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 section N Andley and Rameshwar Nath for the respondent
May 15
The Judgment of the Court was delivered by section K DAS J
This is an appeal on a certificate granted by the High Court of Judicature at Bombay under sub section
2 of section 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 section 12B of the Act
The question which was referred to the High Court under section 661 of the Act was this  Whether the assessee company made a capital gain amounting to Rs 8181900 within the meaning of section 12B of the Indian Income tax Act The High Court answered the question in the negative
The appellant being dissatisfied 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 28328  conversion  shares of the Dharamsi Company at Rs 500 per share together with the managing agency and also 75212  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 1In 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 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 8181900 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 section 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 section 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 section 12B of the Act
The point for our consideration is whether the High Court has correctly answered the question
We must first read sub section
1 of section 12B of the Act as it stood at the material time
The sub section so far as it is relevant for our 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 section 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 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 section 12B as it stands after the enactment of the Finance No 77 of 1956
The question before us is whether the transaction under consideration resulted in capital gains within the meaning of section 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 section 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 section 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 vs 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 SCR 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 section 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 301946 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 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 section 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 8181900 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 8181900
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


Summary:
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 section 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 8181900
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 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 section 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 section 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 section 12B of the Indian Income tax Act