Case: Alapati Venkataramiah Vs. Commissioner Of Income Tax Hyderabad

2. 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 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);Secondly all the immovable properties specified in Schedule heretoThirdly all the plant, machinery, offices, furniture, licences, live-stocks, 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 schedule2. The consideration for the said sale shall be the sum of Rs.2,00,000 which shall be paid and satisfied by payment in cash soon after the capital Rs.3,00,000 has been raised or in any other manner agreed upon between the Directors of the Co. and Vendor6. 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 expenses 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 required7. If from any cause whatever other than the wilful default of the vendor the purchase shall 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 (Two lakhs) cash at the rate of .........p.c. per annum8. Upon the adoption of this agreement by the company in such manner as to render the same binding on the company the said Manthena shall be discharged from all liabilities in the respect thereof9. 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 (sic - Manthena?) for the purpose of this clause10. If this agreement shall not be adopted by the company in manner aforesaid before and day next, either of the parties may by notice in writing to the other determine the same"3. 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 connection with the grant of loan by Government. On March 20, 1948, the assessee was credited with the price of Rs.2,00,000 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 as follows:"The company was registered on 5th July 1947., The Memorandum of Association and Articles 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 vendors agreement with Sri Alapati Venkataramaiah. Proprietor of Mohan Tile Works on 17-3-1948."4. 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 Act5. 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 unjustified."6. 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"7. The assessee then appealed to the Appellate Tribunal. The Tribunal, by its order, dated November 24, 1955, held thatthere was in fact no sale, much less legal transfer of lands, buildings, 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 year 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 25th March, 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 tried down to an inadivisably made wrong statement. In the circumstances, we delete the addition."8. It appears that the Commissioner of Income-tax filed an application under S. 35 of the Act for the correction of the Tribunals order on the ground that the Tribunal had not mentioned in the order certain documents which, if they had been considered would perhaps support 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-consideration of various materials on record and it proceeded to rectify this order as a mistake apparent from the record. Accordingly it deleted para 4 in 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 agreement dated March 17, 1948, the possession of the entire factory 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 follows:Rs. A. PPlant and Machinery L.P. 27 15,989 0 0Furniture account " 29 18,805 0 0Electric goods " 31 1,289 0 0Site and Construction account " 33 1,26,470 0 0Stock account " 34 30,050 0 0Goodwill account " 40 7,396 6 0Total 2,00,000 0 0Further 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 above9. The High Court came to the conclusion (1) that in the circumstances of the case it is immaterial as to where 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 lakhs 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 arisen to the assessee in the year of account and there is no justification even for the contention that at least 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.

Court's reasoning:
Clause 8 expressly contemplates adoption of the agreement by the company in such manner as to render the same binding on the company, and Cl. 9 contemplates that it is only after the adoption of the agreement that the company shall stand in the place of the said Mantana 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 Cls. 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 to13. 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 16th March, 1949 and in and by the said resolution the company agreed to pay purchase price in instalments commencing from 31st March, 1949. The agreement was subsequently approved by the general body of shareholders at a meeting held on 10th April, 1949 and on such approval, acceptance and adoption, the agreement became binding on the assessee and the company."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 propertyWe are, therefore, unable to prevent the assessee from relying upon the distinction between movable and immovable assetsIn the result, we hold that the following assets were not sold or transferred before April 1, 1948Therefore, no capital gains in respect of these items arose in the previous year ending March 31, 194818. 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.. 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 along with 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, 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."