SIKRI, J. - (1.) THE following Judgment of the court was delivered by :
(2.) THIS appeal by special leave is directed against the judgment of the High court of Andhra Pradesh answering the question referred to it under s. 66 of the Income Tax Act, 1922, against the appellant. The question referred to was 'whether on the facts and in the circumstances of the case a sum of Rs. 79,494.00 is assessable ascapital gains in the assessment year 1948-49.' The facts relevant to the question are as follows. The assessment year in question is 1948-49 and the accounting year is the official year 1947-48. The appellant, hereinafter referred to as the assessee, Alapati Venkataramaiah, was the proprietor of Mohan Tile Works, engaged in the manufacture of tiles and bricks and owned the factory buildings, plant and machinery. The assessee entered into an agreement dated 17/03/1948. 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. 2,00,000.00. 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 the 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 5/07/1947, 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 Vendor or in succession thereto). Secondly all the immovable properties specified in Schedule hereto; Thirdly all the plant, machinery, offices furniture, licences, livestocks, carts, implements and utensils to which the vendor is entitled in connection with the said business specified in the Second Schedule hereto; Fourthly all materials and semi-processed materials in stock described in the third schedule. 2. The consideration for the said sale shall be the sum of Rs. 2,00,000.00 which shall be paid and satisfied by payment in cash soon after the capital Rs. 3,00,000.00 has been raised or in any other manner agreed upon between the Directors of the Company and Vendor. 6. The purchase shall be completed by Seventeenth day of March, 1948 at Tenali when possession of the premises shall as far as practicable be given to the company and' the consideration aforesaid shall be paid and satisfied subject to the provisions of the agreement and thereupon the Vendor and all other necessary parties, if any, shall at the expense of the company execute and do all the assurances and things for vesting the said premises in the company and giving to it the full benefit of this Agreement as shall be reasonably required. 7. If from any cause whatever other than the wilful default of the vendor the purchase shah not be completed by the said 17th day of March 1948 the company shall pay interest on the said sum of Rs. 2,00,000.00 (Two lakhs) cash at the rate of ......... p.c. per annum. 8. Upon the adoption of this agreement by the company in such manners as to render the same binding on the company the said Manthena shall be discharged from all liability in respect thereof. 9. Unless before the day the company shall have become entitled to commence business either of the parties hereto may by notice in writing to the other, determine this agreement and after adopting this agreement the company shall stand in the place of the said vendor for the purpose of this clause. 10. If this agreement shall not be adopted by the company in the manner aforesaid before and day next, either of the parties may by notice in writing to the other determine the same.' The assessee was appointed managing agents of the company on 15/07/1947, and on 11/03/1948, he wrote a letter on behalf of the company to the Director of Industries 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 20/03/1948, the assessee was credited with the price of Rs.2,00,000.00 in the books of the company. On 22/11/1948, sale deed in respect of land was executed in favour of the company. On 9/12/1948, the company mortgaged the land with all its buildings and structures thereon and the machinery. plant and other property for Rs. 1,00,000.00 to the State of Madras. On 16/03/1949. the Board of Directors, by resolution No. 22 approved the agreement dated 17/03/1948, and on 10/04/1949, the agreement was approved at the annual general meeting of the company. In the first annual report dated 22/03/1949, it was stated as follows: 'The company was registered on 5/07/1947. The Memorandum of Association and Articles alongwith 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 agreement, with Sri Alapati Venkatramiah, Proprietor of Mobart Tile Works on 17/3/1948.' It appears that the assessee had returned this income as capital gains in his return and the Income Tax Officer, without any discussion, held that the assessee realised an excess of Rs.79,494.00 over and above the original cost and this was capital gains assessable under s. 12B of the Act. The assessee appealed to the Appellate Assistant Commissioner and in the grounds of appeal stated that 'the Income Tax Officer erred in determining the excess over the original cost in respect of the building at Rs. 79,494.00 as attracting tax to capital gains. As a matter of fact the building was sold at Rs. 1,69,950.00, but a sum of one lakh alone was received and' the balance is yet to be received. The transaction therefore cannot be said to be complete nor can it be said that the profits had been realised. Therefore, the sum of Rs. 79,494.00 as attracting capital gains is absolutely justified.'
(3.) THE Appellate Assistant Commissioner observed that the fact that a part of the sale amount had not been realised was irrelevant. THEn he said that 'at one stage it was contended that there was no legal transfer of the buildings. machinery, etc. to the limited company. THEre is no substance in this contention also. THE limited company is said to have obtained a loan of more than a lakh of rupees from the Madras government on the basis that they were the owners of the buildings. machinery, etc. which they had purchased from the appellant. THE statement therefore that there was no legal transfer cannot be true. I am satisfied that the sum of Rs. 79,494.00 as returned by the appellant under the head capital gains was rightly included in the assessment.' The assessee then appealed to the Appellate tribunal. The tribunal, by its order dated' 24/11/1955, held that 'there was in fact no sale, much less legal transfer of lands, buildings, machinery etc., to the limited liability company which was promoted to take over the tiles business. There was only an agreement to sell . In fact, the assessee did not receive a single pie during the year of account or even during the period when the capital gains was in force. He received in all Rs. 1 lakh in several instalments beginning from 25/3/1949, which is beyond the year of account. The point that the assessee himself returned the sum of Rs. 79,494.00 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 s. 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 para 4 in n its order dated 24/11/1955, and substituted its order dated 8/03/1957. The tribunal held that in pursuance of cl. 6 of the agreement dated 17/03/1948, the possession of the entire factory was immediately handed over to Mohan Industries and that the sale deed dated 22/11/1948 was executed for consideration of Rs. 4,500.00 only and refers only to the land on which the factory is situated, and did not refer to the factory, machinery and plant, etc. which had been taken possession of by Mohan Industries on 17/03/1948. Further it held that the entries in the account books of Mohan Industries under date 20/03/1948, showed that a sum of Rs. 2,00,000.00 was credited in favour of the assessee and the asset accounts were debited as follows: JUDGEMENT_115_AIR(SC)_1966Html1.htm Further it noticed that the assessee also made corresponding entries in the books on 20/03/1948, by debiting Rs. 2,00,000.00 to Mohan Industries and crediting the various accounts in the same way. The tribunal also relied on the letter dated 11/03/1948, from Mohan Industries to the Director of Industries, and the first annual report dated 22/03/1949. As stated above, the tribunal referred the question set out above. ;