Commissioner of Income Tax, Hyderabad
Vs. M/S. Motor and General Stores (P.) Ltd. [1967] INSC 134 (2 May 1967)
02/05/1967 RAMASWAMI, V.
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 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 exchange 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.
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 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 Income tax 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, 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 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 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 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 the 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 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 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 .
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