Dalmia Cement (Bharat) LTD. vs Commissioner Of Income Tax, New Delhi

Judicial Analysis Court Copy Headnote Facts Arguments Court observation

1999 Supreme(SC) 514

1999(4) Supreme 195
Supreme Court of India
(From Delhi High Court)
M. Srinivasan & Umesh C. Banerjee, JJ.
Dalmia Cement Ltd., Rajasthan -Appellant
versus
Commissioner of Income Tax, New Delhi -Respondent
Civil Appeal Nos. 4632-33 of 1992
Decided on 16-4-1999
Counsel for the Parties :
For the Appellant for M/s. Khaitan & Co. : Joseph Vellapally, Sr. Advocate, Ms. Sushmita Banerjee, Tarun Gulati, Advocates.
For the Respondent : Dr. V. Gauri Shanker, Sr. Advocate, S. Rajappa and B.K. Prasad, Advocates.

Headnote:Income Tax Act, 1961-Section 4 read with Sections 28 and 60-Income-Diversion by overriding title-Assessee agreed to sell its factories by an agreement dated 24.7.1962-Agreement provided that from 30.9.1962 onwards profits of factories would be for transferee on completion of sale transaction-Actual sale transaction completed on 30.9.1964-Assessee claimed income for period between 30.9.1962 and 30.9.1964 not assessable in its hands-High Court rejected plea holding accrual of profit to assessee not stopped by agreement and profit would be transferred to transferee only after completion of sale which was contingent - Whether correct?-No-Sale stood completed as on date of assessment year in question-Event contemplated in agreement had already taken place and an overriding title to income had in fact been created by operation of law in favour of transferee-Income stood diverted by overriding title as a matter of fact even before accrual.
       Held : While at the first blush the reasoning of the High Court seems to be rather attractive but on consideration of the issue on a wider perspective the High Court cannot but be said to be in clear error. For the year 1965-66 when the order of assessment was made, the profits were ascertained on 30th September, 1964 and the property was itself transferred, as such question of accrual of profit, on account of the transferred assets, does not and cannot arise. Be it noted that completion of sale transaction ought to be attributed its normal meaning and in this regard contextual facts should also be looked into and considered in the proper perspective. The sale transaction in fact has taken place and as such there being any contingency, as was there at the earlier point of time, does not arise. The event has taken place and the Supplemental Agreement dated 2nd November, 1962 makes the situation clear and categorical. The parties agreed the relevant date to be 30th September, 1962 and not the completion of sale. Clause 3 of the agreement of which, the High Court made a special reference and interpreted that by reason of the contingent event which would be subsequent to the accrual of profits, the profit cannot but be treated to be in the hands of the assessee does not withstand the test of correctness. The High Court has not laid any importance to the event which stands completed by reason of the sale agreement. There is no question of enabling the assessee to retain the profit in its own hand after the ‘sale agreement’. The event as noticed above, has taken place and by reason of the event and in terms of the provisions of the agreement question of tracing the profit in the hands of the assessee does not and cannot arise. In any event profits of a business do not accrue from day to day but at the end of the accounting year. Profits were ascertained on 30th September, 1964 when the property was transferred as such for the year 1965-66 as noted above, question of profit accruing to the assessee does not arise. As a matter of fact the profit stands diverted to the purchaser in terms of and in accordance with the agreement dated 24th July, 1962 read with Supplemental Agreement dated 2nd November, 1962 and the date of actual transfer of the factory in question which, in fact, has taken place on 30th September, 1964 does not alter the situation. The income stands diverted by an overriding title as a matter of fact even before the accrual. (Para 8)
       At no stage of the proceeding up to the High Court, there was any dispute as regards assessee’s contention of diversion by overriding title. The finding of the High Court that issue of overriding title on the basis of an event which is yet to take place, being not available in the facts of the matter under consideration, cannot in our view be said to be a correct appreciation of law, since on the date of assessment, the event has already taken place and an overriding title has in fact been created by operation of law and there is no escape from it and as such we are unable to record our concurrence therewith. (Para 13)
       The other aspect of the matter ought also not to be lost sight of to wit: the assessment of capital gains: There appears to be clear inconsistency between the assessment of capital gains on the transfer of the factories on one hand and finding on accrual of income since the computation of capital gains was effected by treating the gross amount of consideration as the sale price. The Income-tax Officer thus by implication accepted the profits as belonging to the transferee and not to the Transferor-otherwise, the net amount paid alone ought to have been taken as the sale price. The High Court’s judgment therefore, does not only suffer from apparent inconsistency but on a totality of the situation is inherently contradictory. (Para 21)

Judgment

Banerjee, J.-These appeals by the grant of special leave are directed against a common order of the High Court in Income Tax Reference Nos. 87 and 88 of 1974 in terms of the order of Reference by the Income Tax Appellate Tribunal, Delhi Branch in respect of Assessment Years 1964-65 and 1965-66.

2. The Tribunal has referred the following two questions to the High Court for the above-mentioned assessment years 1964-65 and 1965-66.

For the assessment year 1964-65 the question reads as below:

“Whether on the facts and in the circumstances of the case, 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 1.10.1962 to 30.9.1963 was taxable in the hands of the applicant company?”

And for the assessment year 1965-66 the question was:

“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 1.10.1963 to 30.9.1964 was taxable in the hands of the applicant company?”

The High Court however, answered the questions in the affirmative for both the assessment years and hence these appeals.

3. At this juncture, it would be convenient to advert to the contextual facts briefly. The assessee Dalmia Cement Limited, the owner of two cement factories situated in Pakistan, by an agreement in writing dated 24th July, 1962 agreed to sell and transfer to one Maneckji, its properties and assets in Pakistan represented in the two cement factories.

4. The facts depict further that subsequent to the agreement, the parties did enter into a supplemental agreement on 2nd November, 1962. We would refer to both the agreements presently but before so doing, to conclude the factual aspects be it noted that the assessee in its return of income for the assessment year 1964-65 on 30th June, 1964 recorded the total income as Rs. 24,28,675/- but subsequently on a revised return, filed on 20th November, 1968, the total income shown was reduced to Rs. 1,40,852/-. Similarly for the year 1965-66, the return filed on 30th June, 1965 recorded the total income of Rs. 24,58,314/- but the revised return depicted a loss of Rs. 2,45,786/-. The original return however did not include profits from the working of the two Pakistan factories but only the interest income for the two year period from 1.10.1962 to 30.9.1964 which however was deleted in the revised return on the ground of non-receipt of the same.

5. The Income Tax Officer did however reject the contention that the profit from the two factories belong to Mr. Maneckji or his nominee with effect from 1.10.1962 and the Income-tax Officer’s assessment included the profits of the two companies in the total income of the assessee company for both the years. On an appeal to the Appellate Assistant Commissioner the order of the Income Tax Officer stood confirmed for both the years. Similar is the order of the Tribunal in the appeal by the assessee by recording a finding that profits arisen after 30.9.1962 and before 30.9.1964 were taxable in the hands of the assessee company. Subsequently the matter came up before the High Court for consideration of the above noted two questions and the High Court as noticed above answered the same in the affirmative.

6. It would be convenient at this juncture however to advert to the terms of the agreement dated 24th July, 1962 which inter alia contained the following:

“...........and whereas, the company has agreed to sell and transfer to Mr. Maneckji all its properties and assets in Pakistan pertaining to the said business mentioned briefly in the preceding paragraph and set out in detail hereinafter for the consideration and upon the terms and conditions hereinafter appearing......”

“.....The consideration for the said sale shall be ascertained in the following manner and the total sum thereby ascertained (less the deduction of Rs

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1999 Supreme(SC) 514

Cases Referred (2)