1972 PLP 164 (PTD)

NARAYANA PILLAI, J.‑

This is a reference by the Income‑tax Appellate Tribunal, Madras Bench. The assessment year concerned is 1958‑59 and the accounting period the 12 months ended on August 30, 1967. The questions referred are: "(i) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the title to the movable properties passed to the vendee only on August 30, 1957, and not either on January 1, 1957, or on June 1, 1957? (ii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the profits under section 10(2)(vii) from the sale of the movable properties were not assessable in the assessment year 1958‑59? " The assessee is a private limited company doing business in manufacture and sale of yarn and cloth. It was running a spinning and weaving mill at Quilon. On March 4, 1957, it entered into a contract with one Karimuthu Thyagaraja Chettiar, hereinafter referred to as Chettiar, for sale to him or his nominees for Rs. 23,01,111 its entire business as a going concern. Rs. 1,00,000 was paid in advance on the date of agreement itself. The balance amount was to carry interest from the date of agreement till payment. From January 1, 1957, till the date on which the sale was to be effected, the assessee's management of the business y was to be deemed as for and on behalf of Chettiar. On June 1, 1957, the shareholders of the assessee‑company passed a resolution ratifying the agreement dated March 4, 1957. On June 14, 1957, Chettiar nominated M/s. Parvathi Mills (Private) Ltd., hereinafter referred to as the mills, as the purchaser in whose favour the sale deeds were to be executed. On August 30, 1957, the assessee executed two sale deeds in favour of the mills after receiving the balance of consideration due "or the sale. One of those sale deeds was for the movable properties including the machinery and stock‑in‑trade and the other for the lands and buildings thereon. The assessee, on August 31, 1957, informed the Chief Inspector of Factories and Boilers at Trivandrum, on September 2, 1957, the Chief Controller of Imports and Exports at Bombay and the Labour Commissioner at Trivandrum and on September 12, 1957, the concerned, insurance company about the sale of the business on August 30, 1957, to the mills. For the relevant assessment year the assessee filed a return disclosing a loss. It did not disclose as profits under section 10(2)(vii) of the Income‑tax Act, 1922, the sale amount for the building, machinery or plant in excess of the written -down value of the same. That was on the ground that the sale took place only on August 30, 1957. The Income‑tax Officer found that the sale of the immovable properties took effect from August 30, 1957, and the movable properties from January 1, 1957. Consequently, he took into account the amount received by the assessee on sale of movables in excess of the written‑down value of the same as profit for the accounting year and passed an order of assessment accordingly. That was confirmed in appeal by the Appellate Assistant Commissioner but he was of the view that the sale of the movables took place only on June 1, 1957, the date of the resolution of the shareholders of the assessee‑company by which the agreement of March 4, 1957, was ratified. In the further appeal filed by the assessee, the Appellate Tribunal held that she sale of both movables and immovabies took place only on August 30, 1957, and that the profit arising out of such sale was not assessable as income which accrued during the accounting period which ended on June 30, 1957. It was thereafter that, at the instance of the revenue, this reference was made. We are here concerned with the date of the sale of the movable properties. Was it on January 1, 1957, from which date the assessee had allowed Chettiar to take part in the management of the business or June 1, 1957, when a resolution was passed by the shareholders of the assessee‑company ratifying the agreement for sale or August 30, 1957, when the sale‑deeds were executed? A contract for sale has to be distinguished from a contract of sale which is the sale itself. As regards immovable properties a contract for sale by itself does not create any interest in them. That is made clear in section 54 of the Transfer of Property Act. It is in sharp contrast to the rule in the case of movables. Sections 19 to 24 of the Sale of (foods Act deal with contracts for sale of movables. If the contract for sale of movables, which are in a deliverable state is unconditional, the title in them passes to the purchaser the moment the contract is made even if delivery takes place only later. This and the other rules in sections 20 to 24 of the Sale of Goods Act are subject to section 19(3) of that Act which says that they can be applied only in the absence of a different intention on the part of the parties. Unless a different intention is made out, if a contract for sale of movables is made and the seller delivers possession of them to the buyer, the title in them is taken as having passed to the buyer forthwith. These propositions look simple but difficulties arise in their application. Such difficulties frequently arise when the contract for sale is a combined one for both movable and immovable properties. In such a case should it be the rule applicable to movable properties or immovable properties that has to be applied. Undoubtedly, it is the rule applicable to immovable properties that has to prevail. That is because the contract is a combined one and the intention of the parties is not that the title to the movables should pass separately from the immovables. Section 85 of the Contract Act provided for such a contingency. It said that, where the agreement was for sale of both immovable and movable property combined, the ownership of the movable property did not pass before the transfer of the immovable property. But it was repealed by the Sale of Goods Act. It was held by the Supreme Court in Commissioner of Income‑tax v. Bhurangya Cool Co. ((1958) 34 I T R 802 (S C)), that, in spite of the repeal, the principle laid down in section 85 was still applicable. With the above background let us consider the agreement for sale in the present case. Although the agreement was executed only on March 4, 1957, it was mentioned in it that from January 1, 1957, onwards Chettiar was allowed to take part in the management of the business. From that date onwards he or his nominee was given the privilege of employment of workers and staff in the business. He was to be liable for bonus, salary, wages and allowances and gratuity or pension due to them. In respect of machinery and stores for the business, for which orders had been placed by the assessee, Chettiar was to advance the necessary amounts for purchase. From January 1, 1957, onwards the assessee was to be deemed as carrying on the business for and on behalf of Chettiar. It is these provisions in the contract that are mainly relied upon by the revenue as pointers in the direction of the sale being on January 1, 1957. The provisions referred to above are insufficient to establish the case of the revenue. There is nothing in the agreement to show that any of the properties, movable or immovable, of the business was actually delivered over by the assessee to Chettiar either on January 1, 1957, or on March 4, 1957. The provisions of the agreement only show that from January 1, 1957, onwards, as a purely temporary working arrangement, Chettiar was also allowed to take part in the management of the business. That had to be done in the Interests of both the parties. That was because, after the decision had been taken to sell the business, the assessee was not likely to take so much interest in the business as it used to do before and to safeguard the interests of Chettiar, who had advanced a portion of the consideration for sale, he had to be given a place in the management. Similarly, as he was given a voice in the management, he had to be made liable for claims of the workers and staff for amounts due to them. The first 3 clauses of the agreement begin by saying that the assessee agrees to sell and Chettiar agrees to buy the properties of the business. They do not spell out actual sale. In clause 10 power is granted to Chettiar to nominate a person as factory manager. Clause 11 provided that the factory manage:, so nominated by Chettiar, should be given a power of attorney by the assessee. There was no need for such a provision if Chettiar became the owner when the contract was entered into. The licences and permits obtained by the assessee for the business were to continue in its name. It was only after execution of the sale deeds that the assessee informed the necessary authorities about the sale of the business on August 30, 1957, to the mills and requested them to transfer the licences and permits to the mills. The sale deed of the movables specifically stated that the transfer of the movables was made on the date of that document. A meticulous scrutiny of the provisions in the agreement for sale makes it abundantly clear that it was not piecemeal sales of the movable and immovable properties of the business that was contemplated but a sale of them all together and that it was not the intention of the parties to sell or give 'delivery of the movable properties before sale of the immovable properties. We conclude that the title to the movable properties passed to the mills only on August 30, 1957, and not on any day earlier than that. Consequently, we answer both the questions referred to us in the affirmative, that is, in favour of the assessee. We make no order as to costs. A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be sent to the Appellate Tribunal as required by section 66(5) of the Indian Income‑tax Act, 1922.