Case: Dalmia Cement Ltd Vs. Commissioner of Income Tax

The Tribunal has referred the following two questions to the High Court for the above-mentioned assessment years 1964-65 and 1965-66.2. For the assessment year 1964-65 the question reads as belowon the facts and in the circumstances of the case, Income Tax Appellate Tribunal was right in holding that the profit arising from the working of the two cement factories situated in Pakistan for the year 1.10.1962 to 30.9.1963 was taxable in the hands of the applicant companyAnd for the assessment year 1965-66 the question wason the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the profit arising from the working of the two cement factories situated in Pakistan for the year 1.10.1963 to 30.9.1964 was taxable in the hands of the applicant companyHigh Court however, answered the questions in the affirmative for both the assessment years and hence these appeals.4. At this juncture, it would be convinent to advert to the contextual facts briefly. The assessee Dalmia Cement Limited, the owner of two cement factories situated in Pakistan, by an agreement in writing dated 24th July, 1962 agreed to sell and transfer to one Maneckji, its properties and assets in Pakistan represented in the two cement factories.5. The facts depict further that subsequent to the agreement, the parties did enter into a supplemental agreement on 2nd November, 1962. We would refer to both the agreements presently but before so doing, to conclude the factual aspects be it noted that the assessee in its return of income for the assessment year 1964-65 on 30th June, 1964 recorded the total income as Rs. 24,28,675/- but subsequently on a revised return, filed on 20th November, 1968, the total income shown was reduced to Rs. 1,40,852/-. Similarly for the year 1965-66, the return filed on 30th June, 1965 recorded the total income of Rs. 24,58,314/- but the revised return depicted a loss of Rs. 2,45,786/-. The original return however did not include profits from the working of the two Pakistan factories but only the interest income for the two year from 1.10.1962 to 30.9.1964 which however was deleted in the revised return on the ground of non-receipt of the same.6. The Income Tax Officer did however reject the contention that the profit from the two factories belong to Mr. Maneckji or his nominee with effect from 1.10.1962 and the income-tax Officers assessment included the profits of the two companies in the total income of the assessee company for both the years. On an appeal to the Appellate Assistant Commissioner the order of the Income Tax Officer stood confirmed for both the years. Similarly is the order of the Tribunal in the appeal by the assessee by recording a finding that profits arisen after 30.9.1962 and before 30.9.1964 were taxable in the hands of the assessee company. Subsequently the matter came up before the High Court for consideration of the above noted two questions and the High Court as noticed above answered the same in the affirmative.7. It would be convenient at this juncture however to advert to the terms of the agreement dated 25th July, 1962 which inter alia contained the followingand whereas, the company has agreed to sell and transfer to Mr. Maneckji all its properties and assets in Pakistan pertaining to the said business mentioned briefly in the preceding paragraph and set out in detail hereinafter for the consideration and upon the terms and conditions hereinafter appearing......""...... The consideration for the said sale shall be ascertained in the following manner and the total sum thereby ascertained (less the deduction of Rs. 20,00,000/- (rupees twenty lacs) therefrom) is hereinafter called "the purchase price".(a) the price to be paid by Mr. Maneckji for all the fixed assets to be more fully described in the Schedule hereinbefore mentioned shall be their value in the books of accounts of the Company on the 30th day of September, 1962 hereinafter called "assessment day" subject to adjustments at book prices for fixed assets bought, sold, damaged or destroyed between assessment day and the date on which the transaction is completed hereinafter called "completion day" (normal) wear and tear excepted);(b) the price to be paid by Mr. Maneckji for all stores including firebricks, grinding media, gunny bags, spare parts, general stores, coal and miscellaneous items to be transferred to Mr. Maneckji shall be their value in the books of account of the Company upon assessment day, subject to the adjustment at book prices for the above items bought, manufactured, in process damaged, sold or destroyed between assessment day and completion day;(c) the price to be paid by Mr. Maneckji for all goods in transit, raw materials, in process, clinker (half made cement), manufactured cement, firebricks manufactured by Dandot Factory, shall be their value in the books of account of the Company upon assessment day, subject to adjustment at book prices for the above items bought, manufactured, in process, damaged, sold or destroyed between assessment day and completion day;(d) cash shall be transferred at par;""18.......... The completion of the transaction is subject to the approval of the Governmental agencies of both India and Pakistan to the extent of such approvals as may be necessary and required by law for the effectuation of this Agreement and Mr. maneckji will use his best endeavours to obtain all the said approvals from the Government of Pakistan. The Company hereby undertakes on its part to use its best endeavours to obtain all the said approvals from the Government of India.19. The transfer of the subject matter of this Agreement shall be completed on or before the 31st December, 1962 and unless otherwise mutually agreed in writing, this Agreement shall expire upon that day.20. This agreement and/or the subject matter hereof may be transferred to anybody corporate formed and controlled by Mr. Maneckji, if so required and the Company shall be bound to effect the transfer as if such body corporate were a party hereto.It would also be convenient at this juncture to note some of the terms of the Supplemental Agreement as belowtherefore it is agreed by and between the parties that :Clause 2 of the said agreement shall be deleted and replaced by the following Clause :"The consideration of the said sale shall be ascertained in the following manner and total sum thereby ascertained (less the deduction of Rs. 20,00,000/- therefrom) is hereinafter called the purchase price.(a) The price to be paid by Mr. Maneckji for all the fixed assets shall be their value in the books of account of the Company on the 30th day of September, 1962 hereinafter called "assessment day". Ã¯7Â?3  Å.....................(d) All cash held by the Company in Pakistan as on 30th September, 1962 shall be transferred at par.(e) Investments and Government securities shall be transferred at average market price on assessment day except that the shares held by the Company in Dalmia Cement (Pakistan) Ltd., a wholly owned subsidiary shall be transferred at the net worth of the shares determined with reference to the Balance Sheet of Dalmia Cement (Pakistan) Ltd., as on 30th September, 1962.(f) The price to be paid by Mr. Maneckji for all the Companys loans, advances outstandings and other debts standing to the credit of the Company shall be their value in the books of the Company on assessment day.The interest payable by Mr. Maneckji at six per cent annum on the purchase price shall be calculated with effect from 1st October 1962 and paid in the manner provided in para 3(b) of the said agreement.The profit and loss arising from the operations of the Company during the period subsequent to 30th September, 1962 shall, in the event of the completion of the sale transaction in accordance with the said agreement, be to the account of Mr. Maneckji. The operations of the Companys factories and business in Pakistan shall, however, continue to remain under the full and undisturbed control, and direction of the Company as hitherto, and nothing stated herein shall be construed as permitting in any manner interference on the part of Mr. Maneckji with the conduct of the business and operations of the factories until the same are transferred to Mr. Maneckji on the completion of the transaction.In supercession of para 5 of the said agreement, it is hereby agreed that the all liabilities of the Company relating to the period uptill 30th September, 1962 which may relate to the properties, assets and premises hereby transferred shall be the sole responsibility of the Company and Mr. Maneckji shall be responsible for all such liabilities in respect of the period commencing 1st October 1962.Incidentally, be it noted that the Principal Agreement dated 24th July, 1962 though had a time limit, the same, by consent of the parties and by way of Supplemental Agreement was extended from time to time and the period of completion of the purchase was extended till 30.9.1964 and it is on that date the parties did enter into a Sale Deed for transfer of rights by the assessee Dalmia Cement Ltd. in favour of Pakistan Progressive Cement Industry.

Court's reasoning:
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.