Alapati Venkataramiah Vs. Commissioner
of Income Tax Hyderabad  INSC 84 (29 March 1965)
29/03/1965 SIKRI, S.M.
GAJENDRAGADKAR, P.B. (CJ) SHAH, J.C.
CITATION: 1966 AIR 115 1965 SCR (3) 567
Indian Income-tax Act, 1922 (11 of 1922), s.
12B--Capital Gains-Passing of Title--What constitutes--Date of sale or transfer
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
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]
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 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
It is common ground that the Company was
incorporated on July 5, 1947, before the date of the agreement. Since the
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
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 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
"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 promoted to take over the tiles
business. There was only an agreement to sell . In fact, the assessee did not
receive a single pie during the 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 installments
beginning from 25-3-1949, which is beyond the year of account. The point that
the assessee himself returned the sum of Rs. 79,494/under the capital gains
leads us nowhere. He might have done it under the advice of some
"income-tax expert". The assessee cannot be tied down to an inadvisably
made wrong statement. In the circumstances, we delete the 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 certain 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 decision 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 March 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/- only and refers only to the land on
which the factory is situated, and did not refer to the factory, machinery and
plant, etc. which had been taken possession of by Mohan Industries on March 17,
1948. Further it held that the entries in the account books of Mohan Industries
under date March 20, 1948, showed that a sum of Rs. 2,00,000/- was credited in
favour of the assessee and the asset accounts were debited as 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 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
"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 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 installments
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 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.
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.