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 section 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. 7,396-6-0. "
We are, therefore, unable to prevent the assessee from relying upon the distinction between movable and immovable assets. In the 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. 7,396-6-0.
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 along with the
transference of the whole business. It cannot be said in the circumstances of
this case that the goodwill was t>" 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)
Secondly, all the immovable properties specified in
schedule hereto ;
Thirdly, all the plant, machinery, office 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. 2,00,000-0-0 which shall be paid and satisfied by payment in cash soon after
the capital Rs. 3,00,000-0-0 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 shall not be completed by the said 17th day
of March, 1948, the company shall pay interest on the said sum of Rs.
2,00,000-0-0) (Two lakhs) cash at the rate of ............ p.c. per annum.
8. Upon the adoption of this agreement by the company in
such manner 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 (sic) 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 Manthena Venkata Raju
for the purpose of this clause.
10. If this agreement shall not be adopted by the company
in manner aforesaid before and the day next (sic), 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 connection with the grant of loan by
Government. On March 20, 1948, the assessee was credited with the price of Rs.
2,00,000 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 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 along with 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
Venkataramaiah, Proprietor of Mohan Tile Works on March 17, 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 section 12B of the
Act.
The assessee appealed to the Appellate Assistant
Commissioner and 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 unjustified.
"
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 was in
fact no sale much less legal transfer of lands, building, machinery etc., to the
limited liability company which was promoted 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 year of account or even during the period when the capital
gains tax was in force. He received in all Rs. 1 lakh in several instalments
beginning from 25th March, 1949, which is beyond the year of account. The point
that the assessee himself returned the sum of Rs. 79,494 under the capital 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 inadvisably made wrong
statement. In the circumstances, we delete the addition. "
It appears that the Commissioner of Income-tax filed an
application under section 35 of the Act for the correction of the Tribunal's
order on the ground that the Tribunal had not mentioned in the order certain
documents which, if they had been considered, would perhaps support a conclusion
different from the one arrived at by the Tribunal. The Tribunal thereupon came
to the conclusion that its earlier decision deleting the amount from taxation
was based on non-consideration of various materials on record and it proceeded
to rectify this order as a mistake apparent from the record. Accordingly it
deleted paragraph 4 in its order dated November 24, 1955, and substituted its
order dated March 8, 1957. The Tribunal held that in pursuance of clause 6 of
the agreement dated March 17, 1948, the possession of the entire factory was
immediately handed over to Mohan Industries and that the sale deed dated
November 22, 1948, was executed for consideration of Rs. 4,500 only and refers
only to the land on which the factory is situated, and did 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 credited in favour of the assessee and the asset accounts were
debited as follows :
Rs. As. Ps.
Plant & machinery a/c L. P. 27 15,989 0 0
Furniture account " 29 18,805 0 0
Electric goods " 31 1,289 10 0
Site & construction account " 33 1,26,470 0 0
Stock account " 34 30,050 0 0
Goodwill account " 40 7,396 0 0
------------------------------------
Total 2,00,000 10 0
------------------------------------
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 where the money was actually
paid because the transfer had already been made by putting the company in
possession ; (2) that the words used in section 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 arisen to the assessee in the year of account and there is no
justification even for the contention that at least 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. Viswanatba Sastri, the learned counsel for the
assessee, contends that under section 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, 1949, 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 section 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 : .... "
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. Up to 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 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 Manthena 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 16th March, 1949, and in and by the said
resolution the company agreed to pay purchase price in instalments commencing
from 31st March, 1949. The agreement was subsequently approved by the general
body of shareholders at a meeting held on 10th April, 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 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. Bhurangya Coal Co.
). 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 section 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 section 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 section 12B can be
attracted, title must pass to the company by any of the modes men