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TMI Blog1965 (3) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... arch 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 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 vend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Commerce, Madras, furnishing a detailed list of land, building and machinery comprising the assets of the company together with their value, in connection with the grant of loan by Government. On March 20, 1948, the assessee was credited with the price of Rs. 2,00,000 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, 1949, 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 along with 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 inadvisably made wrong statement. In the circumstances, we delete the addition. " It appears that the Commissioner of Income-tax filed an application 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 certain documents which, if they had been considered, would perhaps support a conclusion different from the one arrived at by the Tribunal. The Tribunal thereupon came to the conclusion that its earlier decision deleting the amount from taxation was based on non-consideration of various materials on record and it proceeded to rectify this order as a mistake apparent from the record. Accordingly it deleted paragraph 4 in its order dated November 24, 1955, and substituted its order dated March 8, 1957. The Tribunal held that in pursuance of clause 6 of the agreement dated March 17, 1948, the possession of the entire factory was immediately handed over to Mohan Industries and that the sale deed dated November 22, 1948, was executed for conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany that the income had arisen to the assessee in the year of account and there is no justification even for the contention that at least 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. Viswanatba 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, 1949, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 16th March, 1949, and in and by the said resolution the company agreed to pay purchase price in instalments commencing from 31st March, 1949. The agreement was subsequently approved by the general body of shareholders at a meeting held on 10th April, 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 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 v. Bhurangya Coal Co. ). No such conveyance was executed before April 1, 1948. It is only on November 22, 1948, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... movable and immovable assets. In the 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. 7,396-6-0. 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 along with the transference of the whole business. It cannot be said in the circumstances of this case that the goodwill was transferred ..... X X X X Extracts X X X X X X X X Extracts X X X X
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