TMI Blog1991 (4) TMI 110X X X X Extracts X X X X X X X X Extracts X X X X ..... l was right in holding that the profit arising from the working of the two cement factories situated in Pakistan for the year October 1, 1963, to September 30, 1964, was taxable in the hands of the applicant-company ? " We may state a few relevant and material facts giving rise to the present references. The questions are in respect of the two assessment years but they essentially relate to the question as to whether the profits arising during the aforesaid two years are taxable in the hands of the applicant company. There were two cement factories situated in Shanti Nagar and Dandot in Pakistan. By an agreement dated July 24, 1962, the assessee-company agreed to sell and transfer to one Mr. Maneckji its properties and assets in Pakistan represented by the two cement factories. The assessee-company agreed to sell and Shri Bruch Maneckji agreed to purchase : (a) All lands including lessee rights in leasehold lands (subject to the approval/permission of the appropriate authority, if any) building and hereditaments upon which the said business of cement and refractory manufacturing is carried on and in all erection works, fixed engines, machinery and plant thereon which belongs to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s comprised in sub-clauses (b) to (g) of this clause shall be specified in detail in a separate schedule of movable assets to be prepared as on the completion day. The parties further agreed as to how the consideration for the said sale shall be ascertained. This was provided in clause 2 of the agreement which reads as under; "2. 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 lakhs) 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 account of the company on September 30, 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 complete, 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... continue to remain under the full and undisturbed control and discretion 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." According to the aforesaid clause, the profit and loss arising from the operation of the company during the period subsequent to September 30, 1962, shall be to the account of Mr. Maneckji in the event of the sale transaction in accordance with the agreement, and the operations of the company's factories and business in Pakistan shall continue to remain under the full and undisturbed control and discretion of the company as hitherto, and no interference can be made by Mr. Maneckji in the conduct of business of the factories until the same are transferred to Mr. Maneckji on completion of the transaction. The sale deed could not be effected on or before the date already fixed, i.e., December 31, 1962, and the date of the transfer of the factories was extended from time to time by supplemental agreements dated December 31, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter September 30, 1962, and before September 30, 1964, were taxable in the hands of the assessee-company. The Tribunal found that the profits actually accrued to the assessee-company and profits could accrue only to the assessee-company for both the years. The Tribunal stated that the agreements did not retrospectively make Mr. Maneckji or his nominee the owners of the factories or bring about the accrual of the profits in favour of Mr. Maneckji or his nominee. The profits had already accrued before September 30, 1964, and so they had accrued to the company because nobody else was on the scene and, as a matter of fact, the profits were to all intents and purposes received by the company. The accrual of the profits could not be stopped till the arrangement between the assessee-company and Maneckji was finalised nor could the accrual of profits to the company during the years be undone and the process reversed so as to turn the accrual of the profits in favour of Maneckji. The Tribunal also observed that the completion of the transaction of sale only made certain basic arrangements effective from September 30, 1964, and the fact that the purchase price was determined by reference to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tribunal for accrual of the profits to the assessee-company, the Tribunal held that the profits arising after September 30, 1962, and before September 30, 1964, were taxable in the hands of the assessee-company. It is to be seen as to whether, in the facts and circumstances of the case, the profits arising from the working of the two cement factories, in the two years, are taxable in the hands of the assessee-company or not. Shri Khaitan, learned counsel for the assessee-company vehemently urged that as per clause 3 of the supplemental agreement dated November 2, 1962, the profits have to be taken to the account of Mr. Maneckji during the period subsequent to September 30, 1962. When they have to be taken to the account of Mr. Maneckji, no profits had accrued to the assessee-company although the business would be run by the assessee-company without any interference from Mr. Maneckji. Simply on the basis that the assessee-company remains in full and undisturbed control of the business, it cannot be taken that the profits would accrue to the assessee-company. Reliance was placed by the learned counsel for the assessee-company on a decision of the Calcutta High Court in CIT v. J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or and on behalf of the purchaser and, under the agreement, the income was that of the purchaser. Even before accrual of the income, income was diverted by an overriding title and reliance was placed on CIT v. Tea Producing Co. of India Ltd. [1963] 48 ITR 200 (Cal). So far as the facts of the present case are concerned, it would appear that the transfer of income or profit to the account of Mr. Maneckji is to take place only on completion of sale transaction and the assessee-company was to remain in full control of the business and operation of the factories. The profits would arise simultaneously by the conduct of business and running of the factories. It is true that, as per clause 3 of the supplemental agreement, dated November 2, 1962, the profits have to be taken to the account of Mr. Maneckji but that would be only in the event of completion of the sale transaction by a particular date which would be an event to take place subsequent to the accrual of the profits. When the business and operation of the factories is to be effected by the assessee-company without any interference by Mr. Maneckji or his nominee and the sale transaction is yet to take place, which may take plac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of duties, levies and taxes and if any drawback or rebate is received, the same would be payable to the foreign buyers. The decision of the case, therefore, turned on the facts of that case. Reference has also been made to the decision in State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC). Their Lordships of the Supreme Court laid down the following proposition in relation to the theory of real income. It would appear from the above propositions that the matter has to be examined in the light of the reality of the situation and the theory would have no application when the concept of real income defeats the provisions of the Act. In that case, with regard to the interest on "sticky" advances although the accounts of the respective parties were debited in respect of the amounts of interest, the interest was carried to the "interest suspense account" and the amount of interest debited was not offered for taxation. Hon'ble Mr. Justice Sabyasachi Mukharji (as he then was) and Hon'ble Mr. Justice Ranganath Misra (as he then was) concurred and observed as under (headnote) : "(i) For the content of taxable income, one has to refer to the substantive provisions of the Income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount and at the cost of the purchaser. The purchaser was to get all the profits and was liable for all the losses from that date. Their Lordships observed that, by means of the agreement, it was not possible to alter the actual state of affairs, namely, the carrying on of the business by the appellant. The agreement was entered into on November 29, 1954, and it could not operate from a back date, i.e., September 1, 1954. On merits, the first question was answered in favour of the assessee. The first question was whether, on the facts and circumstances of the case, a sum of Rs. 11,257 being a claim for loss on sale of assets on which depreciation was allowable in earlier years is allowable under section 10(2)(vii) in computing the total income of the assessee. The Tribunal has relied upon the aforesaid observation that the actual state of affairs cannot be altered by an agreement. Reference was also made to CIT v. Bijli Cotton Mills Ltd. [1953] 23 ITR 278 (All). That was a case of floating of the company and accepting of the profits by the company before its incorporation. It was held that the income of the period prior to the incorporation could be legally assessed in the hands o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any part of the income or assets ; (b) 'transfer' includes any settlement, trust, covenant, agreement or arrangement." Section 60 contemplates as to how the income would be chargeable to income-tax when there is no transfer of the assets from which income has arisen. Section .63, clause (b), defines the word "transfer" to include any settlement, trust, covenant, agreement or arrangement. If any document of the nature mentioned in clause (b) exists, it would be considered to be transfer. In the present case, there are agreements between the parties. The agreements between the parties would be considered to be transfer but, in fact, transfer of assets had not taken place till September 30, 1964. So, whatever income has arisen prior to the transfer of assets, section 60 clearly contemplates that such an income which has arisen before the actual transfer of assets has taken place would be chargeable to income-tax as the income of the transferor and shall be included in his total income. We may refer to the commentary of Kanga and Palkhivala on the Law and Practice of Income Tax, Vol. 1, 8th edition, at p. 831, where the following passage of Lord Macmillan in Chamberlain (A. G.) v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relating to work of construction of certain tenements. The said contract and the income were assigned by him in favour of the vendee without a completed and valid assignment. It was held that the contract was not in fact valid since the relevant deed was not signed at all by the executant. All the moneys under the contract were in fact received by the assessee, Thobhandas Jivanlal Gajjar. It was further observed that, in view of the provisions contained in section 60 of the Income-tax Act, 1961, all income arising to any person by virtue of a transfer, whether revocable or not, and whether effected before or after the commencement of the said Act would, where there is no transfer of the assets from which the income arises, be chargeable to income-tax as the income of the transferor and would be included in his total income. Learned judges of the Gujarat High Court held that the Tribunal erred in reaching the conclusion that though the source from which this income was earned was not transferred in fact, nor could have been transferred in law, the income arising from the source could be held to be the income of the alleged transferee and that it was Popatlal Panachand Shah who was l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of Rs. 3,300 as income from other sources. This decision was upheld by the Appellate Assistant Commissioner but, on further appeal, the Tribunal held that though section 60 was attracted, the sum of Rs. 3,300 could not be assessed in the hands of the assessee but the sum was income from property and could only be assessed as such and that that income could be computed under section 24 and that deductions had to be given thereunder. Their Lordships held that the provisions of section 60 were attracted in the case. Definition of the expression "transfer" under section 63(b) was considered and it was observed that it could, therefore, be said that, taking into account the clauses of the maintenance deed as well as the above circumstances, there was an agreement or arrangement that the rent should be paid by the tenant to the parents. The learned judges, therefore, agreed with the conclusion of the Tribunal that the provisions of section 60 are attracted in the present case. Thus, on both the grounds, on the ground of accrual of profits to the assessee-company and also on the ground of applicability of section 60 of the Income-tax Act, we are of the opinion that the profits arisi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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