February 21, 1956 was a sale and
whether the Income-tax authorities were entitled to include
the amount of Rs. 43,568/- as profits under S. 10(2) (vii)
of the Income-tax Act as representing the excess of the
consideration
881
realised by the assessee-company over the written down value
of the assets transferred. On behalf of the appellant it
was contended that the money consideration was fixed at Rs.
1,20,000/and the mode of payment was by transfer of shares
and the transaction was really a sale and not transfer by
way of exchange. We are unable to accept this argument as
correct. In the first place, the document is called
"exchange deed". The preamble of the document states :
"And whereas the party of the first part as at
the Directors meeting held on 3-2-1955
resolved to exchange the property mentioned in
Schedule for the property mentioned in
Schedule II belonging to the party of the
second part and whereas in pursuance of the
resolution of the Board of Directors the
Managing Director of the party of the first
part had handed over possession of the
property described in Schedule I hereto on
9-9-1955 to the party of the second part and
whereas the general body of the first part at
a meeting held on 4-10-1955 resolved to
authorise the Managing Director of the party
of the first part to negotiate with the zamin-
dar and zamindarini of Chikkavaram the second
part herein and or their nominees for the sale
of the party of the entire concern known by
the name of Sri Rama Talkies, Bobbili now
owned by the party of the first part, with all
its equipment machinery fittings spares acces-
sories the old Projector the Jeej car bearing
No. M.S.P. 928 purchased from its funds all
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 9
the buildings and out houses either newly
constructed or mentioned in the registered
sale deed No. 1464/5-9-1949 and in this
exchange deed together with entire premises
covered thereby and the cash deposits lying
with the various distributors and commercial
tax department of the State Government more
fully described in Schedule I hereto and also
the goodwill of the concern for a con-
sideration of Rs. 1,20,000/- (Rupees one lakh
twenty thousand only) consisting of immovable
properties worth Rs. 60,000/- and movable
properties worth Rs. 20,000/- (sic) total Rs.
1,20,000 which will be received in the shape
of transfer of 5% tax-free cumulative
preference shares of Messrs Sri Rama Sugars &
Industries Ltd., Bobbili of the face value of
Rs. 1,20,000/- (rupees one lakh twenty
thousand only) held by the zamindar and
zamindarini of Chikkavaram the party of the
second part herein and more fully described in
Schedule 11 herein and to transfer receipt and
also hand over records relating to the title
and management to enable them to carry on the
business of the
8 82
concern and whereas the general body of the
part of the first part at the meeting held on
11-2-1956 resolved that the action of the
managing director in handing over possession
of the property described in Schedule I to the
party of the second part on 9-9-1955 is
approved and whereas the parties hereto have
agreed to exchange the said properties
described in the first and second Schedule
hereto in the manner hereinafter appearing."
The operative part of the document reads as
follows
"Now this deed witnesse the as follows :
(1) in pursuance of the said agreement and
in consideration of the transfer by the party
of the second part of the property more fully
described in the Schedule 11 hereto to the
party of the first part, the party of the
first part hereby grants and transfers to the
party of the second part 11 all the property
more fully described in Schedule I hereto -to
hold the same to the party of the second part
absolutely for ever.
(2) In further pursuance of the said
agreement and in consideration of the transfer
by the party of the first part of the property
in Schedule I hereto to first part of the
property in Schedule I hereto to the party of
the’ second part, the party of the second
part, hereby grants and transfers to the party
of the first part of the shares more fully
described in Schedule 11 hereto to hold the
same to the party of the first part absolutely
for ever.
(3) each of the parties hereby covenants
(sic) with the other first that the properties
hereby transferred by him is free from
encumbrance charge or lieu of any kind
whatsoever. Secondly that the properties so
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 9
transferred by each of them shall be quitely
entered upon held and enjoyed by the other of
them and the rents and profits and dividends
received by the other of them without any
interruption of disturbance-by the party
transferring the same or any one claiming
through or under them thirdly that each of the
parties hereto will at the request of and cost
of the other execute every such assurance and
so every such act or thinking as shall
reasonably be required by such other for
further or more.
883
(4) The party of the first part covenants
and assurances the party of the second part
that all taxes due to the Government or the
local bodies and all bills for the supply of
electrical energy goods and accessories all
salaries due to the staff have been paid upto
9-9-1955 the date of transfer and that the
party of the second part will be in no way
liable for an act done or commission made by
the Rajah of Bobbili............
On behalf of the appellant Mr. Narsaraju referred to the
Resolution of the Board of Directors dated September 9, 1955
in which it was resolved that the Managing Director Will
negotiate with the zamindar of Chikkavaram or his nominee
for the sale of he Sree Rama Talkies with all its equipment
etc. for a consideraion of Rs. 1,20,000/- Mr. Narsaraju also
referred to the preamble in which the resolution of the
Board of Directors dated September 9, 1955 is quoted and
also the resolution of the Meeting of the general body of
the assessee-company held on October 1, 1955 authorising the
Managing Director to negotiate "for the ;ale of the entire
concern known by the name of Sree Rama Talkies". But, in
our opinion, neither the recital in the preamble nor the
resolution of the Board of Directors dated September 9, 1955
will control the language of the operative portion of the
document or its legal effect. There is no ambiguity in the
construction of the operative part. It is clear from the
operative part of the document that there was an exchange of
the properties described in Sch. 1 for 5 % tax-free
cumulative preference shares of Sri Rama Sugars & Industries
Ltd., Bobbili. It is true that a valuation of Rs.
1,20,000/- was fixed to consist of Rs. 60,000/’or immovable
properties and the goodwill and Rs. 60,000/- for movable
properties, but that is only for the purpose of payment of
stamp duty. In essence the transaction is one of exchange
and there was no sale of the properties described in Sch. I
for any money consideration. In other words, there was no
price paid or promised to be paid for the transfer of the
cinema house known as Sree Rama Talkies together with
machinery and equipment described in Sch. I to the deed
dated February 21,. 1956 but there was a consideration in
the shape of transfer of 5% tax-free cumulative preference
shares of Sri Rama Sugar & industries Ltd. It follows
therefore that the Income-tax authorities were not entitled
to treat the transaction dated February 21, 1956 as a sale
and to apply the provisions of s. 10(2) (vii) of the Income-
tax Act.
We pass on to consider the argument of Mr. Narsaraju that in
revenue matters it was the substance of the transaction
which must be looked at and not the form in which the
parties
884
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 9
have chosen to clothe the transaction’. It was contended
that, in the present case, there was in substance a sale of
Sree Rama Talkies by the assessee-company for a money
consideration of Rs. 1,20,000/-, though the mode of payment
was by transfer of shares and the resolution of the Board of
Directors dated September 9, 1955 clearly indicated that the
intention of the assessee company was to sell Sree Rama
Talkies along with its equipment concerned for a
consideration of Rs. 1,20,000/-. In the present case,
however, there is no suggestion on behalf of the appellant
of bad faith on the part of the assessee-company nor is it
alleged that the particular form of the transaction was
adopted as a cloak to conceal a different transaction. It
is not disputed that the document in question was intended
to be acted upon and there is no suggestion of mala fides or
that the document was never intended to have any legal
effect. In the absence of any suggestion of bad faith or
fraud the true principle is that the taxing statute has to
be applied in accordance with the legal rights of the
parties to the transaction. When the transaction is
embodied in a document the liability to tax depends upon the
meaning and content of the language used in accordance with
the ordinary rules of construction. In Bank of Chettinad
Ltd. v. C.I.T. Madras(1), it was pointed out by the Judicial
Committee that the doctrine that in revenue cases the
’substance of the matter’ may be regarded as distinguished
from the strict legal position, is erroneous. If a person
sought to be taxed comes within the letter of the law he
must be taxed, however great the hardship may appear to the
judicial mind to be. On the other hand, if the Crown
seeking to recover the tax cannot bring the subject within
the letter of the law, the subject is free, however
apparently within the spirit of the law the case might
otherwise appear to, be. In the Duke of’ Westminster’s
cave(1) deeds of covenant had been executed by the Duke in
favour of employees in such amounts that the covenantees, if
remaining in the Duke’s service, would receive respectively
sums equivalent to their wages and salaries. If they left
the services of the Duke the payments would still have been
due, but it was in nearly all instances explained to the
employee that so long as the service continued, while the
deed did not prevent his claiming ordinary wages in
addition, it was expected that he would not do so. It was
argued for the Crown that though in form a (,rant of an
annuity, the transaction was in substance merely one where
by the annuitant was to continue to serve the Duke at his
existing salary, so that the annuity must be treated as
salary. Neither the Court of Appeal nor the House of Lords
agreed with this contention. To regard the payments under
the deed as in effect payments of salary would be to treat a
transaction of one legal character as if it were a
transaction of a different legal
(1) 1940 I.T.R. 522.
(2) 19 T.C.490.
885
character. With regard to the supposed contrast between the
form and substance of the arrangement, Lord Russell of
Killowen stated at page 524 as follows :
"If all that is meant by the doctrine is that
having once ascertained the legal rights of
the parties you may disregard mere
nomenclature and decide the question of
taxability or non-taxability in accordance
with the legal rights, well and good. That is
what this House did in the case of Secretary
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 9
of State in Council of India v. Scoble, (1903)
A.C. 299 (4 T.C. 618); that and no more. If,
on the other hand, the doctrine means that you
may brush aside deeds, disregard the legal
rights and liabilities arising under a
contract between parties, and decide the
question of taxability or non-taxability upon
the footing of the rights and liabilities of
the parties being different from what in law
they are, then I entirely dissent from such a,
doctrine."
In a later case-Commissioners of Inland Revenue v. Wesleyan
and General Assurance Society(1) Viscount Simon expressed
the principle as follows :
"It may be well to repeat two propositions
which are well established in the application
of the law relating to Income Tax. First, the
name given to a transaction by the parties
concerned does not necessarily decide the
nature of the transaction. To call a payment
a loan if it is really an annuity does not
assist the tax-payer, any more than to call an
item a capital payment would prevent it from
being regarded as an income payment if that is
its true nature. The question always is what
is the real character of the payment, not what
the parties call it.
Secondly, a transaction which, on its true
construction, is of a kind that would escape
tax, is not taxable on the ground that the
same result could be brought about by a
transaction in another form which would
attract tax."
For the reasons already given we hold that the question has
been rightly answered by the High Court in the negative and
in favour of the assessee -company and this appeal must be
dismissed with costs.
R.K.P.S. Appeal dismissed.
(1) 30 T.C. 11 .
886