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PETITIONER: JAGDISH SUGAR MILLS LTD.

       Vs.

RESPONDENT: THE C.I.T LUCKNOW

DATE OF JUDGMENT16/07/1986

BENCH: PATHAK, R.S. BENCH: PATHAK, R.S. MUKHARJI, SABYASACHI (J)

CITATION:  1986 AIR 1742            1986 SCR  (3) 198  1986 SCC  (3) 578        JT 1986   214  1986 SCALE  (2)90

ACT:      Income Tax Act, 1961: s. 41(2) Income Tax Act, 1922, s. 10(2) (vii)-Auction  sale of  properties of the assessee for failure to  pay  cane  cess-Whether  compulsory  sale-Excess amount over  different between the original and written down value-Whether gain from business chargeable to Tax.      U.P. Zamindari  Abolition & Land Reforms Act, 1950: ss. 279 &  341/U.P. Zamindari  Abolition &  Land Reforms  Rules, 1952: rr.  281 &  285-M-Attachment of  property and  sale by auction-sale  certificate-   Whether  itself   operates   as effecting transfer of property.      Code of  Civil Procedure:  s.  65-Applicability  of  to proceedings  under  the  U.P.  Zamindari  Abolition  &  Land Reforms Act 1950.

HEADNOTE:      Section 279  of the  U.P. Zamindari  Abolition and Land Reforms Act  specifies the  modes for  the  recovery  of  an arrear of  land revenue.  Rule 281 of the Rules framed under the Act,  authorises the  Collector  to  sell  the  attached immovable property  of a  defaulter by auction, and provides for  confirmation   of  the   sale  by   an  order   of  the Commissioner. Rule 285-M requires the Collector to grant the purchaser a  certificate that  he has purchased the property and provides  that such  certificate shall be deemed to be a valid transfer of such property.      A certain  amount was  payable by  the assessee  to the State  on   account  of  arrears  of  cane  cess  which  was recoverable as  arrears of  land revenue. In proceedings for its recovery  the Collector attached the assesse’s mills and put them  to auction  sale on  November 10, 1955. The entire amount of purchase money had been paid on December 8, 1955. However, the requisite sale certificate under r. 285-M could not be issued till July 4, 1956 on account of the objections raised by the assessee.      In assessment proceedings for the assessment year 1957- 58, the 199 Income-tax officer  called upon  the assessee to explain why the excess  amount which  he had  received on  sale  of  the buildings, machinery  and plant  over the difference between

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the original  and the  written  down  value  should  not  be subjected to  tax under cl. (vii) of sub-s. (2) of s. 10 and under s.  12B  of  the  Indian  Income-tax  Act,  1922.  The assessee  contended   (i)  that  an  auction  sale  being  a compulsory sale  was not  a sale  within the  meaning of cl. (vii) of  sub-s. (2) of s. 10; and (ii) that the sale having been completed  prior to  March 31, 1956, it did not attract the provisions  of s.  12B relating  to capital gains, which became effective  from April  1, 1956  only. The  Income-tax officer rejected  the aforesaid contentions and computed the profits under  s. 10  (2)  (vii)  at  Rs.10,07,000  and  the capital gains  under s. 12B at R.S.. 10, 23, 210. The matter ultimately went  before the  High  Court  which  decided  in favour of the Revenue.      In the assessee’s appeal to this Court it was contended (i) that  cl. (vii) of sub-s. (2) of s. 10 of the Income-tax Act, 1922 had no application because an auction sale was not a voluntary sale; and (ii) that the sale must be regarded as having taken place on November 10, 1985 when the auction was held and  not on  July 4, 1956 when the sale certificate was issued, for  the property should be deemed to have vested in the purchaser  from the  time when  it was sold and not from the time when the sale became absolute and that being so, s. 12B did not extend to the sale.      Dismissing the appeal, the Court ^      HELD: 1.  The sale  of the  properties of  the assessee falls within  the scope  of cl. (vii) of sub-s. (2) of s. 10 of the  Indian Income-tax  Act, 1322. it cannot be said that the element  of consent essential to the character of a sale was absent altogether from the transaction. 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, and  that in  the event  of default  of payment  of cane-cess it  was exposing itself to recovery proceedings as arrears of  land revenue.  The assessee  was also aware that recovery could  be  affected  by  an  auction  sale  of  its property. The  assessee thereby  agreed to  be bound  by the structural framework  imposed  by  the  statute  around  the activity. and,  therefore, agreed  to an auction sale of its properties in the event of its failure to pay the cane-cess. [205C-; 204G-H; 205A-C]      Calcutta   Electric    Supply   Corporation   Ltd.   v. Commissioner of 200 Income-tax, West  Bengal, [1951]  19 ITR 406; Indian Steel & Wire Products Ltd. v. State of Madras, [1968] 1 SCR 479; and R.B. Lachman  Das Mohanlal & Sons v. Commissioner of Income- tax, U.P., [1964] 54 ITR 315, referred to      2. The  date on  which the  sale certificate was issued should be  the date  on which  the sale  must be regarded as having  taken  place.  It  is  only  when  the  property  is transferred that  it can  be deemed  to nave  vested in  the purchaser. Rule  285-M of  the U.P. Zanmindari Abolition and Land Reforms  Act, is  explicit in  its terms. When the sale certificate itself operates as effecting the transfer of the property, no  question arises  of relating the transfer back to the date of auction. [205E; 260A-B]      The  procedure   incorporated  in  the  U.P.  Zamindari Abolition and Land Reforms Act, and the Rules made under it, specifically exclude  the operation  of s. 65 of the Code of Civil Procedure.  Section 341  of that  Act applies the Code only so  far it is consistent with the provisions of the Act

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and not in derogation of it. [206B-C]

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Civil  Appeal  No.  1348 (NT) of 1974      From the  Judgment and  order  dated  7.1.1974  of  the Allanabad High Court in I.T.R. No. 364 of 1971.      S.C. Manchanda,  V.J. Francis,  N.M.  Popli  and  Ujjal Singh for the Appellant.      V.  Gouri  Shankar  and  Miss  A.  Subhashini  for  the Respondent.      The Judgment of the Court was delivered by      PATHAK, J. This appeal is directed against the judgment of the Allahabad High Court answering the following question 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 sections 10(2)                (vii) of  the Income-tax  Act, 1922  were not                attracted?            2.  Whether on the facts and in the circumstances                of the 201           case, the  Tribunal was  justified in holding that           the sale  had taken  place  before  1.4.1956  and,           therefore, the  provisions of  section 12B  of the           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 assessees 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  moveable  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 285 M 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 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

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had 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 cl. (vii) of sub-s. (2)  of s.  10 and  under s. 12B of the Indian Income Tax  Act,  1922.  The  assessee  replied  stating  that  (1) simultaneous computation 202 of income  under cl.  (vii) of  sub-s. (2)  of s.  10 and of capital gains  under s.  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 cl. (vii) of sub-s. (2) of s.  10; (3)  moveable 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-s. (3) of s. 23  read with  sub-s. (1A) of s. 34 of the Indian Income- tax Act, 1922 on March 29, 1965, computing the profits under cl. (vii)  of sub-s.  (2) of  s. 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-s. (1A) of s. 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 cl. (vii) of sub-s. (2)  of s. 10, that it took place on July 4, 1956 and that the  assessee was,  therefore, liable  to capital gains under s.  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 cl. (iii) of s. 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 s. 12B it was not a sale as contemplated under cl. (vii) of sub-s. (2) of s. 10. It was urged that a compulsory sale was not a sale for the purposes of cl. (vii) of sub-s. (2) of s. 10. It was also urged that as the auction sale had 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  appeal. It accepted both the contentions of the assessee and  did not  find it  necessary  to  go  into  the question whether 203 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 cl. (iii) of s. 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 judgment in the reference in favour of the Revenue. And now this appeal.

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    Shri S.C.  Manchanda, appearing  for the  assessee, has raised two  points before  us. The  first contention is that cl. (vii)  of sub-s.  (2) of  s. 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 s.  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-s.  (2) of  s. 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 204      profits of  the previous  year in  which the  sale took place:                xxx       xxxx      xxxxx" The argument for the assessee is that the word "sold" in the clause refers  to a  sale transaction  affected 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. Commissioner of Income-tax, West Bengal, [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 cl.  (vii) of  sub-s. (2)  of  s.  10.  Our attention has  also  been  drawn  to  Indian  Steel  &  Wire Products Ltd  v. State  of Madras,  [1968] 1  S.C.R. 479. 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 a  sale. A  third case, R.B.

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Lachman Das  Mohanlal &  Sons v. Commissioner of Income-tax, U.P., [1964]  54 ITR  315 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 cl. (vii) of sub-s. (2) of s. 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 205 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  affected  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  cl. (vii) of  sub-s. (2)  of s. 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 s. 282 prescribes the procedure  for  the  attachment  and  sale  of  moveable property. Section  286 empowers  the  Collector  to  proceed against  other   immoveable  property   belonging   to   the defaulter.  Rule   281  authorises  the  Collecter  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  285-M provides that  the Collector  shall thereupon put the person declared  to   be  the  purchaser  into  possession  of  the property, and  shall grant  him a  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

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only after  the sale  is  confirmed  and  a  certificate  is granted that the 206 property stands  transferred and  the purchaser  becomes the owner  of   the  property.   Rule  285-M  is  explicit.  The certificate operates  as a  transfer  of  the  property.  As before the  High Court,  learned counsel  for  the  assessee relies on s. 65 of the Code of Civil Procedure 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 s.  65 turns upon the scope of s. 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. S. 341, however, applies the Code  only so far as 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  s. 65.  When the sale certificate itself operates  as effecting  the transfer of the 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. P.S.S.                                     Appeal dismissed. 207