Case ID: 1957

Judgment:
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. A.V. Viswanatha Sastri	 K. Jayaram and R. Vasudeva Pillai for the appellant. K.N. Rajagopal Sastri and R.N. 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. 79	494/ 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. 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). 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. 2	00	000.00 which shall be paid and satisfied by payment in cash soon after the capital Rs. 3	00	000.00 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. 2	00	000.00 (Two lakhs) cash at the rate of . . p.c. 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 Rs.200000/ 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. 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 Rs.79	494/over 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. 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 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. 79	494/ 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. 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 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. 4	500/ 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. 2	00	000/ was credit ed in favour of the assessee and the asset accounts were debited as foll ows: Plant & Machinery a/L.P.27Rs. 15	989 0 0 Furniture account 2918	80500 Electric goods 31 1	289100 Site & Construction amount331	26	47O00 Stock amount 34 30	05000 Goodwill account 407	39660 Total 'Us.2	00	00000 572 Further 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 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. A.V. 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	 1	949	 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	 i.e.	 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. 2	00	000/ 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 26.3.1949 and in and by the said resolution the company agreed to pay purchase price in instalments commencing from 31.3.1949. 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 L/P(N)4SCI 10 574 accepted. The assets comprised of two items of immovable property	 viz.	 Plant and machinery valued at Rs. 15	989/ and site and buildings valued at Rs. 1	26	470/ . 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 Co.(1) 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	 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 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. 1	26	470/ .The machinery and electrical fitting which were permanently embedded in the earth were respectively valued at Rs. 15	989/ and Rs. 1	298 10 0. The stocks were valued at Rs. 30	050/ 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. 15	989 0 0. (ii) Electrical fittings valued at Rs. 1	289 10 0. (iii) Buildings and site valued at Rs. 1	26	470 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. 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. 7	396/6/ . 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. 79	494/ 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. 18	805/ 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. 2	00	000/ 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. 79	494/ 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 I.T.R. 802	 referred to. Before section 12B can be attracted	 title must pass to the company by any of the modes mentioned in section 12B i.e.	 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]