Calcutta High Court
Commissioner Of Income-Tax vs Rungamatee Tea And Industries Ltd. on 8 July, 1991
Equivalent citations: [1993]199ITR282(CAL)
JUDGMENT Ajit K. Sengupta, J.
1. In this reference under Section 256(1) of the Income tax Act, 1961, for the assessment year 1977-78, the following questions of law have been referred to this court :
" 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the income from the estate managed and run by the assessee-company with effect from April 1, 1973, by virtue of an agreement for sale entered into on November 20, 1973, but executed on August 12, 1976, for the period from January 1, 1976, to August 11, 1976, was not liable to be taxed in the hands of the assessee-company for the assessment year 1977-78 ?
2. Whether, on the facts and in the circumstances of the case, on a correct interpretation of Section 60 of the Income-tax Act, 1961, the Tribunal was right in applying the provisions of Section 60 of the said Act to the facts of the instant case?"
2. The facts relating to this reference are that the assessee entered into an agreement with Messrs. Dooars Tea Co. Ltd. for purchase of Ghatia Tea Estate as a going concern from April 1, 1973. Dooars Tea Co. Ltd. was a sterling company carrying on business in India through its agents, Messrs. Gillander Arbuthnot and Co. Ltd. The sale and transfer of the said tea estate required approval of the Reserve Bank of India and also the authorities in the United Kingdom and, therefore, the conveyance deed could not be executed immediately. Clause 6A of the agreement for purchase contemplated that pending completion of the sale, the purchaser should, at its own cost, carry on and maintain and have the management of the tea estate in consultation with and under the supervision of Dooars Tea Co. Ltd., who would continue to be the owners thereof. Clause 24 of the said agreement also provided that, in the event the sale was not effected or the agreement was rescinded, the purchaser would be entitled to the expenses incurred in running the tea estate and the vendor-company would be entitled to the sale proceeds of the tea. Possession and management had been handed over to the assessee from the date of the agreement. The conveyance deed was executed on August 12, 1976. The assessee maintained a separate account for the period which was not returned as its income. The assessee, however, returned the income relating to the period subsequent to August 12, 1976.
3. The Income-tax Officer, while making the assessment, did not include the income from the tea estate from January 1, 1976, to August 11, 1976. But the Commissioner of Income-tax (Appeals), while deciding ex parte the appeal preferred by the assessee on other points, set aside the assessment and directed the Income-tax Officer to assess the surplus over the expenditure in respect of Messrs. Dooars Tea Co. Ltd. for the whole year.
4. The assessee took up the matter before the Appellate Tribunal and contended that, up to 1975-76, the assessee was not the owner of the tea estate and, as per the agreement for purchase, the vendor continued to remain as owner of the tea estate till the transfer was executed by a regular conveyance deed from August 12, 1976. The assessee referred to the requirement of Section 60 of the Income-tax Act and claimed that the income prior to August 12, 1976, should not be included in the total income, relying on the decision in the case of CIT v. Thobhandas Jivanlal Gajjar [1977] 109 ITR 296 (Guj). Various arguments were made before the Appellate Tribunal. The Appellate Tribunal heard both the sides and considered the rival contentions and the facts of the case. It considered the deed of agreement dated November 20, 1973. It noted that the ownership of the tea estate was not transferred in favour of the assessee, which continued to remain with the vendor-company prior to the date of execution of the sale deed on August 12, 1976. The Appellate Tribunal relied on the decision of the Hon'ble High Court of Calcutta in the case of Ganga Properties Ltd. [19701 77 ITR 637. It also considered the decision made in the Gujarat case, CIT v. Thobhandas Jivanlal Gajjar [1977] 109 ITR 296, mentioned above. The Appellate Tribunal also considered the requirements of Section 60 and noted that the action of the Income-tax Officer in not including similar income of Messrs. Dooars Tea Co. Ltd. in the assessee's total income up to the assessment year 1976-77 had become final. It also pointed out that, for the assessment year 1974-75, the Commissioner of Income-tax had not interfered with such action of the Income-tax Officer under Section 263. In the circumstances, the appeal by the assessee was allowed.
5. At the hearing before us, Dr. Pal, appearing for the assessee has drawn our attention to Clause 6A of the agreement and has submitted that the intention was that the vendor would be liable to be assessed on the income arising from the business until the conveyance was executed. He has also submitted that Section 60 of the Act provides that all income arising to any person by virtue of a transfer whether revocable or not and whether effected before or after the commencement of the Act shall, where there is no transfer of the assets from which the income arises, be chargeable to income-tax as the income of the assessee-transferor and shall be included in his total income and since no assets have been transferred in this case, the question of the transferee being assessed to tax does not arise. He has also submitted that, in this case, the income of the relevant period has already been assessed in the hands of the transferor and accordingly for the same period, the transferee cannot be assessed to tax.
6. We are, however, unable to accept this contention. An identical question came up for consideration before a Division Bench of this court in the case of CIT v. Jhanzie Tea Association [1989] 179 ITR 295. In that case, the assessee, a non-resident company, owned a number of tea estates. The assessee sold four of its tea estates under different agreements and all these agreements contained more or less identical terms and conditions. The assessee had agreed to sell one tea estate with effect from January 1, 1969, and the other three 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 which ended on March 31, 1970, the delay being due to the delay in obtaining permission from the Reserve Bank of India. 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. It was provided that from January 1, 1969, in respect of one tea estate and from January 1, 1970, in respect of the other three tea estates, all the expenses connected with the tea estates would be borne by the purchasers 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 the assessment year 1970-71, the income from the four tea estates was assessable in the hands of the assessee. The Appellate Assistant Commissioner and the Tribunal, however, held that the income was diverted by overriding title to the purchasers of the tea estates.
7. Therefore, on behalf of the Revenue, it had been contended that though there was an agreement for sale, such agreement could come into effect only from the date on which the deeds of sale were executed and the immovable properties could not be transferred by any other process. During the relevant period of account, the ownership of the four tea estates remained with the assessee-company and, therefore, the assessee-company will have to pay tax on the income accruing or arising out of any business activity in the tea estates.
8. The court repelled that contention by the following observation (at page 299) :
"This argument is clearly fallacious. The income arising out of agricultural operations in the tea estates would not come within the ambit of the provisions of the Income-tax Act, 1961, because that would be income from agriculture. The manufacturing process after the tea is grown gives rise to business income. The sale proceeds of such manufactured tea is assessed to tax after making allowances for the agricultural activities. Rule 8 of the Income-tax Rules provides the procedure for assessment of the composite income and apportionment of the income between two heads 'agriculture' and 'business'. The income arising out of manufacturing activity is not an income arising out of ownership of land. Any person may use somebody else's land or building for the purpose of earning income through manufacturing process and the income arising out of such activity will belong to the person who carries on the manufacturing activity and not to the person who owns such land."
9. The court thereafter proceeded to consider the effect of the agreement in the following words (at page 300) :
"The next question is about the effect of the agreements. There is no allegation that the agreements have not been acted upon. The agreements clearly provide that the terms and conditions of the agreement will come into effect from a date anterior to the date of execution of the deeds of conveyance. It has been categorically provided in the agreement that all rents, taxes, cesses, income-tax, super profits tax, surtax, sales tax, agricultural income-tax, Assam carnage tax, road tax and all other taxes and outgoings, etc., regarding the tea estates, agreed to be sold, in respect of the period prior to the first day of January, 1969, and also expenses for garden management and upkeep actually incurred prior to the said date and/or expenses for cold weather work for 1969 season incurred prior to the said date would be paid or provided by the vendor and all the expenses subsequent to the period ending on December 31, 1969, on account of rents, taxes, cesses, etc., would be borne by the purchasers. Under Clause 9 of the agreement, it has been agreed that the purchaser would bear the expenses incurred by the vendor as from January 1, 1969, on the outlay in respect of the said tea estate for the period subsequent to January 1, 1969. Clause 14 of the agreement contains Sub-clauses (a) and (b). Sub-clause (a) provided that the vendor would have absolute control over the operational function of the tea estate and the purchaser could offer suggestions, which suggestions the vendor would consider but would not be under any obligation to accept such suggestions. All expenses incurred by the vendor for the period from January 1, 1969, including the salaries of the mananger. the assistant managers, other employees and wages of labourers, including all claims of the employees and labourers on account of bonus, gratuity and pensions as also claims under the Workmen's Compensation Act, etc., from January 1, 1969, would be borne by the purchaser. The vendor would also be paid Rs. 1,000 per month towards remuneration from January 1, 1969, till the date of delivery of possession. All other expenses by the vendor in connection with the work in the tea garden including payment of Government revenue, cess, rents, rates and taxes and other impositions and outgoings or purchase of stores, garden appliances, tea seeds, manure, fuel and other items necessary for the working of the tea garden would also be on the account of the purchaser. Sub-clause (b) of Clause 14 provided that all tea manufactured from January 1, 1969, and the proceeds of sale of such tea and all income arising from the land and all the profits of the said tea estate as from January 1, 1969, subject to the other provisions of the agreement, would belong to the purchaser and the vendor would be entitled to retain out of the sale proceeds any sum that might be payable by the purchaser to the vendor under the agreement."
10. We may now proceed to set out the relevant clauses of the agreement in this case.
11. One of the terms of the said agreement is that the sale shall be effective as a going concern from April 1, 1973, and that the management of the said Ghatia Tea Estate shall be handed over by the vendor to the purchaser after the execution of the agreement on payment by the purchaser to the vendor of fifty per cent. of the purchase price and the cost of running the said Ghatia Tea Estate from April 1, 1973, to the date of handing over the management of the said Ghatia Tea Estate.
12. Clause 6A relied on by Dr. Pal, reads as follows :
"Simultaneously with the execution of these presents and against payment of a further sum of Rs. 6,70,000 (rupees six lakhs seventy thousand) aggregating to the sum of Rs. 8,87,500 (rupees eight lakhs eighty-seven thousand and five hundred) being fifty per cent. of the said purchase price and pending completion of the sale by execution of the conveyance the purchaser shall at its own cost carry on and maintain and have the management of the said tea estate from such date as may be mutually agreed upon by the vendor and the purchaser and the said tea estate shall be run and managed in the same way as it is being run prior to the first day of April, one thousand nine hundred and seventy-three till completion of the conveyance in consultation with and under the supervision of the vendor and the vendor shall continue to be the owner and if for any reason the purchase is not completed the purchaser shall account for and indemnify the vendor for any loss or damage that may be caused to the said tea estate and/or suffered by the vendor on account of the running and management of the said tea estate by the purchaser as aforesaid. It is hereby agreed and declared by and between the parties hereto that no right, title or interest is being created on the said tea estate in favour of the purchaser by the fact of the purchaser being allowed to maintain, manage and run the said tea estate till completion of the sale in terms of this clause and the purchaser is estopped from claiming any such right, title or interest."
13. Clause 6B provides as follows :
"The purchaser shall be entitled to the sale proceeds of the tea of the said tea estate during the period the said tea estate would be managed by the purchaser PROVIDED ALWAYS THAT all expenses incurred by the vendor for running and management of the said tea estate on and from the first day of April one thousand nine hundred and seventy-three till the date of taking over of the management of the said tea estate by the purchaser, whether the said expenses were incurred by the vendor before or after the first day of April one thousand nine hundred and seventy-three and/or the date of taking over of the management of the said tea estate in terms of Clause 6A hereof, shall be paid by the purchaser to the vendor before taking over of the management of the said tea estate by the purchaser within one month from the date of execution of these presents."
14. Clause 12, inter alia, provides as follows :
" (a) The purchaser shall bear all sales tax or any tax payable or assessed, if any, on the sale of stores and of the movable assets comprised in the said tea estate to the purchaser and shall keep the vendor indemnified from all claims for such taxes.
(b) The purchaser shall take over the liability of the vendor in relation to income-tax, agricultural income-tax, excess profits tax, business profits tax, super profits tax and other tax on account of all profits earned after the first day of April one thousand nine hundred and seventy-three and so that--
As between the vendor and the purchaser, the purchaser will be solely liable for the payment of all income-tax, agricultural income-tax, excess profits tax, business profits tax, super profits tax and all other taxes imposed on account of all profits earned after the said first day of April, one thousand nine hundred and seventy-three or in respect of the occupation of the said tea estate after the first day of April, one thousand nine hundred and seventy-three.
If, for any reason whatsoever, the vendor is compelled to and does pay any tax in respect of all or any of the foregoing tax liabilities, then in every such case, the purchaser shall forthwith, on demand, reimburse the vendor to the extent of such payment and all lawful costs and charges incurred by the vendor in or about the same, profits in this context mean all the taxable profits accruing after the first day of April, one thousand nine hundred and seventy-three and the purchaser shall not have the benefit of any reduction in the assessment of these profits in respect of loss or depreciation brought forward from earlier years."
15. Clause 22 provides as follows :
" The sale of the tea from the said tea estate by the purchaser while the tea estate is under the management of the purchaser in terms thereof pending completion of the conveyance shall be appropriated in terms thereof. Similarly, the stores required by the purchaser for running of the said tea estate during the said period shall be purchased in its own name and the payment for such purchase shall be made in terms thereof. The purchaser shall be responsible and liable in all respects for sale of tea and purchase of stores sale tax angle (sic)."
16. In our view, on a consideration of the aforesaid clauses, it is clear that the principles laid down in the aforesaid decision would squarely apply to the facts of this case. Section 60 of the Act cannot have any application to the facts and circumstances of this case inasmuch as the income is derived not because of the transfer of assets but because the management and possession and the right to carry on the business operations had been given to the assessee even before the conveyance was executed. The profit arises out of sale of tea manufactured and not from the ownership of the tea garden. The agreement has been acted upon and the agreement clearly provides that the agreement would come into effect from April 1, 1975, and, accordingly, provision has been made in the agreement itself as to what would happen during the period before the sale is completed by the execution of the conveyance. In our view, the transfer of title to the property in this case will not have any relevance or bearing on the question of assessment of the income in the hands of the assessee who, under the agreement itself, obtained the possession and the right to run the tea estate and also to earn profit therefrom. Reliance on the decision of a Division Bench of this court in the case of Ganga Properties Ltd. [1970] 77 ITR 657 is misplaced.
17. For the reasons aforesaid, we are unable to accept the contention of the assessee in this case. We, therefore, answer both the questions in this reference in the negative and in favour of the Revenue.
18. There will be no order as to costs.
19. It is stated by Dr. Pal that the same income has already been assessed in .the hands of the transferor. In our view, the transferor will be entitled to the refund of the tax if the same income has been taxed in the hands of the transferor as well as in the hands of the transferee and if the tax has been realised from the transferor as well. It will be open to the transferor to take appropriate steps in accordance with law.
Shyamal Kumar Sen, J.
20. I agree.