P L D 1957 Supreme Court (Ind (PLP)

S. K. DAS, J.‑

This is an appeal on a certi6c:ite gram by the High Court of Judicature at Bombay under subsection (2) of section 66‑A, Income‑tax Act (hereinafter refer to as the Act). The appellant is the Commissioner of Income‑ tax, Bombay, and the respondent is the Provident Investment, Co, Ltd., Bombay, hereinafter referred to as the assessee company. The short question which falls for consideration in this appeal is whether a particular transaction, details whereof we shall presently state, entered into by the assessee company 1946 resulted in capital gains within the meaning of section 12‑B of the Act. The question which was referred to High Court under section 66 (1) of the Act was this: "Whether the assessee company made a capital amounting to Rs. 81,81,900 within the meaning of section income‑tax Act" ? The High Court answered the question in the negative. The appellant being dissatisfied with the judg ment and order of the High Court asked for and obtained a certificate from the said High Court that the case is a fit one fur appeal to the Supreme Court. The material facts may be very shortly stated. The assessee company is a private limited company, the shares o; which were held by the then Maharaja Sciudia of Gwalior any his nominees. At the material time, the assessee company was the managing agent of Madhowji Dharamsi Manufacturing Co., Ltd., hereinafter briefs referred to as the Dharamsi Company, and Sir Shapurji Broacha Mills Ltd, briefly referred to as the Shapurji Broacha Company. The assessee company held all the "conversation" shares of the Dharamsi Company and a substantial majority of the "conversion" shares of the Shapurji Broacha Company. The Dalmia Investment Company Limited, which will hereinafter be briefly referred to as the Dilmia Company, wrote two letters to the assessee company on 14th September 1946. Iii these two letters, the Dalmia Company offered to purchase 28,32: "conversion" shares of the Dheramsi Company at Rs. 500 per share together with the managing agency, and also 75,212 conversion" shares of the Shapurji Broacha Company, together with the managing agency. We are not concerned with the other 'details mentioned in the two letters, except this that the Dalmia Company made it clear that it would purchase both the mills or neither and a time limit till 23rd September 1946, 3 p.m. was imposed during which the offer would remain open. This time limit was, however, extended later up to 30th September 1946. The letter further stated:‑-- "On your accepting the offer, we will pay to you Rs. 20 lakhs in the case of the Dharamsai Company Rs. 30 lakhs in the case of the Shapurji Broacha Company as and by way of earnest money, You shall have to arrange to get the transfer of the managing agency sanctioned by the general body of the shareholders within a period of 40 days from the date of acceptance. As soon as the transfer is sanctioned, we will pay the balance of the purchase price." On 26th September 1946, there was a meeting of the Board of Directors of the assessee company. At that meeting the Board considered the offers made by the Dalmia Company and resolved to accept the offers. The Board further stated in its minutes that out of the total amount received from the sale of the shares, a sum of Rs. 1 crore should be paid to the assessee company as compensation for the loss of the managing agency of the two mills. On 30th September 1946, the assessee company wrote to the Dalmia Company accepting the offers made subject to a condition which is not material for our purpose. On the same date, the Dalmia Company received the acceptance of the offers made by it and sent two drafts, one for Rs. 20 lakhs and the other for Rs. 30 lakhs. On 7th October 1946, the Datmia Company wrote a very important letter to the assessee com pany. This letter said inter alia:‑-- "With reference to the interview our Solicitor Mr. Tanu bhai had with your Mr. Wadia, we beg to record that it is now being agreed upon as follows in modification of the arrangement previously made between yourselves and ourselves (1) In our letters of offer which have been accepted by you, it was arranged that the managing agency will be transferred either to us or to our nominees. Now, instead of doing so by you, you as the present managing agents will give their (sic) resignation, so that at the time of delivery of the shares and payment of moneys, your managing agency will have come to an end. In view of the above, it is not necessary to obtain any sanction of general meeting. (2)

1. Mr. Shriyans Prasad Jain.

2. Mr. Jaidayal Dalmia,

3. Mr. Shand Prasad Jain, and

4. Mr. Vishnu Hari Dalmia will be appointed Directors of both the Mills Companies and thereafter all the present directors will tender their resignation. (3) Qualification shares in the names of the above pro posed Directors will be transferred by you and the balance of the shares will be delivered to us along with the transfer deeds duly signed against payment. (4) You may communicate by a circular to the share holders that you have resigned the managing agency, You may further mention in the circular that in accordance with the offer we are prepared to take up the deferred shares held by the shareholders which may be offered to us at the rate of Rs. 25 and Rs. 7‑8‑0 of Madhowji Dharamsi Manu facturing Co. Ltd, and Sir Shapurji Broacha Mills Ltd. Mills respectively within two months of the date of letter of offer which we would also send." The assessee company accepted the modified arrangement suggested by the Dalmia Company, and on 19th October 1946, the assessee company wrote to the Dharamsi Company and the Shapurji Broacha Company that it had decided to resign the office of the managing agency and accord ingly tendered its resignation on that date. The balance of the consideration money was then paid to the assessee company, and it was not disputed that the value of the managing ageney was computed at Rs. 1 crore, nor was there any dispute that the managing agency was a capital asset. Out of the said sum of Rs. 1 crore the Income‑tax Officer computed the capital gain at Rs. 81,81,900 and asked the assessee company to pay tax thereon. The Appellate Assistant Commissioner held that the assessee company had sold the managing agency and therefore the profits or gains arising from that sale were capital gains within the meaning of section 12‑B of the Act. The Income‑tax Appellate Tribunal, Bombay, Bench `A' held, however, that there was no sale of the managing agency, because the original contract of purchase was varied by the new contract embodied in the letter of 7th October 1946. The Tribunal, however, held as follows :‑ "The assessee company was the owner of the shares and the managing agencies. It sold the shares to the Dalmia Co. and handed back the managing agencies to the managed companies. This handing back, in our opinion, constitutes a transfer of the managing agencies." On that footing the Tribunal held that section 12‑B of the Act applied. On an application by the assessee company, the Tribunal on being satisfied that a question of law did arise out of its order, referred the question which we have already set out in an earlier paragraph of this judgment, to the High Court of Bombay. The High Court answered the question in the negative on the ground that there was neither a sale nor a transfer of the managing agency within the meaning of section 12‑B of the Act. The point for our consideration is whether the High Court has correctly answered the question. We must first read subsection (1) of section 12‑B of the Act as it stood at the material time. The subsection, so far as it is relevant for our purpose, was in these terms :‑ "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 such profits and gains shall be deemed to be income of the previous year in which the sale, exchange or transfer took place." It is worthy of note that capital gains' were charged for the first time by the Income‑tax and Excess Profits Tax (Amend ment) Act, 1947, which inserted section 12‑B in the Act. It taxed `capital gains' arising after the 31st March 1946, and the levy was virtually abolished by the Indian Finance Act, 1949, which confined the operation of the section to capital gains' arising before the 1st April 1948. The Finance (No. 3) Act, 1956 (Act No. 77 of 1956) re‑introduced the section in wider terms so as to bring within `capital gains' "any profits or gains arising from the sale, exchange, relinquishment or transfer of a capital asset effected after 31st March 1956, etc." We are not, however, concerned with the question whether the transaction under our consideration, which took place in 1946, resulted in capital gains within the meaning of section 12‑B as it stands after the enactment of the Finance (No. 3) Act, 1956 (Act No. 77 of 1956). The question before us is whether the transaction under consideration resulted in capital gains within the meaning of section 12‑B as it origi nally stood. Two other points must be stated at the outset in order to clear the ground for a consideration of the relevant arguments advanced before us. The first point is that there is no ques tion here of the assessee company trying to circumvent the provisions of section 12‑B of the Act by deliberately modifying the original agreement (by its letter dated 7th October 1946) so as to put the transaction outside the scope of that section. The agreement was modified in October 1946, before even the insertion of section 12‑B in the Act. Therefore, no question of deliberate or fraudulent evasion arises in this case. The second point is that in construing fiscal statutes and in A determining the liability of a subject to tax, one must have regard to the strict letter of the law and the true legal position arising out of the transaction in question. The Bombay High Court has referred to a large number of English decisions on this point. We consider it unnecessary to examine those decisions m the present case. The point was considered very recently by this Court in A. V. Fernandez v. The State of Kerala Civil Appeal No. 232 of 1955 (A I R 1957 S C 657), disposed of on 2nd April 1957, where the following observations made are very pertinent :‑‑ "If the Revenue satisfies the Court that the case falls strictly within the provisions of the law, the subject can be taxed. If, on the other hand, the case is not covered within the four corners of the provisions of the taxing statute, no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the Legislature and by consi dering what was the substance of the matter. We must of necessity, therefore, have regard to the actual provisions of the Act and the rules made thereunder before we can come to the conclusion that the appellant was liable to assessment as contended by the Sales Tax authorities." Those observations were made in a case dealing with sales tax but are equally applicable to the case under our considera tion. Two conditions must be fulfilled before the transaction under our consideration can come within the purview of section 12‑B of the Act. The first condition is that the profits or gains must arise from the sale, exchange or transfer of a capital asset; and the second condition is that the sale, exchange or transfer must be effected after 31st March 1946. There is no doubt that the transaction before us was effected after 31st March 1946. There is also no dispute that the managing agency of the two mills which the assessee company held was a capital asset. Therefore, the question boils down to this‑did the profits or gains, namely, the sum of Rs. 1 crore which was computed as the value of the managing agency, arise from the sale or transfer of the managing agency ? The Income‑tax authorities held that there was a sale of the managing agency; but the Appellate Tribunal held that there was no sale in the strict sense but only a transfer of the managing agency to the managed companies, that is, the Dharamsi Company and the Shapurji Broacha Company. The High Court held that there was neither a sale nor a transfer, because the letter of 7th October 1946, substituted a different contract for the original contract entered into by the parties, and the true legal position with regard to the substituted contract was that the assessee company resigned the managing agency, or in other words, the managing agency was relinquished by the assessee company. The learned Solicitor‑General, who has appeared for the appellant, has contested the correctness of the view of the Bombay High Court and has submitted a two‑fold argument before us. His first argument is that there was a concluded contract of sale as a result of the letters, dated 14th September 1946, and 30th September 1946, exchanged between the parties, and the sale having taken place, the letter of 7th October 1946, which merely changed the mode of performance of the contract did not affect the true legal character of the transaction which was a sale of the managing agency. We are unable to accept this argument. The true legal effect of the letters dated 14th September 1946, and 30th September 1946, which contained an offer and an acceptance, was merely this; the Dalmia Company offered to purchase (1) certain shares in the two mills and (2) the managing agency, on payment of a certain consideration, and the assessee company accepted that offer. In law, this was merely an agreement to sell and purchase the shares together with the managing agency on payment of the consideration, etc. The two letters did not by themselves 'amount to a sale of the shares or the managing agency, in the sense of a transfer of the property in them. Before any such sale could take place, the agreement was modified by the letter of 7th October 1946, and instead of "selling" the managing agency the assessee company agreed to resign or relinquish the managing agency. We are unable to agree with the learned Solicitor‑General that the letter of 7th October 1946, merely changed the mode of performance, and did not constitute a new contract. In our opinion the Bombay High Court correctly held that whereas under the original contract the Dalmia Company wanted the managing agency to be transferred, which meant that it wanted the benefit of that contract to be vested in it and was also prepared to accept the burden of the obligations that went with that contract, under the substituted contract the Dalmia Company did not want the managing agency to be assigned to it; on the contrary, it wanted the assessee company to relinquish its rights in the managing agency of the two mills by resigning. On a true interpretation, the letter of 7th Octo ber 1946, substituted a new contract, a contract of relinquish ment rather than a contract of sale, so far as the managing agency was concerned. The second argument of the learned Solicitor‑General is that there was one indivisible consideration for the whole transaction, including the sale of the shares and of the manag ing agency. So far as the shares were concerned, the sale did take place and the entire consideration was paid there was therefore a sale within the meaning of section 12‑B of the Act, and the consideration being one indivisible, the transaction did result in capital gains within the meaning of that section. At the first blush, the argument has an apparent merit of plausi bility, though it was not urged before the Bombay High Court in the manner in which it has been urged before us. On a closer scrutiny, however, it appears to us that this argument is not really available to the learned Solicitor‑General. The parties and the Income‑tax authorities, including the Appellate Tribunal, proceeded on the footing that part of the considera tion, namely, the sum of rupees 1 crore, was the consideration for the sale for relinquishment of the managing agency, the Department contending that the transaction was a sale or transfer and the assessee company contending that it was neither a sale nor a transfer but a mere relinquishment. In the agreed statement of the case, it was sated :‑ " The value of the managing agencies was computed by the assessee company at Rs. 1 crore and there is no dispute on this point. The Income‑tax Officer thereupon computed capital gain at Rs. 81, 81,900 and again there is no dispute on this point. The question which the Tribunal had to deter mine was whether the transactions between the Dalmia Company and the assessee company resulted in a capital gain of Rs. 81,81,900." It is obvious that the entire assessment proceedings proceeded on the basis that the sum of Rs. 1 crore was the consideration for the sale or relinquishment of the managing agencies, and the dispute between the parties was whether the transaction with regard to the managing agencies, in its true legal character, was a sale or transfer or relinquishment. That being the position, it is not now open to the learned Solicitor‑iB General appearing for the Revenue to go behind the agreed statement of the case and to ask us to give an answer to the question of law raised in the case on different assumptions or in a different set of circumstances. The answer must be given on the basis of the facts and circumstances as stated in the agreed statement of the case. We are of opinion that the answer was correctly given by the High Court of Bombay. The transaction in its true legal character was a relinquishment of the managing agency and c was neither a sale nor a transfer thereof. Therefore, the High Court correctly answered the question in the negative. In the result, the appeal fails and is dismissed with costs. K. B. A. Appeal dismissed.