1957 (5) TMI 4 - SC - Income Tax

Whether the assessee company made a capital gain amounting to ₹ 81,81,900 within the meaning of section 12B of the Indian Income-tax Act ? Held that - The answer was correctly given by the High Court of Bombay. The transaction in its true legal character was a relinquishment of the managing agency and was neither a sale nor a transfer thereof. Therefore, the High Court correctly answered the question in the negative. Appeal dismissed.

Issues Involved:
1. Whether the transaction entered into by the assessee company in 1946 resulted in capital gains within the meaning of section 12B of the Indian Income-tax Act.
2. Whether the High Court correctly answered the question regarding the nature of the transaction.

Issue-wise Detailed Analysis:

1. Capital Gains under Section 12B of the Act:
The primary issue was whether the transaction entered into by the assessee company in 1946 resulted in capital gains within the meaning of section 12B of the Indian Income-tax Act. The High Court had previously answered this question in the negative, which led to the appeal to the Supreme Court. The relevant facts include the assessee company being a private limited company holding managing agencies and shares in two mills, which were sold to the Dalmia Company. The Income-tax Officer computed the capital gain at Rs. 81,81,900 and asked the assessee company to pay tax on it. The Appellate Assistant Commissioner held that the profits or gains arising from the sale were capital gains within the meaning of section 12B. However, the Income-tax Appellate Tribunal concluded that there was no sale of the managing agency but rather a transfer, which still constituted a transfer under section 12B. The High Court, however, ruled that there was neither a sale nor a transfer of the managing agency within the meaning of section 12B.

2. Correctness of the High Court's Answer:
The Supreme Court had to determine if the High Court correctly answered the question regarding the nature of the transaction. The Court noted that two conditions must be fulfilled for the transaction to fall under section 12B: (1) the profits or gains must arise from the sale, exchange, or transfer of a capital asset, and (2) the sale, exchange, or transfer must be effected after 31st March 1946. The Court agreed that the transaction was effected after this date and that the managing agency was a capital asset. However, the crux of the matter was whether the sum of Rs. 1 crore arose from the sale or transfer of the managing agency. The High Court had held that the transaction was neither a sale nor a transfer but a relinquishment of the managing agency. The Supreme Court concurred with this view, emphasizing that the original contract was modified by a letter dated 7th October 1946, which substituted a new contract of relinquishment rather than a sale.

The learned Solicitor-General's arguments were also addressed. His first argument that there was a concluded contract of sale was rejected by the Court, which held that the letters exchanged merely constituted an agreement to sell and purchase, not an actual sale. The second argument that there was one indivisible consideration for the whole transaction was also dismissed. The Court noted that the entire assessment proceedings were based on the understanding that Rs. 1 crore was the consideration for the managing agencies, and the dispute was about whether this was a sale, transfer, or relinquishment. The Court concluded that it was a relinquishment.

Conclusion:
The Supreme Court upheld the High Court's decision, stating that the transaction was a relinquishment of the managing agency and not a sale or transfer. Therefore, it did not result in capital gains within the meaning of section 12B of the Indian Income-tax Act. The appeal was dismissed with costs.

← Previous Next →