Case: Dalmia Cement Ltd Vs. Commissioner of Income Tax

by virtue of a transfer whether revocable or not and whether effected before or after the commencement of this Act shall, where there is no transfer of the assets from which the income arises, be chargeable to income-tax as the income of the transferor and shall be included in his total income.""Section 63. "Transfer" and "revocable transfer" defined - for the purposes of Sections 60, 61 and 62 of this Section -(a) a transfer shall be deemed to be revocable if -(i) it contains any provision for the re-transfer directly or indirectly of the whole or any part of the income or assets to the transferor, or(ii) it, in any way, gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets;(b) "transfer" includes any settlement, trust, covenant, agreement or arrangement." The High Court, while dealing with the matter observed : "Section 60 contemplates as to how the income would be chargeable to income tax when there is no transfer of the assets from which income has arisen. Section 63 clause (b) defines the word "transfer" to include any settlement, trust, covenant, agreement or arrangement. If any document of the nature mentioned in clause (b) exists, it would be considered to be a transfer. In the present case, there are agreements between the parties. The agreements between the parties would be considered to be transfer but in fact, transfer of assets had not taken place till 30th September, 1964. So, whatever income has arisen prior to the transfer of assets, Section 60 clearly contemplates that such an income which has arisen before the actual transfer of assets has taken place, would be chargeable to income tax as the income of the transferor and shall be included in his total income.In the present case, up to 30th September, 1964, there was no transfer of assets and under clause-3 of the supplemental agreement dated 2.11.1962, the profits had to be to the account of the transferee on completion of the sale transaction. Even if there is an agreement for diversion of the profits prior to 30th September, 1964, still, in our opinion, in the light of the provisions contained in Section 60, the profits would be taxable in the hands of the assessee company." 18. It is this finding of the High Court which has been criticised by the appellant and we do find some justification in that regard by reasons of the specific language used by the legislation Section 60 of the Act, has its application only to a case where income accrues to the transferee but the income earning asset or source of income remains with the transferor. As a matter of fact this finding of the High Court that income accrued to the Transferor stands contradicted by the finding that Section 60 has its due application in the facts of the matter under consideration.19. Incidentally, Section 63 contains a rather special definition of "Transfer" for the purposes of Sections 60 to 62 and inter alia includes an "agreement" and in this case the very existence of the agreement to transfer dated 24th July, 1962 rules out and totally excludes the application of Section 60 of the Act. 20. The Tribunal however recorded a finding different from that of the High Court as regards the issue of applicability of Section 60 of the Act. The Tribunal recorded :- "Nor are inclined to accept the contention of the Departmental Representative that even under Section 60 the profits accruing after 30.9.1962 were chargeable in the hands of the company. For one thing the underlying assumption of this argument would be that income had actually accrued to Maneckji or his nominees whereas for reasons given earlier we are unable to accept this assumption. Moreover, according to our reading of Section 60 it relates to an arrangement or settlement according to which both the transfer of income and the retention of the ownership of the assets form parts of one scheme." 21. In view of the above, we do feel it expedient to record that the Tribunals finding as regards the applicability of Section 60 cannot but be ascribed to be otherwise in accordance with the known principles of law, having due regard to language used therein and the High Court unfortunately, we are constrained to record, has in fact misconstrued the provision and thus fell into an error. "Significantly, however, the Tribunal while dealing with the matter has recorded in its order "we are painfully aware of the fact that the case of the assessee is a hard one, that the assessee had not received any part of the purchase price so far and that the position regarding the adjustment of profits earned earlier is equally bad. But we have to apply the provisions of law we find them uninfluenced by the hardships through which tough no fault of its own some assessee may have to pass." 22. While we appreciate the sympathy of the Tribunal towards the assessee and record that hard cases do not make bad laws but both the Tribunal and the High Court erred in appreciating the true perspective of the factual matrix of the matter in issue read with the law as noticed above.23. The other aspect of the matter ought also not be lost sight of tie wit: the assessment of capital gains. There appears to be clear inconsistency between the assessment of capital gams on the transfer of the factories on one hand and finding on accrual of income since the computation of capital gains was effected by treating the gross amount of consideration as the sale price. The Income-tax Officer thus by implication accepted the profits as belonging to the transferee and not to the Transferor - otherwise, the net amount paid alone ought to have been taken as the sale price. The High Courts judgment therefore, does not only suffer from apparent inconsistency but on a totality of the situation is inherently contradictory.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]16. Be it noted here, that at no stage of the proceeding up to the High Court, there was any dispute as regards assessees contention of diversion by overriding title. The finding of the High Court that issue of overriding title on the basis of an event which is yet to take place, being not available in the facts of the matter under consideration, cannot in our view be said to be a correct appreciation of law, since on the date of assessment, the event has already taken place and an overriding title has in fact been created by operation of law and there is no escape from it and as such we are unable to record our concurrence therewith.It is this finding of the High Court which has been criticised by the appellant and we do find some justification in that regard by reasons of the specific language used by the legislation Section 60 of the Act, has its application only to a case where income accrues to the transferee but the income earning asset or source of income remains with the transferor. As a matter of fact this finding of the High Court that income accrued to the Transferor stands contradicted by the finding that Section 60 has its due application in the facts of the matter under consideration.19. Incidentally, Section 63 contains a rather special definition of "Transfer" for the purposes of Sections 60 to 62 and inter alia includes an "agreement" and in this case the very existence of the agreement to transfer dated 24th July, 1962 rules out and totally excludes the application of Section 60 of the Act.In view of the above, we do feel it expedient to record that the Tribunals finding as regards the applicability of Section 60 cannot but be ascribed to be otherwise in accordance with the known principles of law, having due regard to language used therein and the High Court unfortunately, we are constrained to record, has in fact misconstrued the provision and thus fell into anhowever, the Tribunal while dealing with the matter has recorded in its order "we are painfully aware of the fact that the case of the assessee is a hard one, that the assessee had not received any part of the purchase price so far and that the position regarding the adjustment of profits earned earlier is equally bad. But we have to apply the provisions of law we find them uninfluenced by the hardships through which tough no fault of its own some assessee may have to pass.While we appreciate the sympathy of the Tribunal towards the assessee and record that hard cases do not make bad laws but both the Tribunal and the High Court erred in appreciating the true perspective of the factual matrix of the matter in issue read with the law as noticed above.23. The other aspect of the matter ought also not be lost sight of tie wit: the assessment of capital gains. There appears to be clear inconsistency between the assessment of capital gams on the transfer of the factories on one hand and finding on accrual of income since the computation of capital gains was effected by treating the gross amount of consideration as the sale price. The Income-tax Officer thus by implication accepted the profits as belonging to the transferee and not to the Transferor - otherwise, the net amount paid alone ought to have been taken as the sale price. The High Courts judgment therefore, does not only suffer from apparent inconsistency but on a totality of the situation is inherently contradictory.