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PETITIONER: COMMISSIONER OF INCOME TAX, HYDERABAD

       Vs.

RESPONDENT: M/S.  MOTOR AND GENERAL STORES (P.) LTD.

DATE OF JUDGMENT: 02/05/1967

BENCH: RAMASWAMI, V. BENCH: RAMASWAMI, V. SHAH, J.C. SHAH, J.C. SIKRI, S.M. SHAH, J.C. SIKRI, S.M.

CITATION:  1968 AIR  200            1967 SCR  (3) 876  CITATOR INFO :  R          1969 SC 812  (6)  RF         1970 SC1212  (16)  F          1987 SC 500  (44)

ACT: income-tax   Act,  1922  s.  10(2)  (vii)-Assessee   selling ’cinema’ and ,other assets in exchange for shares in another Company-Whether  transaction  one of ’sale’  or  ’exchange’- Therefore  whether difference between book-value  of  assets and exchange consideration taxable-Determining the substance rather    than    form    of    transaction    in    revenue matters--Conditions for.

HEADNOTE: The respondent private Limited Company owned a cinema  house and  at a meeting of its Board of Directors on September  9, 1955,  it  was resolved that the Managing  Director  may  be authorised  to  negotiate with a buyer for the sale  of  the entire concern with all its equipment and machinery etc. for a  consideration  of Rs. 1,20,000.  After an  agreement  had been concluded to effect a sale and had been confirmed at an extraordinary  general meeting of the company on October  4, 1955,  an "exchange deed" was entered into on  February  21, 1956  and  the consideration was received  by  the  assessee company  in the shape of transfer of certain shares  of  the face  value of Rs. 1,20,000 -owned by the buyer  in  another company. In the course of its assessment to tax for the year 1956-57, the  Income-tax  Officer computed the  respondent’s  profits under s. 10(2)(vii) by including an amount of Rs. 43,568  on account of the excess amount realised over the written  down value  of  the  assets sold.  The order  of  the  Income-tax Officer was confirmed, in appeal, by the Appellate Assistant Commissioner   and  substantially  also  by  the   Tribunal. However, upon a reference under s. 66(2) of the Act the High Court answered the question in favour of the respondent. In  the appeal to this Court it was contended on  behalf  of the  appellant that the money consideration for  the  assets

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was  fixed  at Rs. 1,20,000 and the mode of payment  was  by transfer of shares so that the transaction was really a sale and not transfer by way of exchange; that the resolution  of the Board of Directors and of the shareholders reproduced in the  preamble of the exchange deed showed clearly that  what was authorised was the sale of the entire concern; and  that in  revenue matters it was the substance of the  transaction which  must  be  looked at and not the  form  in  which  the parties have chosen to clothe the transaction. HELD : The Income-tax authorities were not entitled to treat the transaction as a sale and to apply the provisions of  s. 10(2)(vii)  of  the Income-tax Act, 1922.   In  essence  the transaction was one of exchange and there was no sale of the properties  described  in the exhcange deed.  There  was  no price  paid or promised to be paid for the transfer  of  the properties  but there was only a consideration in the  shape of  transfer  of  shares in another company  by  the  buyer. [883E-G] It  was clear from the operative part of the  exchange  deed that there was an exchange of the properties described in it for the shares of a  877 company.   Neither  the  recital in  the  preamble  nor  the resolutions  could  control the language  of  the  operative portion of the deed or its legal effect. [883D-E] Madam  Pillai  v.  Badrakali Ammal, I.L.R.  45  Madras  612, referred to. The contention that in the present case it was the substance rather  than  the form of the transaction  which  should  be looked  at  must be rejected.  There was  no  suggestion  on behalf of the appellant of bad faith nor was it alleged that the  particular  form of the transaction was  adopted  as  a cloak to conceal a different transaction.  In the absence of any  such suggestion the true principle is that  the  taxing statute  has  to  be applied in accordance  with  the  legal rights  of  the  parties  to  the  transaction.   When   the transaction is embodied in a document, the liability to  tax depends upon the meaning and content of the language used in accordance  with the ordinary rules of construction.  [883H; 884B] Bank  of Chettinad Ltd. v. C.I.T. Madras, 1940  I.T.R.  522; Duke of Westminster’s- case,, 19 T.C. 490; and  Commissioner of Inland Revenue v.   Wesloyan  and  General Assurance Society. 30  T.C.  11, referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 819 of 1966. Appeal  by special leave from the judgment and  order  dated October  30, 1964 of the Andhra Pradesh High Court  in  case Referred No. 6 of 1963. D. Narsaraju T. A. Ramachandran and R. N. Sachthey for the appellant. P. Rain Reddy and A. V. V. Nair, for the respondent. The Judgment of the Court was delivered by Ramaswami,  J. This appeal is brought, by special leave,  on behalf of the Commissioner of Income-tax, Hyderabad from the judgement of the Andhra Pradesh High Court dated October 30, 1964 in a case Referred No. 6 of 1963. The  respondent (hereinafter referred to as the  (’assessee- company’) is a private limited company owning a cinema house called "Sree Rama Talkies", at Bobbili.  It was being  taxed

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on  the profits made by exhibition of films therein.   At  a meeting of its Board of Directors held on September 9, 1955, it  was  resolved that the Managing Director,  the  Raja  of Bobbili may be authorised to negotiate with the Zamindar  of Chikkavaram  or  his  nominee for the  sale  of  the  entire concern with all its equipment and machinery, fittings  etc. for  a  consideration of Rs. 1,20,000/-.  An  agreement  was concluded  to  effect a saLe and this was confirmed  by  the assessee-company  at an extra-ordinary general body  meeting held on October 4, 1955.  Pursuant thereto a deed called the "exchange  deed" was brought into existence on February  21, 1956 and the consideration was received by the assessee- S78 company  in the shape of transfer of 5% tax-free  cumulative preference  shares  in Sri Rama Sugar and  Industries  Ltd., Bobbili.  of  the face value of Rs. 1,20,000/- held  by  the Zamindar and Zamindarini of Chikkavaram.  Separate valuation was  given for the immovable property and for  the  movables etc.  and goodwill, each being valued at Rs. 60,000/-.   For the assessment year 1956-57, the assessee-company  submitted a  return of income showing a sum of Rs. 9,823/- as  profits derived from the transaction.  The Income-tax Officer  found that  the value realised exceeded the written down value  by Rs.  43,568/- and accordingly computed the profits under  S. 10(2)(vii)  of  the Income-tax Act, 1922  and  included  the amount  in the taxable income of the assessee-company.   The order  of  the  Income-tax  Officer  was  confirmed  by  the Appellate  Assistant  Commissioner  in  appeal  and  by  the Income-tax  Appellate Tribunal except for allowing a sum  of Rs.  5,0001- as representing the cost of the  goodwill.   As directed by the High Court, the Appellate Tribunal stated  a case  under  s.  66(2) of the Income-tax Act,  1922  on  the following question of law:               "(1)  Whether the transaction dated  21-2-1956               amounts  to a sale within the purview  of  the               second  proviso to section 10(2) (vii) of  the               Indian Incometax Act; alternatively,               (2)Whether  the consideration for the sale  is               not  the market value of the shares as on  the               date of the transaction, namely, Rs. 95/-  per               share, but the face value of the shares." After  hearing  the reference the High  Court  answered  the question  in favour of the assessee-company and against  the Commissioner of Income-tax. Section 10(2)(vii) of the Income-tax Act’, 1922 provides  as follows :               "10.   Business.  (2) Such  profits  or  gains               shall  be computed after making the  following               allowances,               namely     ............................               (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 :                879.               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,

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             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: It  is only if there is a sale of the cinema house  and  the other  assets that the taxable profits and gains are  to  be computed  in  the present case under s. 10(2) (vii)  as  the amount  by which the written down value exceeds  the  amount for which the assets are actually sold.  The words "sale" or "sold"  have not been defined in the Income-tax  Act,  1922. Consequently, these words have to be construed by  reference to other enactments.  Section 54 of the Transfer of Property Act  defines ’sale’ as a transfer of ownership. in  exchange for a price paid or promised or part paid and part promised. Section 54 of the Transfer of Property Act reads as. follows :               "Sale’ is a transfer of ownership in  exchange               for a price paid or promised or part-paid  and               part-promised." There is no definition of the word ’price’ in this Act.  But it  is,  well-settled that the word ’price’ is used  in  the same  sense in this section as in s. 4 of the Sale of  Goods Act,  1930  (Act III of 1930) (See the decision  of  a  Full Bench of the Madras High Court in Madam Pillai v.  Badrakali Ammal)  (1).   Section 4 of the Sale of Goods Act  reads  as follows :               "(1) A contract of sale of goods is a contract               whereby  the  seller transfers  or  agrees  to               transfer  the property in goods to  the  buyer               for a price.  There may be a contract of  sale               between one part-owner and another.               (2)A  contract  of  sale may  be  absolute  or               conditional.               (3)Where  under  a  contract  of  sale  the               property in the goods is transferred from  the               seller to the buyer, the contract is called  a               sale,  but where the transfer of the  property               in the goods is to take place at a future time               or subject to some condition thereafter to  be               fulfilled, the contract is called an agreement               to sell.               (4)An  agreement to sell becomes a  sale  when               the   time  elapses  or  the  conditions   are               fulfilled subject to which the property in the               goods is to be transferred."               (1)   I.L.R. 45.  Madras, 612.               880 Section  2(10) of the Sale of Goods Act defines  "price"  as meaning  the money consideration for a sale of  goods.   The presence  of money consideration is therefore  an  essential element  in a transaction of sale.  If the consideration  is not money but some other valuable consideration it may be an exchange  or  barter but not -a sale.  Section  118  of  the Transfer of Property Act defines .exchange’ as follows:               "When two persons mutually transfer the owner-               ship  of  one  thing  for  the  ownership   of               another,  neither thing, or both things  being               money  only,  the  transaction  is  called  an               ’exchange’.               A  transfer  of property in completion  of  an               exchange  can be made only in manner  provided               for the transfer of such property by sale."               Section 119 provides :               "If  any  party to an exchange or  any  person

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             claiming  through  or under such party  is  by               reason of any defect in the title of the other               party deprived of the thing or any part of the               thing  received  by  him  in  exchange,  then,               unless  a contrary intention appears from  the               terms  of  the exchange, such other  party  is               liable  to him or any person claiming  through               or  under him for loss caused thereby,  or  at               the option of the person so deprived, for  the               return  of the thing transferred, if still  in               the  possession  of such other  party  or  his               legal representative or a transferee, from him               without consideration." The  definition  of exchange in s. 118 of  the  Transfer  of Property  Act  is not limited to immovable property  but  it extends also to barter of goods.  It is clear therefore that both  under  the  Sale of ,Goods Act  and  the  Transfer  of Property Act, sale is a transfer of property in the goods or of   the  ownership  in  immovable  property  for  a   money consideration.   But  in  exchange  there  is  a  reciprocal transfer   of  interest  in  the  immovable  property,   the corresponding  transfer of interest in the movable  property being denoted by the word ’barter’.  "The difference between a sale and an exchange is this, that in the former the price is  paid in money, whilst in the latter it is paid in  goods by way of barter." (Chitty on Contracts 22nd Edn., Vol.   II page 582). The  question  presented for determination in this  case  is whether the transaction of February 21, 1956 was a sale  and whether the Income-tax authorities were entitled to  include the  amount of Rs. 43,568/- as profits under S. 10(2)  (vii) of  the  Income-tax Act as representing the  excess  of  the consideration 881 realised by the assessee-company over the written down value of  the assets transferred.  On behalf of the  appellant  it was contended that the money consideration was fixed at  Rs. 1,20,000/and  the mode of payment was by transfer of  shares and  the transaction was really a sale and not  transfer  by way  of exchange.  We are unable to accept this argument  as correct.   In  the  first  place,  the  document  is  called "exchange deed".  The preamble of the document states :               "And whereas the party of the first part as at               the   Directors  meeting  held   on   3-2-1955               resolved to exchange the property mentioned in               Schedule   for  the  property   mentioned   in               Schedule  II  belonging to the  party  of  the               second  part and whereas in pursuance  of  the               resolution  of  the  Board  of  Directors  the               Managing  Director of the party of  the  first               part   had  handed  over  possession  of   the               property  described  in Schedule I  hereto  on               9-9-1955  to the party of the second part  and               whereas the general body of the first part  at               a  meeting  held  on  4-10-1955  resolved   to               authorise  the Managing Director of the  party               of the first part to negotiate with the zamin-               dar and zamindarini of Chikkavaram the  second               part herein and or their nominees for the sale               of  the party of the entire concern  known  by               the  name  of Sri Rama  Talkies,  Bobbili  now               owned by the party of the first part, with all               its equipment machinery fittings spares acces-               sories the old Projector the Jeej car  bearing               No.  M.S.P. 928 purchased from its  funds  all

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             the  buildings  and out  houses  either  newly               constructed  or  mentioned in  the  registered               sale  deed  No.  1464/5-9-1949  and  in   this               exchange  deed together with  entire  premises               covered  thereby and the cash  deposits  lying               with  the various distributors and  commercial               tax  department of the State  Government  more               fully described in Schedule I hereto and  also               the  goodwill  of  the  concern  for  a   con-               sideration of Rs. 1,20,000/- (Rupees one  lakh               twenty thousand only) consisting of  immovable               properties  worth  Rs.  60,000/-  and  movable               properties worth Rs. 20,000/- (sic) total  Rs.               1,20,000  which will be received in the  shape               of   transfer   of  5%   tax-free   cumulative               preference shares of Messrs Sri Rama Sugars  &               Industries Ltd., Bobbili of the face value  of               Rs.   1,20,000/-  (rupees  one   lakh   twenty               thousand  only)  held  by  the  zamindar   and               zamindarini  of Chikkavaram the party  of  the               second part herein and more fully described in               Schedule 11 herein and to transfer receipt and               also  hand over records relating to the  title               and management to enable them to carry on  the               business of the               8 82               concern  and whereas the general body  of  the               part of the first part at the meeting held  on               11-2-1956  resolved  that the  action  of  the               managing  director in handing over  possession               of the property described in Schedule I to the               party  of  the  second  part  on  9-9-1955  is               approved  and whereas the parties hereto  have               agreed   to  exchange  the   said   properties               described  in  the first and  second  Schedule               hereto in the manner hereinafter appearing."               The  operative part of the document  reads  as               follows               "Now this deed witnesse the as follows :               (1)   in  pursuance of the said agreement  and               in consideration of the transfer by the  party               of the second part of the property more  fully               described  in  the Schedule 11 hereto  to  the               party  of  the first part, the  party  of  the               first part hereby grants and transfers to  the               party  of the second part 11 all the  property               more fully described in Schedule I hereto  -to               hold the same to the party of the second  part               absolutely for ever.               (2)   In   further  pursuance  of   the   said               agreement and in consideration of the transfer               by the party of the first part of the property               in  Schedule  I hereto to first  part  of  the               property in Schedule I hereto to the party  of               the’  second  part, the party  of  the  second               part, hereby grants and transfers to the party               of  the  first part of the shares  more  fully               described  in Schedule 11 hereto to  hold  the               same to the party of the first part absolutely               for ever.               (3)   each  of  the parties  hereby  covenants               (sic) with the other first that the properties               hereby   transferred  by  him  is  free   from               encumbrance   charge  or  lieu  of  any   kind               whatsoever.   Secondly that the properties  so

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             transferred  by each of them shall be  quitely               entered upon held and enjoyed by the other  of               them  and the rents and profits and  dividends               received  by  the other of  them  without  any               interruption   of  disturbance-by  the   party               transferring  the  same or  any  one  claiming               through or under them thirdly that each of the               parties hereto will at the request of and cost               of the other execute every such assurance  and               so  every  such  act  or  thinking  as   shall               reasonably  be  required  by  such  other  for               further or more.               883               (4)   The  party of the first  part  covenants               and  assurances the party of the  second  part               that  all taxes due to the Government  or  the               local  bodies and all bills for the supply  of               electrical  energy goods and  accessories  all               salaries due to the staff have been paid  upto               9-9-1955  the  date of transfer and  that  the               party  of  the second part will be in  no  way               liable  for an act done or commission made  by               the Rajah of Bobbili............ On  behalf  of the appellant Mr. Narsaraju referred  to  the Resolution of the Board of Directors dated September 9, 1955 in  which  it was resolved that the Managing  Director  Will negotiate  with the zamindar of Chikkavaram or  his  nominee for the sale of he Sree Rama Talkies with all its  equipment etc. for a consideraion of Rs. 1,20,000/- Mr. Narsaraju also referred  to  the preamble in which the  resolution  of  the Board  of  Directors dated September 9, 1955 is  quoted  and also  the resolution of the Meeting of the general  body  of the assessee-company held on October 1, 1955 authorising the Managing  Director to negotiate "for the ;ale of the  entire concern  known by the name of Sree Rama Talkies".   But,  in our  opinion,  neither the recital in the preamble  nor  the resolution of the Board of Directors dated September 9, 1955 will  control the language of the operative portion  of  the document or its legal effect.  There is no ambiguity in  the construction  of the operative part.  It is clear  from  the operative part of the document that there was an exchange of the  properties  described  in  Sch.  1  for  5  %  tax-free cumulative preference shares of Sri Rama Sugars & Industries Ltd.,  Bobbili.   It  is  true  that  a  valuation  of   Rs. 1,20,000/- was fixed to consist of Rs. 60,000/’or  immovable properties  and  the goodwill and Rs. 60,000/-  for  movable properties,  but that is only for the purpose of payment  of stamp  duty.  In essence the transaction is one of  exchange and there was no sale of the properties described in Sch.  I for  any money consideration.  In other words, there was  no price  paid or promised to be paid for the transfer  of  the cinema  house  known  as Sree  Rama  Talkies  together  with machinery  and  equipment described in Sch.  I to  the  deed dated  February 21,. 1956 but there was a  consideration  in the  shape of transfer of 5% tax-free cumulative  preference shares  of  Sri  Rama Sugar & industries  Ltd.   It  follows therefore that the Income-tax authorities were not  entitled to  treat the transaction dated February 21, 1956 as a  sale and to apply the provisions of s. 10(2) (vii) of the Income- tax Act. We pass on to consider the argument of Mr. Narsaraju that in revenue  matters  it was the substance  of  the  transaction which  must  be  looked at and not the  form  in  which  the parties 884

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have  chosen to clothe the transaction’.  It  was  contended that, in the present case, there was in substance a sale  of Sree  Rama  Talkies  by the  assessee-company  for  a  money consideration of Rs. 1,20,000/-, though the mode of  payment was by transfer of shares and the resolution of the Board of Directors dated September 9, 1955 clearly indicated that the intention  of  the assessee company was to  sell  Sree  Rama Talkies   along   with  its  equipment   concerned   for   a consideration  of  Rs.  1,20,000/-.  In  the  present  case, however,  there is no suggestion on behalf of the  appellant of  bad faith on the part of the assessee-company nor is  it alleged  that  the particular form of  the  transaction  was adopted  as a cloak to conceal a different transaction.   It is  not disputed that the document in question was  intended to be acted upon and there is no suggestion of mala fides or that  the  document  was never intended to  have  any  legal effect.   In the absence of any suggestion of bad  faith  or fraud  the true principle is that the taxing statute has  to be  applied  in  accordance with the  legal  rights  of  the parties  to  the  transaction.   When  the  transaction   is embodied in a document the liability to tax depends upon the meaning and content of the language used in accordance  with the  ordinary rules of construction.  In Bank  of  Chettinad Ltd. v. C.I.T. Madras(1), it was pointed out by the Judicial Committee  that  the  doctrine that  in  revenue  cases  the ’substance  of the matter’ may be regarded as  distinguished from  the strict legal position, is erroneous.  If a  person sought  to  be taxed comes within the letter of the  law  he must be taxed, however great the hardship may appear to  the judicial  mind  to  be.  On the other  hand,  if  the  Crown seeking  to recover the tax cannot bring the subject  within the  letter  of  the  law,  the  subject  is  free,  however apparently  within  the  spirit of the law  the  case  might otherwise  appear  to, be.  In the  Duke  of’  Westminster’s cave(1)  deeds of covenant had been executed by the Duke  in favour of employees in such amounts that the covenantees, if remaining in the Duke’s service, would receive  respectively sums  equivalent to their wages and salaries.  If they  left the services of the Duke the payments would still have  been due,  but  it was in nearly all instances explained  to  the employee  that so long as the service continued,  while  the deed  did  not  prevent  his  claiming  ordinary  wages   in addition,  it was expected that he would not do so.  It  was argued  for  the Crown that though in form a  (,rant  of  an annuity,  the transaction was in substance merely one  where by  the annuitant was to continue to serve the Duke  at  his existing  salary,  so that the annuity must  be  treated  as salary.  Neither the Court of Appeal nor the House of  Lords agreed  with this contention.  To regard the payments  under the deed as in effect payments of salary would be to treat a transaction  of  one  legal  character  as  if  it  were   a transaction of a different legal (1) 1940 I.T.R. 522. (2) 19 T.C.490. 885 character.  With regard to the supposed contrast between the form  and  substance  of the arrangement,  Lord  Russell  of Killowen stated at page 524 as follows :               "If all that is meant by the doctrine is  that               having  once ascertained the legal  rights  of               the    parties   you   may   disregard    mere               nomenclature   and  decide  the  question   of               taxability  or  non-taxability  in  accordance               with the legal rights, well and good.  That is               what  this House did in the case of  Secretary

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             of State in Council of India v. Scoble, (1903)               A.C. 299 (4 T.C. 618); that and no more.   If,               on the other hand, the doctrine means that you               may  brush  aside deeds, disregard  the  legal               rights   and  liabilities  arising   under   a               contract  between  parties,  and  decide   the               question of taxability or non-taxability  upon               the  footing of the rights and liabilities  of               the  parties being different from what in  law               they are, then I entirely dissent from such a,               doctrine." In a later case-Commissioners of Inland Revenue v.  Wesleyan and  General Assurance Society(1) Viscount  Simon  expressed the principle as follows :               "It  may  be well to repeat  two  propositions               which are well established in the  application               of the law relating to Income Tax.  First, the               name  given  to a transaction by  the  parties               concerned  does  not  necessarily  decide  the               nature of the transaction.  To call a  payment               a  loan  if it is really an annuity  does  not               assist the tax-payer, any more than to call an               item  a capital payment would prevent it  from               being regarded as an income payment if that is               its true nature.  The question always is  what               is the real character of the payment, not what               the parties call it.               Secondly,  a  transaction which, on  its  true               construction,  is of a kind that would  escape               tax,  is  not taxable on the ground  that  the               same  result  could  be  brought  about  by  a               transaction   in  another  form  which   would               attract tax." For the reasons already given we hold that the question  has been rightly answered by the High Court in the negative  and in  favour of the assessee -company and this appeal must  be dismissed with costs. R.K.P.S.                                Appeal dismissed. (1) 30 T.C. 11 . 886