Full Judgment Text
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PETITIONER:
DALMIA CEMENT LTD., RAJASTHAN
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX,
DATE OF JUDGMENT: 16/04/1999
BENCH:
Umesh C. Banerjee, M.Srinivasan
JUDGMENT:
BANERJEE, J.
These appeals by the grant of special leave are
directed against a common order of the High Court
in Income Tax Reference Nos.87 and 88 of 1974 in
terms of the order of Reference by the Income Tax
Appellate Tribunal, Delhi Branch in respect of
Assessment Years 1964-65 and 1965-66. The Tribunal
has referred the following two questions to the
High Court for the above-mentioned assessment years
1964-65 and 1965-66. For the assessment year
1964-65 the question reads as below: "Whether on
the facts and in the circumstances of the case,
Income Tax Appellate Tribunal was right in holding
that the profit arising from the working of the two
cement factories situated in Pakistan for the year
1.10.1962 to 30.9.1963 was taxable in the hands of
the applicant company?"
And for the assessment year 1965-66 the question was:
"Whether on the facts and in the circumstances of the
case, the Income Tax Appellate Tribunal was right
in holding that the profit arising from the working
of the two cement factories situated in Pakistan
for the year 1.10.1963 to 30.9.1964 was taxable in
the hands of the applicant company?"
The High Court however, answered the questions in the
affirmative for both the assessment years and hence
these appeals.
At this juncture, it would be convenient to advert to
the contextual facts briefly. The assessee Dalmia
Cement Limited, the owner of two cement factories
situated in Pakistan, by an agreement in writing
dated 24th July, 1962 agreed to sell and transfer
to one Maneckji, its properties and assets in
Pakistan represented in the two cement factories.
The facts depict further that subsequent to the
agreement, the parties did enter into a
supplemental agreement on 2nd November, 1962. We
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would refer to both the agreements presently but
before so doing, to conclude the factual aspects be
it noted that the assessee in its return of income
for the assessment year 1964-65 on 30th June, 1964
recorded the total income as Rs.24,28,675/- but
subsequently on a revised return, filed on 20th
November, 1968, the total income shown was reduced
to Rs.1,40,852/-. Similarly for the year 1965-66,
the return filed on 30th June, 1965 recorded the
total income of Rs.24,58,314/- but the revised
return depicted a loss of Rs.2,45,786/-. The
original return however did not include profits
from the working of the two Pakistan factories but
only the interest income for the two year period
from 1.10.1962 to 30.9.1964 which however was
deleted in the revised return on the ground of non-
receipt of the same. The Income Tax Officer did
however reject the contention that the profit from
the two factories belong to Mr. Maneckji or his
nominee with effect from 1.10.1962 and the
income-tax Officer’s assessment included the
profits of the two companies in the total income of
the assessee company for both the years. On an
appeal to the Appellate Assistant Commissioner the
order of the Income Tax Officer stood confirmed for
both the years. Similar is the order of the
Tribunal in the appeal by the assesssee by
recording a finding that profits arisen after
30.9.1962 and before 30.9.1964 were taxable in the
hands of the assessee company. Subsequently the
matter came up before the High Court for
consideration of the above noted two questions and
the High Court as noticed above answered the same
in the affirmative. It would be convenient at this
juncture however to advert to the terms of the
agreement dated 24th July, 1962 which inter alia
contained the following: "...........and whereas,
the company has agreed to sell and transfer to Mr.
Maneckji all its properties and assets in Pakistan
pertaining to the said business mentioned briefly
in the preceding paragraph and set out in detail
hereinafter for the consideration and upon the
terms and conditions hereinafter appearing.."
"........The consideration for the said sale shall
be ascertained in the following manner and the
total sum thereby ascertained (less the deduction
of Rs.20,00,000 (rupees twenty lacs) therefrom) is
hereinafter called "the purchase price". a) the
price to be paid by Mr. Maneckji for all the fixed
assets to be more fully described in the Schedule
hereinbefore mentioned shall be their value in the
books of accounts of the Company on the 30th day of
September, 1962 hereinafter called "assessment day"
subject to adjustments at book prices for fixed
assets bought, sold, damaged or destroyed between
assessment day and the date on which the
transaction is completd hereinafter called
"completion day" (normal) wear and tear excepted);
b) the price to be paid by Mr. Maneckji for all
stores including firebricks, grinding media, gunny
bags, spare parts, general stores, coal and
miscellaneous items to be transferred to Mr.
Maneckji shall be their value in the books of
account of the Company upon assessment day, subject
to the adjustment at book prices for the above
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items bought, manufactured, in process damaged,
sold or destroyed between assessment day and
completion day; c) the price to be paid by Mr.
Maneckji for all goods in transit, raw materials,
in process, clinker (half made cement),
manufactured cement, firebricks manufactured by
Dandot Factory, shall be their value in the books
of account of the Company upon assessment day,
subject to adjustment at book prices for the above
items bought, manufactured, in process, damaged,
sold or destroyed between assessment day and
completion day; d) cash shall be transferred at
par;" "18............The completion of the
transaction is subject to the approval of the
Governmental agencies of both India and Pakistan to
the extent of such approvals as may be necessary
and required by law for the effectuation of this
Agreement and Mr. Maneckji will use his best
endeavours to obtain all the said approvals from
the Government of Pakistan. The Company hereby
undertakes on its part to use its best endeavours
to obtain all the said approvals from the
Government of India. 19. The transfer of the
subject matter of this Agreement shall be completed
on or before the 31st December, 1962 and unless
otherwise mutually agreed in writing, this
Agreement shall expire upon that day. 20. This
agreement and/or the subject matter hereof may be
transferred to anybody corporate formed and
controlled by Mr. Maneckji, if so required and the
Company shall be bound to effect the transfer as if
such body corporate were a party hereto." It would
also be convenient at this juncture to note some of
the terms of the Supplemental Agreement as below:
"Now therefore it is agreed by and between the
parties that: Clause 2 of the said agreement shall
be deleted and replaced by the following Clause:
"The consideration of the said sale shall be
ascertained in the following manner and total sum
thereby ascertained (less the deduction of
Rs.20,00,000/- therefrom) is hereinafter called the
purchase price. a) The price to be paid by Mr.
Maneckji for all the fixed assets shall be their
value in the books of account of the Company on the
30th day of September, 1962 hereinafter called
"assessment day".
......................... d) All cash held by the
Company in Pakistan as on 30th September, 1962
shall be transferred at par.
e) Investments and Government securities shall be
transferred at average market price on assessment
day except that the shares held by the Company in
Dalmia Cement (Pakistan) Ltd., a wholly owned
subsidiary shall be transferred at the net worth of
the shares determined with reference to the Balance
Sheet of Dalmia Cement (Pakistan) Ltd., as on 30th
September, 1962.
f) The price to be paid by Mr. Maneckji for all the
Company’s loans, advances outstandings and other
debts standing to the credit of the Company shall
be their value in the books of the Company on
assessment day.
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The interest payable by Mr. Maneckji at six per cent
annum on the purchase price shall be calculated
with effect from 1st October 1962 and paid in the
manner provided in para 3 (b) of the said
agreement.
The profit and loss arising from the operations of the
Company during the pe riod subsequent to 30th
September, 1962 shall, in the event of the
completion of the sale transaction in accordance
with the said agreement, be to the account of Mr.
Maneckji. The operations of the Company’s
factories and business in Pakistan shall, however,
continue to remain under the full and undisturbed
control, and direction of the Company as hitherto,
and nothing stated herein shall be construed as
permitting in any manner interference on the part
of Mr. Maneckji with the conduct of the business
and operations of the factories until the same are
transferred to Mr. Maneckji on the completion of
the transaction.
In supercession of para 5 of the said agreement, it is
hereby agreed that the all liabilities of the
Company relating to the period uptill 30th
September, 1962 which may relate to the properties,
assets and premises hereby transferred shall be the
sole responsibility of the Company and Mr.
Maneckji shall be responsible for all such
liabilities in respect of the period commencing 1st
October 1962."
Incidentally, be it noted that the Principal Agreement
dated 24th July,1962 though had a time limit, the
same, by consent of the parties and by way of
Supplemental Agreement was extended from time to
time and the period of completion of the purchase
was extended till 30.9.1964 and it is on that date
the parties did enter into a Sale Deed for transfer
of rights by the assessee Dalmia Cement Ltd. in
favour of Pakistan Progressive Cement Industry.
Mr. Vellapally, the learned Senior Advocate appearing
in support of the appeal was rather emphatic in his
contention that the High Court was in clear error
by reason of its reliance on the fact of physical
control of the factories rather than to the
ownership or the title to the profits which was
entirely a matter of agreement between the buyer
and the seller. The factum of non interference by
Mr. Maneckji in the conduct of the business and
operations of the factory until the same are
transferred to Mr. Maneckji on completion of the
transaction, it appears has had weightage with the
High Court. The Appellant contended that the High
Court has otherwise misread and misapplied the law
pertaining to accrual of profits by reason of the
fact that the supplemental agreement itself records
that the profits have to be to the accounts of Mr.
Maneckji. The High Court in this context observed:
"profits would arise simultaneously by the conduct
of business and running of the factories. It is
true that as per clause 3 of the Supplemental
Agreement dated 2nd November, 1962, profits have to
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be to the account of Mr. Maneckji but that would
be only in the event of completion of the sale
transaction by a particular date which would be an
event to take place subsequent to the accrual of
the profit." ..................... ".........when
the business and operation of the factory is to be
effected by the assessee Company without any
interference by Mr. Maneckji or his nominee and
the sale transaction is yet to take place which may
take place or may not take place. In such a
situation there will be no stoppage of accrual of
profits to the assessee company. It is true that
cash in hand as well as in the Bank, and all bills
and notes of the bank would also stand transferred
but that will take place on a future date when the
Sale Deed is executed. In respect of an event
which is yet to take place overriding title does
not come into existence, accrual of profit can only
be stopped if an overriding title is created before
the accrual of the profits....". While at the
first blush the reasoning seems to be rather
attractive but on consideration of the issue on a
wider perspective the High Court cannot but be said
to be in clear error. For the year 1965-66 when
the order of assessment was made, the profits were
ascertained on 30th September, 1964 and the
property was itself transferred, as such question
of accrual of profit, on account of the transferred
assets, does not and cannot arise. Be it noted
that completion of sale transaction ought to be
attributed its normal meaning and in this regard
contextual facts should also be looked into and
considered in the proper perspective. The sale
transaction in fact has taken place and as such
there being any contingency, as was there at the
earlier point of time, does not arise. The event
has taken place and the Supplemental Agreement
dated 2nd November, 1962 makes the situation clear
and categorical. The parties agreed the relevant
date to be 30th September, 1962 and not the
completion of sale. Clause 3 of the agreement of
which, the High Court made a special reference and
interpreted that by reason of the contingent event
which would be subsequent to the accrual of
profits, the profit cannot but be treated to be in
the hands of the assessee does not withstand the
test of correctness. The High Court has not laid
any importance to the event which stands completed
by reason of the sale agreement. There is no
question of enabling the assesssee to retain the
profit in its own hand after the ‘sale agreement’.
The event as noticed above, has taken place and by
reason of the event and in terms of the provisions
of the agreement question of tracing the profit in
the hands of the assessee does not and cannot
arise. In any event profits of a business do not
accrue from day to day but at the end of the
accounting year. Profits were ascertained on 30th
September, 1964 when the property was transferred
as such for the year 1965-66 as noted above,
question of profit accruing to the assessee does
not arise. As a matter of fact the profit stands
diverted to the purchaser in terms of and in
accordance with the agreement dated 24th July, 1962
read with Supplemental Agreement dated 2nd
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November, 1962 and the date of actual transfer of
the factory in question which, in fact, has taken
place on 30th September, 1964 does not alter the
situation. The income stands diverted by an
overriding title as a matter of fact even before
the accrual.
The concept of diversion of income by an over-riding
title has been very lucidly explained by this Court
in CIT v. Sitaldas Tirathdas’s case [1961 (41) ITR
367] in the manner following:-
"In our opinion, the true test is whether the amount
sought to be deducted, in truth, never reached the
assessee as his income. Obligations, no doubt,
there are in every case, but it is the nature of
the obligation which is the decisive fact. There
is a difference between an amount which a person is
obliged to apply out of his income and an amount
which by the nature of the obligation cannot be
said to be a part of the income of the assessee.
Whereby the obligation income is diverted before it
reaches the assessee, it is deductible; but where
the income is required to be applied to discharge
an obligation after such income reaches the
assessee, the same consequence, in law, does not
follow. It is the first kind of payment which can
truly be excused and not the second. The second
payment is merely an obligation to pay another
portion of one’s own income, which has been
received and is since applied. The first is a case
in which the income never reaches the assessee, who
even if he were to collect it, does so, not as part
of his income, but for and on behalf of the person
to whom it is payable."
In Travancore Sugars & Chemical’s case [1973 (88) ITR
1], this Court reiterated the same test and
observed:-
"It is thus clear that where by the obligation income
is diverted before it reaches the assessee, it is
deductible. But, where the income is required to
be applied to discharge an obligation after such
income reaches the assessee it is merely a case of
application of income to satisfy an obligation of
payment and is therefore not deductible."
In this context, reference to a Bench decision of the
Calcutta High Court in the case of Commissioner of
Income Tax Vs. Jhanzie Tea Association [ 1989
(178) ITR 296] also seems to be apposite. S.C.Sen,
J. (as His Lordship then was) in the last noted
decision observed:-
"It is true that the income-tax liability cannot be
assigned by any agreement. The Revenue is entitled
to proceed against the person who earned the income
but where the income has been diverted by an
overriding title even before accrual, then the
Income-tax Officer cannot proceed to assess the
income thus diverted as the income of the
transferor. In this case, not only had the tea
estates been transferred but the income accruing
therefrom had also been transferred to the
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purchaser with effect from January 1, 1969. All
its manufacturing activities as from that date were
on behalf of the purchaser. The income
attributable to the manufacturing activity accrued
to the purchaser. The income attributable to the
manufacturing activity accrued to the purchaser. I
fail to see how the income realised from sale of
such tea can be assessed as the income of the
vendor.
In this connection, reference may be made to the
observations made by G.K. Mitter, J. in the case
of CIT Vs.Tea Producing Co. of India Ltd. (1963)
48 ITR 200 (Cal), where it was stated that before a
person could be assessed under Section 10, it must
be shown that it was he who carried on the
business, profession or vocation and in the case of
a business, it was open to any person to put
another person in charge thereof although
ostensibly such person appeared to be carrying on
the business, in reality the business was that of
the person who owned it and under section 10 of the
Act such owner of the business would be the
assessee. It was observed in that case that (at
page 206):
"If a business carried on by A is transferred to B as
from a certain point of time, B alone can be
assessed to tax in respect of the period subsequent
to the change of the ownership. A and B may agree
that any profits or loss of the business as from a
date anterior to that of the change of ownership
will be on B’s account. In such a case, A will
have to account to B for the income and profits of
the business covered by the period of the agreement
and A may be held to have carried on the business
as B’s agent from the agreed date."
Similar is the view expressed by the Bombay High Court
in the case of Commisisioner of Income Tax Vs.
M.D. Kanoria [1982 (137) ITR 137]. The law thus
seems to be well-settled by a long catena of cases
to the effect that in the event of their being a
diversion of income by overriding title, question
of the income being assessed in the hand of the
assessee does not and cannot arise. Be it noted
here, that at no stage of the proceeding up to the
High Court, there was any dispute as regards
assessee’s contention of diversion by overriding
title. The finding of the High Court that issue of
overriding title on the basis of an event which is
yet to take place, being not available in the facts
of the matter under consideration, cannot in our
view be said to be a correct appreciation of law,
since on the date of assessment, the event has
already taken place and an overriding title has in
fact been created by operation of law and there is
no escape from it and as such we are unable to
record our concurrence therewith.
Mr. Vellapally, on the next count contended that the
High Court’s finding as regards the applicability
of Section 60 of the Act is also totally
unwarranted having due regard to the language of
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Section 60 and Section 63. For convenience sake
Sections 60 and 63 are set out hereunder: "Section
60. Transfer of income where there is no transfer
of assets- All income arising to any person by
virtue of a transfer whether revocable or not and
whether effected before or after the commencement
of this Act shall, where there is no transfer of
the assets from which the income arises, be
chargeable to income-tax as the income of the
transferor and shall be included in his total
income."
"Section 63. "Transfer" and "revocable transfer"
defined- for the purposes of Sections 60,61 and 62
of this Section-
(a) a transfer shall be deemed to be revocable if -
(i) it contains any provision for the re-transfer
directly or indirectly of the whole or any part of
the income or assets to the transferor, or
(ii) it, in any way, gives the transferor a right to
re-assume power directly or indirectly over the
whole or any part of the income or assets;
(b) "transfer" includes any settlement, trust,
covenant, agreement or arrangement."
The High Court while dealing with the matter observed:
"Section 60 contemplates as to how the income would
be chargeable to income tax when there is no
transfer of the assets from which income has
arisen. Section 63 clause (b) defines the word
"transfer" to include any settlement, trust,
covenant, agreement or arrangement. If any
document of the nature mentioned in clause (b)
exists, it would be considered to be a transfer.
In the present case, there are agreements between
the parties. The agreements between the parties
would be considered to be transfer but in fact,
transfer of assets had not taken place till 30th
September, 1964. So, whatever income has arisen
prior to the transfer of assets, Section 60 clearly
contemplates that such an income which has arisen
before the actual transfer of assets has taken
place, would be chargeable to income tax as the
income of the transferor and shall be included in
his total income.
In the present case, up to 30th September, 1964, there
was no transfer of assets and under clause-3 of the
supplemental agreement dated 2.11.62, the profits
had to be to the account of the transferee on
completion of the sale transaction. Even if there
is an agreement for diversion of the profits prior
to 30th September, 1964, still, in our opinion, in
the light of the provisions contained in Section
60, the profits would be taxable in the hands of
the assessee company."
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It is this finding of the High Court which has been
criticised by the appellant and we do find some
justification in that regard by reasons of the
specific language used by the legislation Section
60 of the Act, has its application only to a case
where income accrues to the transferee but the
income earning asset or source of income remains
with the transferor. As a matter of fact this
finding of the High Court that income accrued to
the Transferor stands contradicted by the finding
that Section 60 has its due application in the
facts of the matter under consideration.
Incidentally, Section 63 contains a rather special
definition of "Transfer" for the purposes of
Sections 60 to 62 and inter alia includes an
"agreement" and in this case the very existence of
the agreement to transfer dated 24th July, 1962
rules out and totally excludes the application of
Section 60 of the Act. The Tribunal however
recorded a finding different from that of the High
Court as regards the issue of applicability of
Section 60 of the Act. The Tribunal recorded:-
"Nor are inclined to accept the contention of the
Departmental Representative that even under Section
60 the profits accruing after 30.9.1962 were
chargeable in the hands of the company. For one
thing the underlying assumption of this argument
would be that income had actually accrued to
Maneckji or his nominees whereas for reasons given
earlier we are unable to accept this assumption.
Moreover, according to our reading of Section 60 it
relates to an arrangement or settlement according
to which both the transfer of income and the
retention of the ownership of the assets form parts
of one scheme."
In view of the above, we do feel it expedient to
record that the Tribunal’s finding as regards the
applicability of Section 60 cannot but be ascribed
to be otherwise in accordance with the known
principles of law, having due regard to language
used therein and the High Court unfortunately, we
are constrained to record, has in fact misconstrued
the provision and thus fell into an error.
Significantly, however, the Tribunal while dealing
with the matter has recorded in its order "we are
painfully aware of the fact that the case of the
assessee is a hard one, that the assessee had not
received any part of the purchase price so far and
that the position regarding the adjustment of
profits earned earlier is equally bad. But we have
to apply the provisions of law as we find them
uninfluenced by the hardships through which though
no fault of its own some assessee may have to
pass." While we appreciate the sympathy of the
Tribunal towards the assessee and record that hard
cases do not make bad laws but both the Tribunal
and the High Court erred in appreciating the true
perspective of the factual matrix of the matter in
issue read with the law as noticed above. The
other aspect of the matter ought also not to be
lost sight of to wit: the assessment of capital
gains: There appears to be clear inconsistency
between the assessment of capital gains on the
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transfer of the factories on one hand and finding
on accrual of income since the computation of
capital gains was effected by treating the gross
amount of consideration as the sale price. The
Income-tax Officer thus by implication accepted the
profits as belonging to the transferee and not to
the Transferor - otherwise, the net amount paid
alone ought to have been taken as the sale price.
The High Court’s judgment therefore, does not only
suffer from apparent inconsistency but on a
totality of the situation is inherently
contradictory. In the contextual facts and having
due regard to the provisions of law as noticed
above, the High Court’s affirmation to the
questions raised stands negated and are thus
answered in the negative and in favour of the
assessee. In the premises the Appeals succeed.
The judgment and order of the High Court stand set
aside along with the order of the Tribunal as also
that of the Income-tax Authorities. The
respondent-tax authorities are directed to take
steps in accordance with law, having due regard to
the observations made herein before in this
judgment. There shall, however, be no order as to
costs.