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PETITIONER: THE COMMISSIONER OF INCOME-TAX, BOMBAY

       Vs.

RESPONDENT: THE PROVIDENT INVESTMENT CO., LTD.

DATE OF JUDGMENT: 15/05/1957

BENCH: SARKAR, A.K. BENCH: SARKAR, A.K. DAS, S.K. BHAGWATI, NATWARLAL H. MENON, P. GOVINDA KAPUR, J.L.

CITATION:  1957 AIR  664            1957 SCR 1141

ACT: Income  Tax-Capital gains-Managing agent of company  holding shares  therein-Agreement  of sale of  shares  and  Managing Agency-Sale  of shares-Rclinquishment of Managing Agency  by way  of  Resignation--if amounts to a sale  or  transfer  of Managing  Agency-Agreed Statement of Case for  reference  to High Court--Whether binding on the parties-Indian Income-tax Act, 1922 (XI Of 1922), S. 12B.

HEADNOTE: The  respondent company was the managing agent of two  other companies  holding  certain  shares therein.   D  wrote  two letters to the respondent on September 14, 1946, offering to purchase  some  of those shares together with  the  managing agency and agreeing to pay certain sums as earnest money  on the acceptance of the offer and to pay the balance after the transfer  of  the  managing agency  was  sanctioned  by  the general  body of shareholders.  By a letter dated  September 30, 1946, the respondent accepted the offer on condition  of a sum of Rs. 1 crore being paid out of the consideration  as compensation  for  the loss of the managing agency,  and  on receipt   of   the  letter,  D  paid  the   earnest   money. Subsequently, D wrote a letter on October 7, 1946,  whereby, in  modification of the arrangement previously made, it  was agreed that instead of the managing agency being transferred by  the  respondent, the latter would resign the  office  of managing  agents and certain individuals would be  appointed Directors of the two companies.  Accordingly, the respondent relinquished  the managing agency and thereupon the  balance of  consideration  money  was paid to  it.   The  Income-tax Officer considered that s. 12B of the Indian Income-tax Act, 1922,  was applicable to the transaction and on the  footing that  the managing agency, which was valued at Rs. 1  crore, was  a capital asset, he computed the capital gains  at  Rs. 81,81,900.  The Income-tax Appellate Tribunal held that  the respondent,  as  the owner of the shares  and  the  managing agency,  sold the shares to D and handed back  the  managing agency to the managed companies, and that this handing  back constituted a transfer.  On a reference to the High Court by

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the Tribunal, the agreed statement of the case proceeded  on the  basis that the dispute between the parties was  whether the transaction with regard to the managing agency  resulted in  capital  gains and the High Court held  that  there  was neither a sale nor a transfer of the managing agency  within the meaning Of S. 12B of the Act.  On appeal to the  Supreme Court  by the Commissioner of Income-tax, it  was  contended for him (1) that there was a concluded contract 1142 of  sale  as  a  result of  the  letters  of  September  14, 1946, and September 30, 1946, and a sale having taken place, the  letter of October 7, 1946, merely changed the  mode  of performance  of  the contract and did not  affect  the  true legal  character of the transaction which was a sale of  the managing  agency, and (2) that as there was one  indivisible consideration for the whole transaction, including the  sale of  the shares and of the managing agency, the sale  of  the shares  having  taken  place and  the  entire  consideration having been paid, there was a sale within the meaning of  s. 12B  of  the  Act and the transaction  resulted  in  capital gains. Held  (1) that on a true construction of the  letters  there was originally only an agreement to sell the shares together with  the  managing agency and before the  sale  could  take place  the  letter  of October 7, 1946,  substituted  a  new contract,  a  contract  of  relinquishment  rather  than   a contract  of  sale,  so  far  as  the  managing  agency  was concerned, and (2) that it was not open to the appellant  to go  behind  the  agreed statement of the case  and  raise  a question of law based on different facts and circumstances. Accordingly,    the   transaction   in   question   was    a relinquishment of the managing agency and was neither a sale nor  a transfer within the meaning of s. 12B of  the  Indian Income-tax Act.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 179 of 1954. Appeal from the judgment and order dated March 12, 1953,  of the  Bombay  High Court in Income-tax Reference  No.  43  of 1952. C.   K.  Daphtary, Solicitor-General of India, G.  N.  Joshi and B. H. Dhebar, for the appellant. N.   A. Palkhivala, D. H. Dwarkadas, J. B. Dadachanji, S. N. Andley and Rameshwar Nath, for the respondent. 1957.  May 15.  The Judgment of the Court was delivered by S.   K. DAS J.-This is an appeal on a certificate granted by the  High Court of Judicature at Bombay under sub-s. (2)  of s. 66A of the Indian Income-tax Act (hereinafter referred to as  the Act).  The appellant is the Commissioner of  Income- tax, Bombay, and the respondent is the Provident  Investment Co.,  Ltd., Bombay, hereinafter referred to as the  assesses company. The  short  question which falls for consideration  in  this appeal is whether a particular transaction, details 1143 whereof  we  shall  presently state,  entered  into  by  the assessee  company in 1946 resulted in capital  gains  within the  meaning of s. 12B of the Act.  The question  which  was referred  to  the High Court under s. 66(1) of the  Act  was this:  "  Whether the assessee company made a  capital  gain amounting  to Rs. 81,81,900 within the meaning of s. 12B  of the  Indian  Income-tax Act?" The High  Court  answered  the question in the negative.  The appellant being  dissatisfied

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with the judgment and order of the High Court asked for  and obtained  a  certificate from the said High Court  that  the case is a fit one for appeal to the Supreme Court. The material facts may be very shortly stated.  The assessee company  is a private limited company, the shares  of  which were  held by the then Maharaja Scindia of Gwalior  and  his nominees.   At the material time, the assessee  company  was the  managing agent of Madhowji Dharamsi Manufacturing  Co., Ltd.,  hereinafter  briefly  referred  to  as  the  Dharamsi Company,  and  Sir  Shapurji  Broacha  Mills  Ltd.,  briefly referred  to as the Shapurji Broacha Company.  The  assessee company  held all the " conversion " shares of the  Dharamsi Company  and  a substantial majority of  the  "  conversion" shares   of  the  Shapurji  Broacha  Company.   The   Dalmia Investment  Company  Limited,  which  will  hereinafter   be briefly referred to as the Dalmia Company, wrote two letters to the assessee company on September 14, 1946.  In these two letters,  the  Dalmia Company offered to purchase  28,328  " conversion  " shares of the Dharamsi Company at Rs. 500  per share  together with the managing agency, and also 75,212  " conversion  "  shares  of  the  Shapurji  Broacha   Company, together  with  the managing agency.  We are  not  concerned with the other details mentioned in the two letters,  except this  that  the Dalmia Company made it clear that  it  would purchase  both the mills or neither, and a time  limit  till September  23,  1946, 3 p. m. was imposed during  which  the offer  would  remain open.  This time  limit  was,  however, extended later up to September 30, 1946.  The letter further stated 1144  "  On your accepting the offer, we will pay to you  Rs.  20 lakhs  in the case of the Dharamsi Company, Rs. 30 lakhs  in the case of the Shapurji Broacha Company as and by way. of earnest money.  You shall have to  arrange to get the transfer of the managing agency sanctioned by the general body of the shareholders within a period of 40  days from  the  date of acceptance.  As Boon as the  transfer  is sanctioned, we will pay the balance of the purchase price." On  September 26, 1946, there was a meeting of the Board  of Directors  of  the assessee company.  At that  meeting,  the Board  considered the offers made by the Dalmia Company  and resolved to accept the offers.  The Board further stated  in its  minutes that out of the total amount received from  the sale of the shares, a sum of Rs.  1 crore should be paid  to the  assessee company as compensation for’ the loss  of  the managing  agency of the two mills.  On September  30,  1946, the  assessee company wrote to the Dalmia Company  accepting the  offers  made,  subject  to a  condition  which  is  not material  for  our purpose.  On the same  date,  the  Dalmia Company received the acceptance of the offers made by it and sent two drafts, one for Rs. 20 lakhs and the other for  Rs. 30  lakhs.  On October 7, 1946, the Dalmia Company  wrote  a very important letter to the assessee company.  This  letter said inter alia: " With reference to the interview our Solicitor Mr. Tanubhai had  with  your Mr. Wadia, we beg to record that it  is  now being  agreed  upon  as  follows  in  modification  of   the arrangement   previously   made   between   yourselves   and ourselves: (1)In our letters of offer which have been accepted by  you, it was arranged that the managing agency will be transferred either  to us or to our nominees.  Now, instead of doing  so by  you, you as the present managing agents will give  their (sic)  resignation, so that at the time of delivery  of  the shares and payment of moneys, your managing agency will have

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come  to an end.  In view of the above, it is not  necessary to obtain any sanction of general meeting. 1145 (2)  1. Mr. Shriyans Prasad Jain       2.  Mr. Jaidayal Dalmia       3.  Mr. Shanti Prasad Jain and       4.  Mr. Vishnu Hari Dalmia will be appointed Directors of both the Mills Companies  and thereafter  all  the  present directors  will  tender  their resignation. (3)  Qualification shares in the names of the above proposed Directors will be transferred by you and the balance of  the shares will be delivered to us along with the transfer deeds duly signed against payment. (4)  You  may communicate by a circular to the  shareholders that you have resigned the managing agency.  You may further mention in the circular that in accordance with the offer we are  prepared  to take up the deferred shares  held  by  the shareholders  which may be offered to us at the rate of  Rs. 25 and Rs. 7-8-0 of Madhowji Dharamsi Manufacturing Co. Ltd. and  Sir  Shapurji Broacha Mills  Ltd.   Mills  respectively within  two months of the date of letter of offer  which  we would also send." The  assessee  company  accepted  the  modified  arrangement suggested  by the Dalmia Company, and on October  19,  1946, the  assessee company wrote to the Dharamsi Company and  the Shapurji  Broacha Company that it had decided to resign  the office  of the managing agency and accordingly tendered  its resignation on that date.  The balance of the  consideration money was then paid to the assessee company, and it was  not disputed that the. value of the managing agency was computed at Rs. 1 crore, nor was there any dispute that the  managing agency  was a capital asset.  Out of the said sum of Rs.   1 crore, the Income-tax Officer computed the capital gains  at Rs.  81,81,900  and asked the assessee company  to  pay  tax thereon.  The Appellate Assistant Commissioner held that the assessee company had sold the managing agency and  therefore the  profits  or gains arising from that sale  were  capital gains within the meaning of s. 12B of the Act.  The  Income- tax  Appellate  Tribunal, Bombay Bench ’A’,  held,  however, that  there was no sale of the managing agency, because  the original contract of 147 1146 purchase  was  varied by the new contract  embodied  in  the letter of October 7, 1946.  The Tribunal, however, held as follows: "  The assessee company was the owner of the shares and  the managing agencies.  It sold the shares to the Dalmia Co. and handed back the managing agencies to the managed  companies. This handing back, in our opinion, constitutes a transfer of the managing agencies.  " On  that  footing the Tribunal held that s. 12B of  the  Act applied.   On  an application by the assessee  company,  the Tribunal on being satisfied that a question of law did arise out  of  its  order, referred the  question  which  we  have already set out in an earlier paragraph of this judgment, to the  High  Court  of Bombay.  The High  Court  answered  the question  in  the  negative on the  ground  that  there  was neither a sale nor a transfer of the managing agency  within the meaning of s. 12B of the Act. The  point for our consideration is whether the  High  Court has  correctly  answered the question.  We must  first  read sub-s. (1) of s. 12B of the Act as it stood at the  material time.   The  sub-section, so far as it is relevant  for  our

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purpose, was in these terms: "  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 such  profits and gains shall be deemed to be income of the previous  year in which the sale, exchange or transfer took place.  " It  is worthy of note that ’capital gains’ were charged  for the  first  time by the Income-tax and  Excess  Profits  Tax (Amendment) Act, 1947, which inserted s. 12B in the Act.  It taxed ’capital gains’ arising after March 31, 1946, and  the levy  was  virtually abolished by the  Indian  Finance  Act, 1949,  which  confined  the  operation  of  the  section  to ’capital  gains’ arising before April 1, 1948.  The  Finance (No. 3) Act, 1956 (Act 77 of 1956) re-introduced the section in  wider  terms so as to bring within ’capital  gains’  any profits   or   gains  arising  from  the   sale,   exchange, relinquishment or transfer of a 1147 capital  asset effected after March 31, 1956, etc.’  We  are not,  however,  concerned  with  the  question  whether  the transaction  under  our consideration, which took  place  in 1946, resulted in capital gains within the meaning of s. 12B as it stands after the enactment of the Finance (No. 3) Act, 1956  (Act 77 of 1956).  The question before us  is  whether the  transaction  under consideration  resulted  in  capital gains within the meaning of s. 12B as it originally stood. Two  other points must be stated at the outset in  order  to clear  the  ground  for  a  consideration  of  the  relevant arguments advanced before us.  The first point is that there is  no  question  here of the  assessee  company  trying  to circumvent   the  provisions  of  s.  12B  of  the  Act   by deliberately modifying the original agreement (by its letter dated October 7, 1946) so as to put the transaction  outside the  scope of that section.  The agreement was  modified  in October,  1946, before even the insertion of s. 12B  in  the Act.   Therefore,  no question of deliberate  or  fraudulent evasion  arises in this case.  The second point is  that  in construing fiscal statutes and in determining the  liability of  a  subject to tax, one must have regard  to  the  strict letter of the law and the true legal position arising out of the  transaction  in question.  The Bombay  High  Court  has referred  to  a large number of English  decisions  on  this point.    We  consider  it  unnecessary  to  examine   those decisions  in  the present case.  The point  was  considered very recently by this Court in A. V. Fernandez v. The  State of  Kerala  (1), where the following observations  made  are very pertinent: "  If  the Revenue satisfies the Court that the  case  falls strictly  within the provisions of the law, the subject  can be  taxed.  If, on the other hand, the case is  not  covered within  the  four corners of the provisions  of  the  taxing statute, no tax can be imposed by inference or by analogy or by  trying to probe into the intentions of  the  legislature and by considering what was the substance of the matter.  We must  of  necessity, therefore, have regard  to  the  actual provisions  of the Act and the rules made thereunder  before we can come (1)  (1957] S.C.R. 837. to   the  conclusion  that  the  appellant  was  liable   to assessment as contended by the Sales Tax authorities." Those observations were made in a case dealing with sales tax  but are equally applicable to the case under our consideration. Two  conditions  must be fulfilled  before  the  transaction under  our consideration can come within the purview  of  s.

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12B of the Act.  The first condition is that the profits  or gains  must arise from the sale, exchange or transfer  of  a capital  asset; and the second condition is that  the  sale, exchange or transfer must be effected after March 31,  1946. There  is  no  doubt  that the  transaction  before  us  was effected  after  March 31, 1946.  There is also  no  dispute that the managing agency of the two mills which the assessee company  held was a capital asset.  Therefore, the  question boils down to this-did the profits or gains, namely, the sum of  Rs.  1  crore which was computed as  the  value  of  the managing  agency,  arise from the sale or  transfer  of  the managing agency ? The Income-tax authorities held that there was  a  sale  of  the managing  agency;  but  the  Appellate Tribunal held that there was no sale in the strict sense but only  a  transfer  of the managing  agency  to  the  managed companies,  that is, the Dharamsi Company and  the  Shapurji Broacha Company.  The High Court held that there was neither a  sale  nor a transfer, because the letter  of  October  7, 1946,  substituted  a different contract  for  the  original contract  entered  into by the parties, and the  true  legal position  with regard to the substituted contract  was  that the  assessee company resigned the managing agency,  or,  in other  words,  the managing agency was relinquished  by  the assessee company. The  learned  Solicitor-General, who has  appeared  for  the appellant, has contested the correctness of the view of  the Bombay  High  Court  and has submitted  a  twofold  argument before us.  His first argument is that there was a concluded contract of sale as a result of the letters, dated September 14,  1946,  and  September 30,1946,  exchanged  between  the parties,  and  the sale having taken place,  the  letter  of October   7,  1946,  which  merely  changed  the   mode   of performance of the 1149 contract,  did  not affect the true legal character  of  the ,transaction  which was a sale of the managing  agency.   We are  unable to accept this argument.  The true legal  effect of  the letters dated September 14, 1946, and September  30, 1946, which contained an offer and an acceptance, was merely this:  the  Dalmia Company offered to purchase  (1)  certain shares  in  the two mills and (2) the  managing  agency,  on payment of a certain consideration, and the assessee company accepted  that offer.  In law, this was merely an  agreement to  sell and purchase the shares together with the  managing agency  on  payment  of the  consideration,  etc.   The  two letters did not by themselves amount to a sale of the shares or  the managing agency, in the sense of a transfer  of  the property  in them.  Before any such sale could  take  place, the agreement was modified by the letter of October 7, 1946, and instead of " selling " the managing agency the  assessee company agreed to resign or relinquish the managing  agency. We  are unable to agree with the  learned  Solicitor-General that the letter of October 7, 1946, merely changed the  mode of  performance, and did not constitute a now contract.   In our  opinion,  the  Bombay High Court  correctly  held  that whereas  under  the  original contract  the  Dalmia  Company wanted  the managing agency to be transferred,  which  meant that it wanted the benefit of that contract to be vested  in it  and  was  also  prepared to accept  the  burden  of  the obligations   that  went  with  that  contract,  under   the substituted  contract, the Dalmia Company did not  want  the managing  agency to be assigned to it; on the  contrary,  it wanted the assessee company to relinquish its rights in  the managing  agency of the two mills by resigning.  On  a  true interpretation, the letter of October 7, 1946, substituted a

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new  contract,  a contract of relinquishment rather  than  a contract  of  sale,  so  far  as  the  managing  agency  was concerned. The second argument of the learned Solicitor-General is that there  was  one  indivisible  consideration  for  the  whole transaction,  including  the sale of the shares and  of  the managing  agency.  So far as the shares were concerned,  the sale did take place and the entire 1150 consideration  was paid; there was therefore a  sale  within the  meaning  of s. 12B of the Act,  and  the  consideration being  one  and indivisible, the transaction did  result  in capital  gains within the meaning of that section.   At  the first   blush,  the  argument  has  an  apparent  merit   of plausibility, though it was not urged before the Bombay High Court  in the manner in which it has been urged  before  us. On  a closer scrutiny, however, it appears to us  that  this argument  is not really available to the learned  Solicitor- General.   The  parties  and  the  Income-tax   authorities, including  the Appellate Tribunal, proceeded on the  footing that  part of the consideration, namely, the sum of  Rs.   1 crore, was the consideration for the sale or  relinquishment of  the managing agency, the Department contending that  the transaction was a sale or transfer and the assessee  company contending  that it was neither a sale nor a transfer but  a mere  relinquishment.  In the agreed statement of the  case, it was stated : "  The  value of the managing agencies was computed  by  the assessee company at Rs.  1 crore and there is no dispute  on this  point.   The  Income-tax  Officer  thereupon  computed capital gain at Rs. 81,81,900 and again there is no  dispute on  this  point.   The question which the  Tribunal  had  to determine  was whether the transactions between  the  Dalmia Company and the assessee company resulted in a capital  gain of Rs. 81,81,900. It  is  obvious  that  the  entire  assessment   proceedings proceeded on the basis that the sum of Rs.  1 crore was  the consideration for the sale or relinquishment of the managing agencies,  and the dispute between the parties  was  whether the transaction with regard to the managing agencies, in its true   legal   character,  was  a  sale   or   transfer   or relinquishment.  That being the position, it is not now open to  the learned Solicitor-General appearing for the  Revenue to go behind the agreed statement of the case and to ask  us to give an answer to the question of law raised in the  case on  different assumptions or in a different set  of  circum- stances.  The answer must be given on the basis of 1151 the  facts  and  circumstances  as  stated  in  the   agreed statement of the case. We are of opinion that the answer was correctly given by the High  Court  of Bombay.  The transaction in its  true  legal character  was a relinquishment of the managing  agency  and was  neither a sale nor a transfer thereof.  Therefore,  the High Court correctly answered, the question in the negative. In the result, the appeal fails and is dismissed with costs.                               Appeal dismissed.