Full Judgment Text
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PETITIONER:
ALAPATI VENKATARAMIAH
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX HYDERABAD
DATE OF JUDGMENT:
29/03/1965
BENCH:
SIKRI, S.M.
BENCH:
SIKRI, S.M.
GAJENDRAGADKAR, P.B. (CJ)
SHAH, J.C.
CITATION:
1966 AIR 115 1965 SCR (3) 567
ACT:
Indian Income-tax Act, 1922 (11 of 1922), s. 12B--Capital
Gains-Passing of Title--What constitutes--Date of sale or
transfer --What is.
HEADNOTE:
On 17th March 1948, the assessee entered into an agreement
to sell his factory to a company, and on the very same day
possession of all the assets of the factory was handed over
to the company. A few days later an entry was made in the
company’s account showing that a sum of Rs. 2,00,000/- had
been paid to the assessee and there were corresponding
entries in the assessee’s accounts also. In fact only a lakh
and odd was paid to the assessee and even that amount was
paid only in March 1949. In November 1948 a sale deed
was executed and registered and in March 1949 the Board of
Directors of the Company ratified the sale. For the
assessment year 1948-49, the assessee had included in his
return the sum of Rs. 2 lakhs as capital gains. The Income-
tax Officer held that the assessee realised an excess of Rs.
79,494/- over and above the original cost, as capital gains
assessable under s. 12B of the Income-tax Act. 1922. The
Appellate Assistant Commissioner, and the Tribunal confirmed
the order. In reference, the High Court held that it was
immaterial as to when the money was actually paid because
the transfer had already been made to the company by
possession, that for the purpose of the section the assessee
should have the right to receive the profits and not that he
should have in fact received it, that entire property was
transferred by giving possession to the company in the year
of account, and that the income had arisen to the assessee
in the year of account. In appeal to this Court, it was
contended that as the sale took place only in March 1949,
when the Directors ratified the agreement of sale, no sale
or transfer took place before 1st April 1948, as required by
s. 12B, and hence the amount was not liable to tax.
HELD: Title to the assets could not pass to the company
till the conveyance was executed and registered and
consequently no sale, in the instant case, took place of the
assets before 1st April 1948 as required by s. 12B. [574B]
Commissioner of Income-tax v. Bhurangya Coal Co. 34 I.T.R.
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802, referred to.
Before s. 12B can be attracted, title must pass to the
company by any of the modes mentioned in s. 12B i.e., sales
exchange or transfer It is true that the word ’transfer’ is
used in addition to the word ’sale’ but even so, in the
context, transfer must mean effective conveyance. of the
capital asset to the transferee. Delivery of possession of
immovable property cannot by itself be treated as equivalent
to conveyance of the immovable property. [574E]
The date of sale or transfer according to s. 12B is the date
when the sale or transfer takes place, and the entries in
the account books are irrelevant for the purpose of
determining such a date. [574F-G]
In the present case, machinery, electrical fittings,
buildings and site were not sold or transferred in the
relevant year of account; only
568
one asset, namely, furniture was transferred on 17th March
1948 as title to furniture can pass by delivery. Capital
gains, if any, made by the transfer of furniture accrued on
that date. The position of goodwill is however different. It
is an intangible asset and it ordinarily passes along with
the transference of the whole business and so it was not
transferred before 1st April 1948. [575A-E]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 5 of 1964.
Appeal by special leave from the judgment and order dated
December 1, 1961 of the Andhra Pradesh High Court in Case
Referred No. 21 of 1960.
A.V. Viswanatha Sastri, K. Jayaram and R. Vasudeva
Pillai for the appellant.
K.N. Rajagopal Sastri and R.N. Sachthey, for the respondent.
The Judgment of the Court was delivered by
Sikri, J. This appeal by special leave is directed against
the judgment of the High Court of Andhra Pradesh answering
the question referred to it under s. 66 of the Income Tax
Act, 1922, against the appellant. The question referred to
was "whether on the facts and in the circumstances of the
case a sum of Rs. 79,494/- is assessable as capital gains in
the assessment year 1948-49."
The facts relevant to the question are as follows. The
assessment year in question is 1948-49 and the accounting
year is the official year 1947-48. The appellant,
hereinafter referred to as the assessee, Alapati
Venkataramaiah, was the proprietor of Mohan Tile Works,
engaged in the manufacture of tiles and bricks and owned the
factory buildings, plant and machinery. The assessee entered
into an agreement dated March 17, 1948. with one Shri
Manthena Venkata Raju agreeing to sell to the Mohan
Industries Limited, hereinafter called the Company, the
aforesaid factory, plant, machinery, furniture, stocks and
goodwill for a sum of Rs. 2,00,000/-. The agreement recited
that the assessee had been carrying on business under the
name and style of Mohan Tile Works at Tenali and that the
company to be called the Mohan Industries Limited is to be
formed under the indian Companies Act, having for its object
among other things the acquisition and the working of the
said business. It appears that this agreement was drafted
before the Company was incorporated and the recital clause
was not modified when the agreement was actually executed.
It is common ground that the Company was incorporated on
July 5, 1947, before the date of the agreement. Since the
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answer to the question turns in part on the construction of
the agreement it would be convenient to set out the relevant
clauses, which are as follows:
"1. The vendor shall sell and’ the company shall
purchase:
First the Goodwill of the said business (with the exclusive
right to represent the company as carrying on such business
in continuation of the Vendor or in succession thereto).
569
Secondly all the immovable properties specified in
Schedule hereto;
Thirdly all the plant, machinery, offices
furniture, licences, livestocks, carts, implements and
utensils to which the vendor is entitled in connection with
the said business specified in the Second Schedule hereto;
Fourthly all materials and semi-processed materials in stock
described in the third schedule.
2. The consideration for the said sale shall be the sum
of Rs. 2,00,000.00 which shall be paid and satisfied by
payment in cash soon after the capital Rs. 3,00,000.00 has
been raised or in any other manner agreed upon between the
Directors of the Company and Vendor.
6. The purchase shall be completed by Seventeenth day of
March, 1948 at Tenali when possession of the premises shall
as far as practicable be given to the company and’ the
consideration aforesaid shall be paid and satisfied subject
to the provisions of the agreement and thereupon the Vendor
and all other necessary parties, if any, shall at the
expense of the company execute and do all the assurances and
things for vesting the said premises in the company and
giving to it the full benefit of this Agreement as shall be
reasonably required.
7. If from any cause whatever other than the wilful default
of the vendor the purchase shah not be completed by the said
17th day of March 1948 the company shall pay interest on the
said sum of Rs. 2,00,000.00 (Two lakhs) cash at the rate
of ......... p.c. per annum.
8. Upon the adoption of this agreement by the company in
such manners as to render the same binding on the company
the said Manthena shall be discharged from all liability in
respect thereof.
9. Unless before the day the company shall have become
entitled to commence business either of the parties hereto
may by notice in writing to the other, determine this
agreement and after adopting this agreement the company
shall stand in the place of the said vendor for the purpose
of this clause.
10. If this agreement shall not be adopted by the
company in the manner aforesaid before and day next, either
of the parties may by notice in writing to the other
determine the same."
The assessee was appointed managing agents of the
company on July 15, 1947, and on March 11, 1948, he wrote a
letter on behalf of the company to the Director of
Industries and Commerce. Madras, furnishing a detailed list
of land, building and machinery comprising the assets of the
company together with their value, in
570
connection with the grant of loan by Government. On March
20, 1948, the assessee was credited with the price of
Rs.200000/- in the books of the company. On November 22,
1948, sale deed in respect of land was executed in favour of
the company. On December 9, 1948, the company mortgaged the
land with all its buildings and structures thereon and the
machinery. plant and other property for Rs. 1,00,000/- to
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the State of Madras. On March 16. 1949. the Board of
Directors, by resolution No. 22 approved the agreement dated
March 17, 1948, and on April 10, 1949, the agreement was
approved at the annual general meeting of the company. In
the first annual report dated March 22, 1949, it was stated
as follows:
"The company was registered on 5th July
1947. The Memorandum of Association and
Articles alongwith the prospectus of the
company were published and the shareholders
and the public are well aware of the objects
and the prospectus of this industry in Andhra.
To achieve their objects the directors entered
into an agreement called vendor’s agreement,
with Sri Alapati Venkatramiah, Proprietor
of Mobart Tile Works on 17-3-1948."
It appears that the assessee had returned this income
as capital gains in his return and the Income Tax Officer,
without any discussion, held that the assessee realised an
excess of Rs.79,494/over and above the original cost and
this was capital gains assessable under s. 12B of the Act.
The assessee appealed to the Appellate Assistant
Commissioner and in the grounds of appeal stated that "the
Income Tax Officer erred in determining the excess over the
original cost in respect of the building at Rs. 79,494/- as
attracting tax to capital gains. As a matter of fact the
building was sold at Rs. 1,69,950, but a sum of one lakh
alone was received and’ the balance is yet to be received.
The transaction therefore cannot be said to be complete nor
can it be said that the profits had been realised.
Therefore, the sum of Rs. 79,494/- as attracting capital
gains is absolutely justified."
The Appellate Assistant Commissioner observed that the
fact that a part of the sale amount had not been realised
was irrelevant. Then he said that "at one stage it was
contended that there was no legal transfer of the buildings.
machinery, etc. to the limited company. There is no
substance in this contention also. The limited company is
said to have obtained a loan of more than a lakh of rupees
from the Madras Government on the basis that they were the
owners of the buildings. machinery, etc. which they had
purchased from the appellant. The statement therefore that
there was no legal transfer cannot be true. I am satisfied
that the sum of Rs. 79,494/- as returned by the appellant
under the head capital gains was rightly included in the
assessment."
The assessee then appealed to the Appellate Tribunal. The
Tribunal, by its order dated’ November 24, 1955, held that
"there
571
was in fact no sale, much less legal transfer of lands, buil
dings,
machinery etc., to the limited liability company which was promot
ed to
take over the tiles business. There was only an agreement to sell
. In
fact, the assessee did not receive a single pie during the ye
ar of
account or even during the period when the capital gains was in
force.
He received in all Rs. 1 lakh in several instalments beginning
from
25-3-1949, which is beyond the year of account. The point tha
t the
assessee himself returned the sum of Rs. 79,494/under the capital
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gains
leads us nowhere. He might have done it under the advice of
some
"income-tax expert". The assessee cannot be tied down to an inadv
isably
made wrong statement. In the circumstances, we delete the additio
n."
It appears that the Commissioner of Income Tax filed an appli
cation
under s. 35 of the Act for the correction of the Tribunal’s Order
on the
ground that the Tribunal had not mentioned in the order c
ertain
documents which, if they had been considered, would perhaps supp
ort a
conclusion different from the one arrived at by the Tribunal.
The
Tribunal thereupon came to the conclusion that its earlier de
cision
deleting the amount from taxation was based on non-considerati
on of
various materials on record and it proceeded to rectify this order
as a
mistake apparent from the record. Accordingly it deleted para 4 i
n its
order dated November 24, 1955, and substituted its order dated Mar
ch 8,
1957. The Tribunal held that in pursuance of cl. 6 of the agr
eement
dated March 17, 1948, the possession of the entire factor
y was
immediately handed over to Mohan Industries and that the sale deed
dated
November 22, 1948 was executed for consideration of Rs. 4,500/- on
ly and
refers only to the land on which the factory is situated, and di
d not
refer to the factory, machinery and plant, etc. which had been
taken
possession of by Mohan Industries on March 17, 1948. Further it
held
that the entries in the account books of Mohan Industries under
date
March 20, 1948, showed that a sum of Rs. 2,00,000/- was credit
ed in
favour of the assessee and the asset accounts were debited as foll
ows:
Plant & Machinery -a/L.P.27Rs. 15,989 0 0
Furniture account 2918,80500
Electric goods 31 1,289100
Site & Construction amount331,26,47O00
Stock amount 34 30,05000
Goodwill account 407,39660
Total’Us.2,00,00000
572
Further it noticed that the assessee also made corresponding
entries in the books on March 20, 1948, by debiting Rs.
2,00,000/- to Mohan Industries and crediting the various
accounts in the same way. The Tribunal also relied on the
letter dated March 11, 1948, from Mohan Industries to the
Director of Industries, and the first annual report dated
March 22, 1949. As stated above, the Tribunal referred the
question set out above.
The High Court came to the conclusion (1) that in the
circumstances of the case it is immaterial as to when the
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money was actually paid because the transfer had already
been made by putting the company in possession; (2) that the
words used in s. 12B are sale, exchange, relinquishment or
transfer. If transfer is equivalent to sale, in that it
should only be by a registered instrument, the Legislature
would not have used two different words for that purpose.
All that is required for the purpose of this section is that
the assessee should have a right to receive the profits and
not that he should have in fact received it. The assessee,
in their view, had a right to receive the two lakh of rupees
under the agreement immediately and in fact he treated it as
having been received; (3) the entire movable and immovable
property was transferred by giving possession to the company
in the year of account and in order to perfect the title the
only thing that is required was a registered conveyance in
respect of land which was done subsequently; and (4) that it
is apparent from the entire transaction and the method of
accounting adopted both by the assessee and the company that
the income had ,risen to the assessee in the year of account
and there is no justification even for the contention that
atleast immovable assets should be deemed to have been
transferred only in the year in which the actual sale deed
was executed. Accordingly, it answered the question in the
affirmative.
Mr. A.V. Vishwanatha Sastri, the learned counsel for the
assessee contends that under s. 12B of the Income Tax Act,
as it stood at the relevant time, profits and gains are
deemed to be the income of the previous year in which the
sale, exchange or transfer took place. He says that the
sale took place when on March 16, 1,949, the Board of
Directors ratified the agreement dated March 17, 1948; till
then there was only an agreement to sell and that an
agreement to sell is neither a sale nor a transfer of a
capital asset. The relevant part of s. 12B was in the
following terms:
"12B. Capital gains-(1) 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 before the 1st day of April 1948, and such profits and
gains shall be deemed to be income of the previous year in
which the sale, exchange or transfer took place. ...."
573
The word "capital asset" was defined to mean "property of
any kind held by the assessee whether or not connected with
his business, profession or vocation but does not include
(i) any stock-in-trade, consumable stores or raw materials
held for the purpose of his business, profession or
vocation."
The question which arises is whether any sale or
transfer took place before the first day of April, 1948.
Upto that date, apart from the agreement to sell, three
events had taken place. First, the assessee as managing
agents had written on March 11, 1948, i.e., before the
agreement was signed, to the Government regarding loan.
Secondly, on March 17, 1948, the possession of the land and
the buildings and machinery had’ been given to the
company. Thirdly, on March 20, 1948, the assessee had been
credited with the price of Rs. 2,00,000/- in the books of
the company and he had also made appropriate entries in his
own account books
Turning now to the agreement dated March 17, 1948, it is
urged that this is an agreement to sell and not a sale
deed’. This is evident from clause 1 of the agreement.
Further it is contended that it is a conditional agreement
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to sell. Reliance is placed on clauses 8 and 9 of the
agreement. Clause 8 expressly contemplates adoption of the
agreement by the company in such manner as to render the
same binding on the company, and clause 9 contemplates that
it is only after the adoption of the agreement that the
company shall stand in the place of the said Mantuna Venkata
Raju. It seems to us that it was a conditional agreement to
sell and before it could ripen into a contract between the
company and the assessee, it had to be adopted by the
company. We may mention that Mr. Rajagopala Sastri urged
that we should discard clauses 8 and 9 because they were
meant to operate if the agreement had been executed before
the incorporation of the company. But we are unable to
rewrite the agreement. Clauses 8 and 9 are appropriate in an
agreement which is made by an agent subject to confirmation
by a principal and must be given effect to.
When was the agreement adopted by the company’? We are
relieved from addressing ourselves to this question because
in the statement of the case, which was agreed to by the
assessee and the Revenue, it is stated that "the said
agreement was approved and accepted by a resolution of the
Board of Directors of the Company on 26.3.1949 and in and by
the said resolution the company agreed to pay purchase price
in instalments commencing from 31.3.1949. The agreement was
subsequently approved by the general body of share holders
at a meeting held on 10-4-1949 and on such approval,
acceptance and adoption, the agreement became binding on
the assessee and the company."
Even if the agreement was accepted by the company in 1949,
the question still remains whether any sale or transfer of
assets took place before April 1948. Sale or transfer of an
asset could take place, as it did in respect of the site,
even before the agreement was
L/P(N)4SCI-10
574
accepted. The assets comprised of two items of immovable
property, viz., Plant and machinery valued at Rs. 15,989/-
and site and buildings valued at Rs. 1,26,470/-. It is clear
that title to these assets could not pass to the company
till the conveyance was executed and registered. (See
Commissioner of Income Tax v. Bhurangva Coal Co.(1) No such
conveyance was executed before April 1, 1948. It is only on
November 22, 1948, that a sale deed was executed and
registered in respect of the site. Therefore, it is clear
that the title to these assets did not pass to the company
till after April 1, 1948, and consequently nO sale took
place of these assets before April 1, 1948.
Mr. Rajagopala Sastri however urges in the alternative
that even if no sale took place before April 1, 1948, the
assets had been transferred to the company before that date.
He says that ’transfer’ is a wide word’ and had been used in
s. 12B to cover those cases where rights in assets have been
transferred in such a manner as to give rise to capital
gains. He further urges that in this case possession of the
assets was transferred’ to the company on March 17, 1948,
and the assessee could never get back possession of the
immovable assets in view of s. 53A of the Transfer of
Property Act. In none of the cases cited before us has this
point been considered. We are unable to sustain this
contention. Before s. 12B can be attracted, title must pass
to the company by any of the modes mentioned in s. 12B, i.e.
sale, exchange or transfer. It is true that the word
’transfer’ is used in addition to the word ’sale’ but even
so, in the context transfer must mean effective conveyance
of the capital asset to the transferee. Delivery of
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possession of immovable property cannot by itself be treated
as equivalent to conveyance of the immovable property.
The High Court has relied on the entries made in the
account books of the assessee and the company on March 20,
1948, but the date of sale or transfer according to s. 12B
is the date when the sale or transfer takes place, and it
seems to us that the entries in the account books are
irrelevant for the purpose of determining such a date.
Mr. Rajagopala Sastri contends that the assessee should not
be allowed at this stage to draw a distinction between
movable and immovable assets, but in the statement of the
case, which was agreed to by the assessee and’ the Revenue,
a distinction is drawn thus:
"The building and site was valued at Rs. 1,26,470/-.The
machinery and electrical fitting which were permanently
embedded in the earth were respectively valued at Rs.
15,989/- and Rs. 1,298-10-0. The stocks were valued at Rs.
30,050/- and goodwill at Rs. 7396-6-0."
We are, therefore, unable to prevent the assessee from
relying upon the distinction between movable and immovable
assets. In the
(1) 34 I.T.R. 802.
575
result, we hold that the following assets were not sold’ or
transferred before April 1, 1948.
(i) Machinery valued at Rs. 15,989-0-0.
(ii) Electrical fittings valued at Rs. 1,289-10-0.
(iii) Buildings and site valued at Rs. 1,26,470-0-0.
Therefore, no capital gains in respect of these items arose
in the previous year ending March 31, 1948.
This brings us to the movable assets. Stocks valued at
Rs. 30,050/- are expressly exempt from the definition of
capital asset, and therefore we hold that no capital gain
accrued in respect of their sale or transfer. This leaves
furniture valued at Rs. 18,805/-, and goodwill valued at Rs.
7,396/6/-. There is no doubt that possession of furniture
was delivered on March 17, 1948, and as title to furniture
can pass by delivery, capital gains, if any, accrued on that
date. In the circumstances of the case, delivery must have
been made with the intention of passing title. The position
regarding goodwill is however different. It is an intangible
asset and it ordinarily passes alongwith the transference of
the whole business. It cannot be said in the circumstances
of this case that the goodwill was transferred before April
1, 1948. Accordingly, we hold that only one asset, namely,
furniture was transferred before April 1, 1948. In the
result, we answer the question referred to the High Court
as follows:
"In the facts and circumstances of the case the sum of Rs.
79,494/- is not assessable as capital gains in the
assessment year 1948-49, but only such part of it, if any,
as is attributable to the capital gain made by the transfer
of furniture valued at Rs. 18,805/- is assessable."
The appeal is accordingly accepted and as the assessee has
succeeded substantially he will have his costs here and in
the High Court.
Appeal allowed.
576