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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