The judgment of the court was delivered by
R. S. PATHAK J.-This appeal is directed against the
judgment of the Allahabad High Court answering the following questions in the
negative:
" (1) Whether, on the facts and in the circumstances
of the case, the Tribunal was justified in holding that the provisions of
section 10(2)(vii) of the Indian Income-tax Act, 1922, were not attracted ?
(2) Whether, on the facts and in the circumstances of the
case the Tribunal was justified in holding that the sale had taken place before
April 1, 1956, and, therefore, the provisions of section 12B of the Indian
Income-tax Act, 1922, were not attracted ? "
The assessee, a public limited company, was put into
liquidation under the orders of the Allahabad High Court. An amount of Rs.
8,58,893-5-6 was payable by the assessee to the State of Uttar Pradesh on
account of arrears of cane cess. In proceedings for recovery of that amount as
arrears of land revenue, the Collector of Deoria attached the assessee's mills
and put them to auction sale on November 10, 1955. The land, building, machinery
and parking grounds were sold for Rs. 24,00,000 while the movable properties
including mill stores, spare parts, tools and equipment were sold for Rs.
1,80,000. All the properties were purchased by the Kanpur Sugar Works (P.) Ltd.
Although the sale was held on November 10, 1955, the sale certificate under rule
285M of the U.P. Zamindari Abolition and Land Reforms Rules, 1952, could not be
issued till July 4, 1956, on account of objections raised by the assessee, in
spite of the fact that the entire amount of purchase money of Rs. 25,80,000 had
been paid by the purchasers on December 8, 1955. During the period in which the
objections were pending, i.e., November 10, 1955, to July 2, 1956, the
Government of India appointed an authorised controller to run the sugar mills by
a notification dated November 25, 1955.
After possession of the mills was given to the purchasers,
a suit was filed by them against the assessee claiming damages for loss of
profits on account of the possession of the mills not having been delivered to
them immediately after the auction sale. In the suit, the purchasers claimed, in
the alternative, compensation for loss of interest on Rs. 25,80,000 from the
date of deposit of the sale price to the date of delivery of the mills. The
claim of the purchasers was ultimately settled by compromise for a sum of Rs.
1,25,000.
In the assessment proceedings for the assessment year
1957-58, the relevant accounting period being the year ended October 31, 1956,
the Income-tax Officer called upon the assessee to explain why the excess amount
which the assessee bad received on sale of the building, machinery and plant
over the difference between the original and the written down value should not
be subjected to tax under clause (vii) of sub-section (2) of section 10 and
under section 12B of the Indian Income-tax Act, 1922. The assessee replied
stating that (1) simultaneous computation of income under clause (vii) of
sub-section (2) of section 10 and of capital gains under section 12B amounted to
double taxation and was against the principles of natural justice and the
legislative intention; (2) the sale being a compulsory sale was not a sale
within the meaning of clause (vii) of sub-section (2) of section 10 ; (3)
movable property was exempt from capital gains tax; and (4) as the sale was
complete before April 1, 1956, it did not attract the provisions relating to
capital gains which became effective from April 1, 1956, only. Alternatively, it
was claimed that the value of the mills as on January 1, 1954, was much higher
than that determined and the assessee was not liable to tax on capital gains.
The Income-tax Officer rejected the contentions raised by the assessee and
completed the assessment under sub-section (3) of section 23 read with
sub-section (1A) of section 34 of the Indian Income-tax Act, 1922, on March 29,
1965, computing the profits under clause (vii) of sub-section (2) of section 10
at Rs. 10,07,000 and the capital gains at Rs. 10,23,210. The Income-tax Officer
did not find any substance in the assessee's contention that the value of the
fixed assets of the mills was Rs. 18,50,000 as on January 1, 1954, and that
there was no justification for initiating the assessment proceedings under
sub-section (1A) of section 34 of the Indian Income-tax Act, 1922.
On appeal by the assessee, the Appellate Assistant
Commissioner by his order dated May 1, 1968, agreed with the Income-tax Officer
that the sale attracted clause (vii) of sub-section (2) of section 10, that it
took place on July 4, 1956, and that the assessee was, therefore, liable to
capital gains under section 12B. But contrary to the view taken by the
Income-tax Officer, the Appellate Assistant Commissioner held that the assessee
was entitled to substitute the market value of the machinery as on January 1,
1954, in place of its cost price under clause (iii) of section 12B, and
accordingly reduced the capital gains from Rs. 10,23,210 to Rs. 4,89,343.
Both the Revenue and the assessee filed appeals before the
Income-tax Appellate Tribunal. Before the Appellate Tribunal, it was the case of
the assessee that while an auction sale may be a sale within the meaning of
section 12B, it was not a sale as contemplated under clause (vii) of subsection
(2) of section 10. It was urged that a compulsory sale was not sale for the
purposes of clause (vii) of sub-section (2) of section 10. It was also urged
that as the auction sale bad taken place prior to March 31, 1956, the assessee
was not liable to tax on capital gains at all. The Appellate Tribunal by its
order dated January 31, 1970, allowed the assessee's appeal and dismissed the
Revenue's appeal. It accepted both the contentions of the assessee and did not
find it necessary to go into the question whether the Appellate Assistant
Commissioner was right in substituting the market value of the machinery as on
January 1, 1954, in place of its cost price under clause (iii) of section 12B.
At the instance of the Commissioner of Income-tax,
Lucknow, the Appellate Tribunal referred the two questions of law set out
earlier to the High Court for its opinion. On January 7, 1974, the High Court
pronounced the judgment in the reference in favour of the Revenue. And now this
appeal.
Shri S. C. Manchanda, appearing for the assessee, has
raised two points before us. The first contention is that clause (vii) of
sub-section (2) of section 10 of the Indian Income-tax Act, 1922, has no
application because a sale effected for recovering arrears of cane cess as an
arrear of land revenue is not a voluntary sale and does not fall within the
terms of the relevant statutory provisions. The second contention is that the
sale must be regarded as having taken place on November 10, 1955, when the
auction was held and not on July 4, 1956, when the sale certificate was issued,
and that being so, section 12B which took effect from April 1, 1956, does not
extend to the sale. These are the only two contentions before us and, in our
opinion, they can be disposed of shortly.
Clause (vii) of sub-section (2) of section 10 of the
Indian Income-tax Act, 1922, provides for the computation of profits and gains
chargeable to tax under the head " Business " after making the
following allowances:
" (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:
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, 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:..."
The argument for the assessee is that the word " sold
" in the clause refers to a sale transaction effected on the free volition
of the seller and not where it is in the nature of a compulsory transfer for
recovering an arrear of land revenue. Reliance is placed on Calcutta Electric
Supply Corporation Ltd. v. CIT [1951] 19 ITR 406, where the Calcutta High Court
laid down that the word " sale " in its ordinary meaning, was a
transaction entered into voluntarily between two persons, the buyer and the
seller, and that, therefore, the requisition of an electricity generating plant
by the Government under sub-rule (1) of rule 83 of the Defence of India Rules,
not being a voluntary sale, did not fall within the mischief of clause (vii) of
sub-section (2) of section 10. Our attention has also been drawn to Indian Steel
& Wire Products Ltd. v. State of Madras [1968] 1 SCR 479; AIR 1968 SC 478;
[1968] 21 STC 138 (SC). In that case, this court was called upon to consider
whether the supplies by the appellant of certain steel products to various
persons in the State of Madras under the Iron and Steel (Control of Production
and Distribution) Order, 1941, could be regarded as sales for the purposes of
the Madras General Sales Tax Act. The court observed that the transactions must
be treated as sales because the element of mutual assent was not excluded
altogether from the transactions. Learned counsel seeks support from that case
in support of his submission that the element of consent is essential to the
character of sale. A third case, R. B. Lachman Das Mohanlal & Sons v. CIT
[1964] 54 ITR 315 (All), has been placed before us but nothing said therein is
truly apposite to the limited question before us. We have given the matter
careful consideration and we think, for the reasons which follow, that there is
no escape from the conclusion that the transaction in this case constitutes a
sale for the purposes of clause (vii) of sub-section (2) of section 10.
The levy of cane cess was imposed under a statute in
respect of an activity carried on voluntarily by the assessee. When entering
upon and carrying out that activity, the assessee was fully conscious that he
did so subject to the provisions of the statute. The statute provided for the
levy of cane cess and its recovery, in the event of default of payment, as
arrears of land revenue. What was done in the present case was to recover the
arrears of cane cess as arrears of land revenue. All along, therefore, the
assessee was aware that when it entered upon and carried out an activity
attracting cane cess, it was exposing itself to recovery proceedings as arrears
of land revenue. The assessee was aware that recovery could be effected by an
auction sale of its properties. It can be inferred from the circumstance that by
embarking upon the activity which attracted cane cess, the assessee agreed to be
bound by the structural framework imposed by the statute around that activity,
and, therefore, agreed to an auction sale of its properties as arrears of land
revenue in the event of its failure to pay the cane cess. We are not satisfied
that the element of consent is absent altogether from the transactions
considered in this case. We are clearly of opinion that the sale of the
properties of the assessee fall within the scope of clause (vii) of sub-section
(2) of section 10 of the Indian Income-tax Act, 1922, and, therefore, the first
contention must be rejected.
Turning to the second contention, the question is whether
the sale can be said to have taken place when the properties were auctioned or
on the date when the sale certificate was issued. The recovery of an arrear of
land revenue in Uttar Pradesh is governed by the provisions of the U.P.
Zamindari Abolition and Land Reforms Act and the Rules made thereunder. We have
been taken through the pertinent provisions of that Act and its Rules. The High
Court, in the judgment under appeal, has made detailed reference to them and, in
an admirable exposition of the law, has demonstrated that the date on which the
sale certificate was issued is the date on which the sale must be regarded as
having taken place. We have no hesitation in endorsing that view. Section 279 of
the U.P. Zamindari Abolition and Land Reforms Act specifies the modes for the
recovery of an arrear of land revenue and section 282 prescribes the procedure
for the attachment and sale of movable property. Section 286 empowers the
Collector to proceed against other immovable property belonging to the
defaulter. Rule 281 authorises the Collector to sell immovable property and upon
the property being auctioned under the Rules and the objections, if any, thereto
having been considered and disposed of, provides for confirmation of the sale by
an order of the Commissioner. Rule 285M provides that the Collector shall
thereupon put the person declared to be the purchaser in possession of the
property and shall grant him certificate to the effect that he has purchased the
property to which the certificate refers, and that such certificate shall be
deemed to be a valid transfer of such property. It is apparent that it is only
after the sale is confirmed and a certificate is granted that the property
stands transferred and the purchaser becomes the owner of the property. Rule
285M is explicit. The certificate operates as a transfer of the property. As
before the High Court, learned counsel for the assessee relies on section 65 of
the Code of Civil Procedure, 1908, in support of his submission, that the
property shall be deemed to have vested in the purchaser from the time when the
property is sold and not from the time when the sale becomes absolute. The
application of section 65 turns upon the scope of section 341 of the U.P.
Zamindari Abolition and Land Reforms Act which applies the provisions of the
Code of Civil Procedure to the proceedings taken under that Act. Section 341,
however, applies the Code only so far it can be applied consistently with the
Act and not in derogation of it. As is clear, the procedure incorporated in the
U. P. Zamindari Abolition and Land Reforms Act and the Rules made under it
specifically exclude the operation of section 65. When the sale certificate
itself operates as effecting the transfer of property, no question arises of
relating the transfer back to the date of auction. It is true that the order of
the Commissioner confirming the sale refers back to the auction which has
already taken place, but that is hardly of any moment in view of the terms of
rule 285M. We see no force in the second contention.
In the result, the appeal fails and is dismissed with
costs.
Appeal dismissed.
