TMI Blog1957 (5) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... falls for consideration in this appeal is whether a particular transaction details whereof we shall presently state, entered into by the assessee company in 1946 resulted in capital gains within the meaning of section 12B of the Act. The question which was referred to the High Court under section 66(1) of the Act was this : "Whether the assessee company made a capital gain amounting to Rs. 81,81,900 within the meaning of section 12B of the Indian Income-tax Act ?" The High Court answered the question in the negative. The appellant being dissatisfied with the judgment and order of the High Court asked for and obtained a certificate from the said High Court that the case is a fit one for appeal to the Supreme Court. The material facts may be very shortly stated. The assessee company is a private limited company, the shares of which were held by the then Maharaja Scindia of Gwalior and his nominees. At the material time, the assessee company was the managing agent of Madhowji Dharamsi Manufacturing Co. Ltd., hereinafter briefly referred to as the Dharamsi Company, and Sir Shapurji Broacha Mills Ltd., briefly referred to as the Shapurji Broacha Company. The assessee company held al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " With reference to the interview our solicitor Mr. Tanubhai 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. Shanti 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 proposed 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 cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meaning of section 12B of the Act. The point for our consideration is whether the High Court has correctly answered the question. We must first read sub-section (1) of section 12B of the Act as it stood at the material time. The sub-section, 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 (Amendment) Act, 1947, which inserted section 12B 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 (77 of 1956) re-introduced the section in wider terms so as to bring within "capital gains" "any profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations were made in a case dealing with sales tax but are equally applicable to the case under our consideration. Two conditions must be fulfilled before the transaction under our consideration can come within the purview of section 12B 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 31 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 October 7, 1946, substituted a new contract, a contract of relinquishment 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 managing 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 12B of the Act, and the consideration being one and 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 plausibility, 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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