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
AV Viswanatha Sastri K Jayaram and R Vasudeva Pillai for the appellant
KN Rajagopal Sastri and RN Sachthey for the respondent
The Judgment of the Court was delivered by Sikri J
This appeal by special leave is directed against the judgment of the High Court of Andhra Pradesh answering the question referred to it under section 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 79494 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 200000 
The agreement recited that the assessee had been carrying on business under the name and style of Mohan Tile Works at Tenali and that the company to be called the Mohan Industries Limited is to be formed under the indian Companies Act having for its object among other things the acquisition and the working of the said business
It appears that this agreement was drafted before the Company was incorporated and the recital clause was not modified when the agreement was actually executed
It is common ground that the Company was incorporated on July 5 1947 before the date of the agreement
Since the answer to the question turns in part on the construction of the agreement it would be convenient to set out the relevant clauses which are as follows 1
The vendor shall sell and  the company shall purchase First the Goodwill of the said business with the exclusive right to represent the company as carrying on such business in continuation of the Vendor or in succession thereto
569 Secondly all the immovable properties specified in Schedule hereto Thirdly all the plant machinery offices furniture licences livestocks carts implements and utensils to which the vendor is entitled in connection with the said business specified in the Second Schedule hereto Fourthly all materials and semi processed materials in stock described in the third schedule
The consideration for the said sale shall be the sum of Rs 20000000 which shall be paid and satisfied by payment in cash soon after the capital Rs 30000000 has been raised or in any other manner agreed upon between the Directors of the Company and Vendor
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
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 20000000 Two lakhs cash at the rate of   pc per annum
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
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
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 Rs200000 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 100000 to the State of Madras
On March 16
the Board of Directors by resolution No 22 approved the agreement dated March 17 1948 and on April 10 1949 the agreement was approved at the annual general meeting of the company
In the first annual report dated March 22 1949 it was stated as follows The company was registered on 5th July 1947
The Memorandum of Association and Articles alongwith the prospectus of the company were published and the shareholders and the public are well aware of the objects and the prospectus of this industry in Andhra
To achieve their objects the directors entered into an agreement called vendor s agreement with Sri Alapati Venkatramiah Proprietor of Mobart Tile Works on 17 3 1948
 It appears that the assessee had returned this income as capital gains in his return and the Income Tax Officer without any discussion held that the assessee realised an excess of Rs79494over and above the original cost and this was capital gains assessable under section 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 79494 as attracting tax to capital gains
As a matter of fact the building was sold at Rs 169950 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 79494 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 79494 as returned by the appellant under the head capital gains was rightly included in the assessment
 The assessee then appealed to the Appellate Tribunal
The Tribunal by its order dated  November 24 1955 held that there 571 was in fact no sale much less legal transfer of lands buil dings machinery etc to the limited liability company which was promot ed to take over the tiles business
There was only an agreement to sell 
In fact the assessee did not receive a single pie during the ye ar of account or even during the period when the capital gains was in force
He received in all Rs 1 lakh in several instalments beginning from 25 3 1949 which is beyond the year of account
The point tha t the assessee himself returned the sum of Rs 79494under 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 inadv isably made wrong statement
In the circumstances we delete the additio n It appears that the Commissioner of Income Tax filed an appli cation under section 35 of the Act for the correction of the Tribunal s Order on the ground that the Tribunal had not mentioned in the order c ertain documents which if they had been considered would perhaps supp ort a conclusion different from the one arrived at by the Tribunal
The Tribunal thereupon came to the conclusion that its earlier de cision deleting the amount from taxation was based on non considerati on of various materials on record and it proceeded to rectify this order as a mistake apparent from the record
Accordingly it deleted para 4 i n its order dated November 24 1955 and substituted its order dated Mar ch 8 1957
The Tribunal held that in pursuance of cl 6 of the agr eement dated March 17 1948 the possession of the entire factor y was immediately handed over to Mohan Industries and that the sale deed dated November 22 1948 was executed for consideration of Rs 4500 on ly and refers only to the land on which the factory is situated and di d not refer to the factory machinery and plant etc
which had been taken possession of by Mohan Industries on March 17 1948
Further it held that the entries in the account books of Mohan Industries under date March 20 1948 showed that a sum of Rs 200000 was credit ed in favour of the assessee and the asset accounts were debited as foll ows Plant  Machinery aLP27Rs
15989 0 0 Furniture account 291880500 Electric goods 31 1289100 Site  Construction amount3312647O00 Stock amount 34 3005000 Goodwill account 40739660 Total Us20000000 572 Further it noticed that the assessee also made corresponding entries in the books on March 20 1948 by debiting Rs 200000 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 section 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 AV Vishwanatha Sastri the learned counsel for the assessee contends that under section 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 1949 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 section 12B was in the following terms 12B Capital gains 1 The tax shall be payable by an assessee under the head Capital gains in respect of any profits or gains arising from the sale exchange or transfer of a capital asset effected after the 31st day of March 1946 and before the 1st day of April 1948 and such profits and gains shall be deemed to be income of the previous year in which the sale exchange or transfer took place
  573 The word capital asset was defined to mean property of any kind held by the assessee whether or not connected with his business profession or vocation but does not include i any stock in trade consumable stores or raw materials held for the purpose of his business profession or vocation
 The question which arises is whether any sale or transfer took place before the first day of April 1948
Upto that date apart from the agreement to sell three events had taken place
First the assessee as managing agents had written on March 11 1948 ie 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 200000 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 2631949 and in and by the said resolution the company agreed to pay purchase price in instalments commencing from 3131949
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 LPN4SCI 10 574 accepted
The assets comprised of two items of immovable property viz Plant and machinery valued at Rs 15989 and site and buildings valued at Rs 126470 
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 vs Bhurangva Coal Co1 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 section 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 section 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 section 12B can be attracted title must pass to the company by any of the modes mentioned in section 12B ie 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 section 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 126470 The machinery and electrical fitting which were permanently embedded in the earth were respectively valued at Rs 15989 and Rs 1298 10 0
The stocks were valued at Rs 30050 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 1 575 result we hold that the following assets were not sold  or transferred before April 1 1948
i Machinery valued at Rs 15989 0 0
ii Electrical fittings valued at Rs 1289 10 0
iii Buildings and site valued at Rs 126470 0 0
Therefore no capital gains in respect of these items arose in the previous year ending March 31 1948
This brings us to the movable assets
Stocks valued at Rs 30050 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 18805  and goodwill valued at Rs 73966 
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 79494 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 18805 is assessable
 The appeal is accordingly accepted and as the assessee has succeeded substantially he will have his costs here and in the High Court
Appeal allowed


Summary:
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 200000 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 79494 over and above the original cost as capital gains assessable under section 12B of the Income tax Act
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 section 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 section 12B 574B Commissioner of Income tax vs Bhurangya Coal Co 34 ITR 802 referred to
Before section 12B can be attracted title must pass to the company by any of the modes mentioned in section 12B ie 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 section 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