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Petitioner: DALMIA CEMENT LTD. VS Respondent: COMMISSIONER OF INCOME-TAX
Court Name: Delhi High Court Judge(s): Arun Kumar, M. C. Jain Title: DALMIA CEMENT LTD. vs COMMISSIONER OF INCOME-TAX Case No.: Income-tax References Nos.87 and 88 of 1974 Date of Judgment:1991-04-12 Reported As: 1992 PTD 212 Result: Questions answered in affirmative
JUDGMENT
JUDGMENT ' M.C. JAIN, C.J.---These references under section 256(1) of the Income-tax Act, 1961, have been made by the Income-tax Appellate Tribunal, Delhi Bench, as the questions referred by it arise out of the order of the Tribunal dated September 29, 1972, in Income-tax Appeals Nos.4639 and 4640 of 1970-71 in respect of the assessm ent years 1964-65 and 1965-66. The Tribunal has referred the following questions to this Court for its opinion:-- "Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the profit arising from the working of the two cement factories situated in Pakistan for the year October 1, 1962, to September 30, 1963, was taxable in the hands of the applicant-company?" ' For 1965-66: For 1964-65: "Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal 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 assesse company agreed to sell and transfer to one Mr. Maneckji its properties and assets in Pakistan represented by the two cement factories. The assesse company agreed to sell and Shri Bruch Maneckji agreed to purchase:
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(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 the company with said lands, interests in land, erections, works, fixed engines, machinery and plants are intended for ease of identification to be more particularly described in a schedule to be separately prepared and signed by the parties hereto together with the rights, easements and appurtenances thereto belonging; (b) all the finished goods, stock-in-trade, general stores and other stocks of materials and things in or about any of the said premises or belonging to the said business; (c) all the licences, patterns, drawings, designs, apparatus, implements, tools and like chattels belonging to the company and used in or adapted or intended for the said business; (d) all the office furniture, motor and other vehicles and utensils to which the company is entitled in connection with the said business; (e) all the rights and privileges appertaining to the said business of cement and refractory manufacturing as now carried on by the company on the premises aforesaid and all the trade marks, credits, book debts and securities for the same (including cheques and bills given to the company in payment or satisfaction of such debts) contracts, engagements, orders, matters and things belonging or in any way relating to the said business and the full benefits thereof respectively and also all the assignable interest and benefit of the company in all improvements and secret processes relating to the said business which the company now has or may by the date of completion of the purchase have discovered or have become entitled to and whether as patentees, licensees or otherwise and whether jointly with any other person or persons or otherwise; (g) (h) #TBS (i) (j) (k) / (l) #TBE (m) all cash in hand and at the bank, and all bills and notes of the bank, and all bills and notes of the company relating to the said business; all investments in shares and Government securities; all the following documents, accounts and papers either in original or duly certified copies; pending orders for equipment and stores; outstanding supplies to be made; book debts taken over by Mr. Maneckji.; (iv) technical working data and log books, etc.; (v) stores ledger showing stocks of raw material, finished stocks and stores; (vi) such other books of account of the company as may be required by Mr. Maneckji for production before any competent authority; (i) the assets 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 iz 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
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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 and miscellaneous items to be transferred to Mr. Maneckji shall be their value in the books of account of the company upon assessment day, subject to adjustment at book prices for the above items bought, manufactured, in process, damaged, sold or destroyed between assessm ent day and completion day; (c) the price to be paid by Mr. Maneckji for all goods in transit, raw materials in process, clinker (half-made cement), manufactured cement, firebricks manufactured by Dandot factory, shall be their value in the books of account of the company upon assessment day, subject to adjustment at book prices for the above items bought, manufactured, in process, damaged, sold or destroyed between assessm ent day and completion day; (d) cash shall be transferred at par; (e) investments and Government securities shall be transferred at average market price on assessm ent day; (f) the price to be paid by Mr. Maneckji for all the company's loans, advances, outstandings and other debts standing to the credit of the company shall be their value in .The books of the company upon assessm ent day, subject to adjustment for realisation and new debts between assessm ent day and completion day." ' Clause 3 further provides the mode of payment of the purchase price. Clause 19 of the agreement provided that the transfer of the subject-matter of the agreement shall be completed on or before December 31, 1962, and, unless otherwise mutually agreed in writing, the agreement shall expire on that day. It also made a provision that the agreement or the subject-matter thereof may be transferred to any body corporate formed and controlled by Mr. Maneckji, if so required and the company shall be bound to effect the transfer as if such body corporate were a party to the agreement. The completion of the transaction is subject to the approval of the Governments and Governmental agencies of both India and Pakistan. On November 2, 1962, a supplemental agreement was entered into between the assessee-company and Maneckji and clause 3 thereof provides as under: ' The profit and loss arising from the operation of the company during the period subsequent to 30th September, 1962, shall, in the event of the completion of the sale transaction in accordance with the said agreement, be to the account of Mr. Maneckji. The operations of the company's factories and business in Pakistan shall, however, 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, 1962, March 29, 1963, June 24, 1963, September 23, 1963, December 29, 1963, March 24, 1964 and June 30, 1964. The sale-deed
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ultimately came to be executed on September 30, 1964 and, on that date, the transfer of the two cement factories was effected in favour of Pakistan Progressive Cement Industries Limited, the nominee of Mr. Maneckji as provided in clause 20 of the original agreement. The dates of the main agreement as well as of the supplemental agreement were extended up to the 8th Supplemental Agreement entered into on June 30, 1964, wherein the date of completion was extended up to September 30, 1964. The purchase price was fixed at Rs,2,33,66,678 by reference to the book value of the assets on September 30, 1962, and the liabilities of the company to pay rents, rates, cesses and assessm ent in respect of the lands and buildings was restricted to the liabilities arising up to September 30, 1962. The accounting year in respect of the two assessment years ended on September 30, 1963, and September 30, 1964, respectively. ' The assessee company filed the return of income for the assessment year 1964-65 on June 30, 1964, showing a total income of Rs,24,28,675 and a revised return showing a total income of Rs,1,40,852 was filed on January 20, 1968. Similarly, for the year 1965-66, a return was filed on June 30, 1965, showing an income of Rs,24,58,314 and a revised return was filed on October 22, 1969, showing a loss of Rs,2,45,786. For the assessment year 1965-66, the return did not include profits from the working of the two Pakistan factories but it included only the interest income for the two- year period from October, 1, 1962, to September 30, 1964. But, in the revised return, the two years' interest was also deleted on the ground that the same had not been received. The assessee- company's case before the Income-tax Officer was that the profits from the two factories belonged to Mr. Maneckji or his nominee with effect from October 1, 1962, but this plea was not accepted by the Income-tax Officer and the Income-tax Officer's assessment included the profits of the two factories in the total income of the assessee-company for both the years. The Appellate Assistant Commissioner confirmed the decision of the Income-tax Officer for both the years. The assessee then filed appeals before the Tribunal. The Tribunal, however, held that the profits arising after 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 accured 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 assesse 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 the value of the assets as on September 30, 1962, did not ante-date the arrangement. It only gave the parties an agreed basis for the determination of the purchase price. The agreement did not give retrospective effect and all that the agreement did was to safeguard the interest of the parties in view of the delay in the finalisation of the transaction of sale. Thus, vis-a-vis outside parties, the position of the assessee- company and the factories did not change at all. ' Reference was made to the observations made in Waddington v. 0' Callaghan [1931] 16 TC 187 by Rowlatt, J., where it was expressed that no one could alter the past by an agreement and reference was also made to Western States Trading Co. P. Ltd. v. CIT [1971] 80 ITR 21 (SC), wherein it was observed that, by means of an agreement, it was not possible to alter the actual state of affairs. The reasoning adopted in Western States Trading Co. [1971] 80 ITR 21 (SC) was made applicable by the Tribunal to the case in hand. The Tribunal also examined the question of agency and turned
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down the same and stated that the Tribunal is unable to extend the principle of agency backward in point of time in the present case so as to convert the present company into an agency of Mr. Maneckji. The Tribunal also decline d to accept the contention of the Departmental representative that, even under section 60, the profits accruing after September 30, 1962, were chargeable in the hands of the company. Th.; reasoning given by the Tribunal kr declining to accept the said content; u is that there would be an underlying assumption that income had actual', accrued to Maneckji or his nominee whereas for the reasons given by the 5 ribunal, the Tribunal is unable to accept this assumption. The other reasoning given by the Tribunal for declining to accept the assumption relating to section 60 is that, according to its reading of section 60, it relates to an arrangement or settlement according to which both the transfer of income and the retention of the ownership of the assets formed part of one scheme and, according to the Tribunal, in the present case, the scheme is quite different. There is one scheme and that scheme is for the transfer of assets as well as the income. Only there has been some delay in the transfer of the assets while the transfer of income has become a controversial issue. Thus, for the reason-given by the 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. Jhanzie Tea Association [1989] 179 ITR 295. In that case, the assessee was a non-resident company. It owned a number of tea estates. The assessee sold four of its tea estates under different agreements. The assessee had agreed to sell one tea estate with effect from January 1, 1969, and the other three tea estates with effect from January 1, 1970, but the deeds of conveyance in favour of the purchasers were not executed within the relevant previous year. The Tribunal found that the agreements clearly provided that their terms and conditions would come into effect from dates anterior to the dates of execution of the deeds of sale. The agreements provided that all the expenses connected with the tea estates would be borne by the purchaser and that all the tea manufactured from January 1, 1969, or January 1, 1970, as the case may be, and the profits arising therefrom would belong to the purchasers. The Income-tax Officer held that for assessm ent year 1970-71, the income from the four tea estates was assessable in the hands of the assessee. The Appellate Assistant Commissioner, however, held that the income was diverted by overriding title to the purchasers of the tea estates. The learned Judges of the Calcutta High Court held that the income arising out of agricultural operations in the tea estates will not come within the provisions of the Income-tax Act and the income arising from the manufacturing process after the tea is grown is a business income and it was held that, in this case, not only the tea estates had been transferred but the income accruing therefrom had also been transferred to the purchasers with efffect from January 1, 1969, in respect of the one tea estate and with effect from January 1, 1970, in respect of the other three tea estates. ' All the manufacturing activities of the assessee as from those dates were on behalf of the purchaser. There was, therefore, diversion of income by overriding title and the income from tea business from January 1, 1969, in the case of one tea estate and from January 1, 1970, in respect of
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the other three tea estates was not liable to be assessed in the hands of the assessee. It would appear from this decision that a distinction was made between agricultural income and business income and it was found as a fact that the entire expenses were to be borne by the purchaser and the assessee was to run the business for 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 C.I.T. 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 place or may not take place in such a situation, there will be no stoppage of accrual of profits to the assessee-company. It is true that cash in hand as well as in the bank and all bills and notes of the bank would also stand transferred but that will take place on a future date when the sale-deed is executed. In respect of an event which is yet to take place, overriding title does not come into existence, and accrual of profits can be stopped only if an overriding title is created before the accrual of the profits. Thus, the said authority, in our opinion, is clearly distinguishable on the facts of the present case. ' Reference has also been made to another decision of the Calcutta High Court in CIT v. A. Tosh and Sons (Pvt.) Ltd. [1987] 166 ITR 867. In that case, the assessee exported tea to foreign countries. Under agreements entered into with the foreign buyers, the foreign buyers were liable to pay all taxes, duties and levies in respect of the tea and if any refund or rebate of such taxes and duties were received, these would be remitted to them by the assessee to the foreign buyer. The assessments for the two years were reopened on the ground that income arising from the receipt of rebate on excise duty and customs duty drawback and interest on deposits of such rebate and drawback had escaped assessm ent in the assessment years 1972-73 and 1975-76. The Tribunal held that these amounts were not assessable in the hands of the assessee as they were received by the assessee on the account of foreign buyers and not on its own account. The assessee was under an obligation to remit the said amounts to the foreign buyers after obtaining permission from the Reserve Bank. These amounts were not received by the assessee as its own receipt or income. They were received on behalf of the foreign buyers. They can hold the assessee accountable for the same. Even if permission is not given by the Reserve Bank, the foreign buyers can receive the said money in India and spend the same in India. It was observed that the amounts were never the real income of the assessee as they were diverted even at the inception by an overriding title of the foreign buyers. Any accretions to the said amount by way of interest or otherwise could not also be held to be the income of the assessee. It would appear that there was an agreement between the assessee and the foreign buyers for payment 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 Travaneore v. CIT [1986] 158 ITR 107 (SC). Their Lordships of the Supreme Court laid down the following prop 'don in relation to the theory of real income.
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' It would appear from the abo examined in the light of the reality of no application when the concept of re Act. In that case, with regard to the in accounts of the respective parties were interest, the interest was carried to t amount of interest debited was not o Sabyasachi Mukharji (as he then wa Misra (as he then was) concurred and "(i) propositions that the matter has to be I. e situation and the theory would have income defeats the provisions of the erect on "sticky" advances although the debited in respect of the amounts of e "interest suspense account" and the erred for taxation. Hon'ble Mr. Justice and Hon'ble Mr. Justice Ranganath .Served as under (headnote): me, one has to refer to the substantive act, 1961, mainly section 5 read with the ' For the content of taxable income provisions of the Income-tax other relevant sections. (i) In some limited fields where something which is the reality of the situation prevents the accrual of the income, then the notion of real income, i,e,, making the income accrue in the real sense of the term, can be brought into play but the notion of real income cannot be brought into play where income has accrued according to the accounts of the assessee and there is no indication by the assessee treating the amount as not having accrued. Suspended animation following inclusion of the amount in the suspense account does not negate accrual and after the event of accrual, corroborated by appropriate entries in the books of account, on the mere ipse dixit of the assessee, no reversal of the situation can be brought about. (ii) The concept of reality of the income and the actuality of the situation are relevant factors which go to the making up of the accrual of income but once accrual takes place and…
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