Judgement

S.K. DAS J. - This is an appeal on a certificate granted by the High Court of Judicature at Bombay under sub-s. (2) of S. 66A, Income- tax Act (hereinafter referred to as the Act.). The appellant is the Commissioner of Income-Tax, Bombay, and the respondent is the Provident Investment Co. Ltd., Bombay, hereinafter referred to as the assessee company.

2. The short question which 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 S. 12-B of the Act. The question which was referred to the High Court under S. 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 S. 12.B, 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 SC.

3. 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 Dhhaarasi- Copany, and Sir Shapurji Broacha Mills Ltd., briefly referred to as the Shapurji Broacha Company.

The assessee company held all the conversion shares of the Dharamsi Company and a substantial majority of the conversion shares of the Shapurji Broacha Company. The Dalmia Investment Company Limited, which will hereinafter be briefly referred to as the Dalmia Company, wrote two letters to the assessee company on 14th September 1946. In these two letters, the Dalmia Company offered to purchase 28,328 conversion shares of the Dharamsi Company at Rs.500 per share together with the managing agency, and also 75,212 conversion shares of the Shapurji Broacha Company, together with the managing agency.

We are not concerned with the other details mentioned in the two letters, except this that the Dalmia Company made it clear that it would purchase both the mills or neither and a time limit till 23rd September 1946, 3 P.M. was imposed during which the offer would remain open. This time limit was, however, extended later up to 30th September 1946. The letter further stated:

"On your accepting the offer, we will pay to you Rs. 20 lakhs in the case of the Dharamsi Company, Rs. 30 lakhs in the case of the Shapurji Broacha Company as and by way of earnest money. You shall have to arrange to get the transfer of the managing agency sanctioned by the general body of the shareholders within a period of 40 days from the date of acceptance. As soon as the transfer is sanctioned, we pill pay the balance of the purchase price."

4. On 26th September 1946, there was a meeting of the Board of Directors of the assessee company. At that meeting, the Board considered the offers made by the Dalmia Company and resolved to accept the offers. The Board further stated in its minutes that out of the total amount received from the sale of the shares, a sum of Rs.1 crore should be paid to the assessee company as compensation for the loss of the managing agency of the two mills.

On 30th September 1946, the assessee company wrote to the Dalmia Company accepting the offers made, subject to a condition which is not material for our purpose. On the same date, the Dalmia Company received the acceptance of the offers made by it and sent two drafts, one for Rs. 20 lakhs and the other for Rs. 30 lakhs. On 7th October 1946, the Dalmia Company wrote a very important letter to the assessee company. This letter said inter alia:

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 modificat