Andhra HC (Pre-Telangana)
Commissioner Of Income-Tax vs J. Narayana Murthy on 4 October, 1996
Equivalent citations: [1997]228ITR99(AP)
Author: Syed Shah Mohammed Quadri
Bench: R. Bayapu Reddy, S.S. Mohammed Quadri
JUDGMENT
Syed Shah Mohammed Quadri J.
1. In this reference under section 256(1) of the Income-tax Act, 1961 (for short "the Act"), at the instance of the Revenue, the following questions are referred to this court for opinion :
"1. Whether, on the facts and in the circumstances of the case and in law, the Tribunal is correct in holding that the official receiver is not a representative assessee under the provisions of section 160(1)(iii) in respect of the capital gains derived on the sale of the property of the insolvent ?
2. Whether, on the facts and in the circumstances of the case and in law, the Tribunal is justified in holding that sale of the insolvent's property effected by the official receiver results in no capital gain assessable to tax ?
3. Whether, on the facts and in the circumstances of the case and in law, the Appellate Tribunal is justified in holding that there is no cost in respect of property sold by the official receiver ?
4. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that capital gains arising on the sale of agricultural lands falling within the definition of capital asset under section 2(14)(iii) are not chargeable to income-tax under section 45 of the Income-tax Act, 1961 ?"
2. The respondent, Sri J. Narayana Murthy (hereinafter referred to as "the assessee"), was adjudged as an insolvent in I.P. No. 2 of 1974 by the order of the subordinate judge at Vijayawada dated November 30, 1974. Consequently, all the properties owned by the insolvent, including an extent of ac. 0-94 cents situate in Gummadala village, Krishna district vested in the official receiver, Krishna District, at Machilipatnam. While administering the properties of the assessee, the official receiver sold the said extent of land for a sum of Rs. 3,50,000 and executed sale deeds on December 16, 1980. On the ground that the assessee had acquired that land for a sum of Rs. 25,000 on December 10, 1962, and thus capital gains accrued to him, notice under section 139(2) of the Act was issued to the official receiver calling upon him to file the returns for the assessment year 1981-82. In response to the said notice, the official receiver filed a nil return on December 4, 1982. Before the income-tax Officer, the official receiver took the plea that no capital gains tax could be levied on the sale of the land as the property belonged to the insolvent who ceased to be the owner of the land on the passing of the adjudication order and that the creditors had stepped into the shoes of the insolvent and that as the trustee of the creditors, the official receiver was under obligation to sell the property and distribute the sale proceeds among the creditors. These submissions, however, were not accepted by the Income-tax Officer who assessed the gains resulting from the sale of the land to capital gains tax by assessment order dated July 23, 1984. The assessee filed an appeal before the Commissioner of Income-lax (Appeals), Visakhapatnam, against the said order of assessment. By order dated November 27, 1984, the Commissioner upheld the order of assessment and, inter alia, held that the said land was situate within the urban agglomeration and, therefore, capital gains arising from its sale could not be exempted as arising from the sale of agricultural land. The official receiver filed further appeal before the Income-tax Appellate Tribunal. The Appellate Tribunal accepted the contentions of the official receiver and allowed the appeal, inter alia, holding that section 160(1)(iii) of the Act has no application to the official receiver; by the sale of the insolvent's property, no gain could be said to have arisen in the hands of the official receiver and as the properties of the insolvent had vested in him, he sold the same for the benefit of the creditors and distributed the proceeds among the creditors. It is from that order, the above said questions arose.
3. Before us, nobody represented the official receiver. We requested Mr. S. Ravi, advocate, to assist the court in the matter.
4. Mr. S.R. Ashok, learned standing counsel for income-tax, contends that the property of the insolvent had vested in the official receiver for a limited purpose and that the divestment of ownership was not total, therefore, the insolvent remained as the owner of the property and on the sale of the property of the insolvent, the capital gains are deemed to have accrued to him. On that premise, he contends that the official receiver has rightly been assessed in his representative capacity under section 160(1)(iii) of the Act. Mr. Ashok developed his argument stating that the position of the official receiver was that of a general power of attorney and thus he was acting for and on behalf of the insolvent. He seeks to draw support from the provisions of sections 66 and 67 of the Provincial Insolvency Act, 1920, which provide for management of the property by the insolvent and granting of allowance to him and also his right to receive the surplus remaining after payment in full of his creditors with interest.
5. Mr. S. Ravi submits that section 160 of the Act deals with representative assessee and the case of an insolvent does not fall under any one of the clauses of sub-section (1) of section 160, as such, the official receiver cannot be treated as a representative assessee of the insolvent. His contention is that from the date of vesting of the property in the official receiver till an order is passed by the court discharging him as insolvent, he has no right or interest in the property and that for all practical purposes, the official receiver alone will be the owner of the property.
6. We shall examine these contentions of learned counsel. It would be necessary to refer to the relevant provisions of the Provincial Insolvency Act here. Section 27 says that if the court does not dismiss the petition, it shall make an order of adjudication and shall specify in such order the period within which the debtor shall apply for his discharge. Section 28 which is relevant for our purpose, reads as follows :
"28. Effect of an order of adjudication. - (1) On the making of an order of adjudication, the insolvent shall aid to the utmost of his power in the realisation of his property and the distribution of the proceeds among his creditors.
(2) On the making of an order of adjudication, the whole of the property of the insolvent shah vest in the court or in a receiver as hereinafter provided, and shall become divisible among the creditors, and thereafter, except as provided by this Act, no creditor to whom the insolvent is indebted in respect of any debt provable under this Act shall during the pendency of the insolvency proceedings have any remedy against the property of the insolvent in respect of the debt, or commence any suit or other legal proceeding except with the leave of the court and on such terms as the court may impose.
(3) For the purposes of sub-section (2), all goods being at the date of the presentation of the petition on which the order is made, in the possession, order or disposition of the insolvent in his trade or business, by the consent and permission of the true owner, under such circumstances that he is the reputed owner thereof shall be deemed to be the property of the insolvent.
(4) All property which is acquired by or devolves on the insolvent after the date of an order of adjudication and before his discharge shall forthwith vest in the court or receiver, and the provisions of sub-section (2) shall apply in respect thereof.
(5) The property of the insolvent for the purposes of this section shall not include any property (not being books of account) which is exempted by the Code of Civil Procedure, 1908, or by any other enactment for the time being in force from liability to attachment and sale in execution of a decree.
(6) Nothing in this section shall affect the power of any secured creditor to realise or otherwise deal with his security, in the same manner as he would have been entitled to realise or deal with it if this section had not been passed.
(7) An order of adjudication shall relate back to, and take effect from, the date of the presentation of the petition on which it is made."
7. Sub-section (1) of section 28 casts an obligation on the insolvent to aid to the utmost of his power in the realisation of his property and the distribution of the proceeds among his creditors. Sub-section (2) thereof directs that on the making of an order of adjudication, the whole of the property of the insolvent shall vest in the court or in a receiver and shall become divisible among the creditors. It also provides that no creditor, to whom the insolvent is indebted in respect of any debt provable under this Act, can have any remedy against the property of the insolvent in respect of the debt during the pendency of the insolvency proceedings. The debtor is also barred from commencing any suit or other legal proceedings against the property of the insolvent, except with the leave of the court and on such terms as the court may impose. Sub-section (3) enumerates the properties of the insolvent which shall be deemed to be the property of the insolvent for purposes of vesting in the court or the receiver. Sub-section (4) says that all property which is acquired by or devolves on the insolvent after the date of an order of adjudication and before his discharge shall vest in the court or receiver and the provisions of sub-section (2) shall apply in respect thereof. Sub-section (5) excludes such properties of the insolvent from the operation of section 28, which are exempted by the Code of Civil Procedure or by any other enactment for the time being in force from liability to attachment and sale in execution of a decree. Sub-section (6) deals with the rights of secured creditors. We are not concerned with this sub-section and, therefore, we do not wish to deal with it. It may be noted here that an order of adjudication shall relate back to, and take effect from, the date of the presentation of the petition and this is what is provided by sub-section (7). Section 56, inter alia, empowers the court to appoint a receiver for the property of the insolvent at the time of the order of adjudication and says that on such appointment the property shall vest in the receiver. Section 67 confers right on the insolvent to the surplus remaining after payment in full of his creditors with interest as provided by the Act and all the expenses of the proceedings taken thereunder.
8. From a combined reading of the provisions discussed above, it follows that on the passing of an order of adjudication and appointment of a receiver all the properties of the insolvent, except those which are exempted from attachment under the provisions of the Code of Civil Procedure or any other provision of law for the time being in force, vest in the receiver and that till the order of discharge is passed under section 41 he would not be entitled to the surplus, if any, remaining after payment in full of his creditors with interest and all the expenses of the proceedings taken thereunder. The official receiver alone will be dealing with the property of the insolvent which has vested in him under the provisions of the Provincial Insolvency Act.
9. We shall now refer to section 160 of the Income-tax Act, in so far as it is relevant for our purpose :
"160. (1) For the purposes of this Act, 'representative assessee' means -
(i) in respect of the income of a non-resident specified in sub-section (1) of section 9, the agent of the non-resident, including a person who is treated as an agent under section 163;
(ii) in respect of the income of a minor, lunatic or idiot, the guardian or manager who is entitled to receive or is in receipt of such income on behalf of such minor, lunatic or idiot;
(iii) in respect of income which the Court of Wards, the Administrator-General, the Official Trustee or any receiver or manager (including any person, whatever his designation, who in fact manages property on behalf of another) appointed by or under any order of a court, receives or is entitled to receive, on behalf or for the benefit of any person, such Court of Wards, Administrator-General, Official Trustee, receiver or manager;
(iv) in respect of income which a trustee appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise (including any wakf deed which is valid under the Mussalman Wakf Validating Act, 1913 (6 of 1913)), receives or is entitled receive on behalf, or for the benefit of any person, such trustee or trustees;
(v) in respect of income which a trustee appointed under an oral trust receives or is entitled to receive on behalf, or for the benefit, any person, such trustee or trustees."
10. The contention of the Revenue is that the receiver is a representative assessee of the insolvent in view of the provisions of clause (iii) of sub-section (1) of section 160. A careful reading of the said clause would show in respect of the income which the Court of Wards, the Administrator-General, the Official Trustee or any receiver or manager, whatever his designation may be, who having been appointed by or under any order court, in fact manages property on behalf of another, receives or is entitled to receive, on behalf or for the benefit of any person, such Court Wards, Administrator-General, Official Trustee, receiver or manager, will be a representative assessee. The question then arises as to on whose all does the official receiver, appointed in insolvency proceeding, receive the income or manage the property ? or more precisely does the official receiver receive the income or manage the property on behalf of the insolvent ?
11. Reliance is placed on the observations of a learned single judge in Balibhadradas v. Mirchilal [1918] 48 IC 236 by learned counsel for the Revenue in support of his contention that the official receiver receives the income and manages the properties vested in him on behalf of the insolvent. That is a case decided by a judicial Commissioner's Court of Nagpur. The observation relied upon is as follows (page 238) :
"Moreover, there is authority for the position that failing intervention by the court or receiver in which the insolvent's property has vested, the insolvent has the same power of acting in respect of after acquired property as he had before insolvency."
12. In our view, the above observation does not advance the case of the Revenue. We are unable to read that observation to mean that even after vesting of the property in the official receiver, the insolvent has any say in the property to assert his title or deal with the property in any way. The observation was made in regard to after acquired property which is the subject-matter of our discussion.
13. Reliance is also placed by learned standing counsel on a judgment of the Division Bench of the Madras High Court in Sriramulu Naidu v. Andalammal [1906] ILR 30 Mad 145. What is laid down in that case is that an undischarged insolvent has, in respect of after acquired property, movable and immovable, a right against all the world except the official assignee and he can sue to recover such property if the official assignee does not intervene. For the reasons already mentioned, this judgment also is of no assistance to the Revenue.
14. In Fruit and Vegetable Merchants Union v. Delhi Improvement Trust, , the Supreme Court was considering the provisions of the U.P. Town Improvement Act and the Rules made thereunder. In paragraph 19, the Supreme Court has explained the concept of vesting in the following words (page 353) :
"It would thus appear that the word 'vest' has not got a fixed connotation, meaning in all cases that the property is owned by the person or the authority in whom it vests. It may vest in title, or it may vest in possession, or it may vest in a limited sense, as indicated in the context in which it may have been used in a particular piece of legislation."
15. Having regard to the provisions of the Improvement Act, the Supreme Court has held that when the provisions speak of a certain building or street or square or other land vesting in a municipality or other local body or in a trust, it does not necessarily mean that ownership has passed to any of them. Referring to the provisions of section 56 of the Provincial Insolvency Act, the Supreme Court has observed as follows (page 353) :
"That the word 'vest' is a word of variable import is shown by provisions of Indian statutes also. For example, section 56 of the Provincial Insolvency Act (5 of 1920) empowers the court at the time of the making of the order of adjudication or thereafter to appoint a receiver for the property of the insolvent and further provides that 'such property shall thereupon vest in such receiver'. The property vests in the receiver for the purpose of administering the estate of the insolvent for the payment of his debts after realising his assets. The property of the insolvent vests in the receiver not for all purposes but only for the purpose of the Insolvency Act and the receiver has no interest of his own in the property."
16. From the above observations of the Supreme Court, it is clear that under section 56 of the Provincial Insolvency Act, the property vests in the receiver for the purpose of administering the estate of the insolvent, for the payment of his debts after realising his assets. When the Supreme Court has observed that the property of the insolvent vests in the receiver not for all purposes but only for the purpose of the Insolvency Act and the receiver has no interest of his own in the property, it only means that the property which vests in the official receiver cannot be dealt with by the receiver for his personal use; he cannot deal with the property as absolute owner for the purpose of discharging his debts or for giving away the same as gift and he cannot use the same for extraneous purposes as one would deal with his personal property. The above observation of the Supreme Court does not mean that while the property of the insolvent remains vested in the official receiver, the insolvent would also have an interest in the property which he can claim during the period the adjudication order remains in force, i.e., before an order of discharge is passed.
17. In Kripa Nath v. Ganga Prasad, , a Division Bench of the Allahabad High Court, on an interpretation of section 28(2) of the Provincial Insolvency Act took the following view (headnote) :
"Vesting of a property in the court or the receiver not only gives the court or the receiver the right to take possession of the property and deal with it in a certain manner but amounts to a legal transfer of the right, title and interest of the insolvent in the court or the receiver as the case may be and as a result of the vesting, the property for the purposes of the Insolvency Court becomes the property of the court or the receiver and ceases to be the property of the insolvent. After the order of adjudication either the court or the receiver, as the case may be, becomes owner and the insolvent is divested of his rights with respect to the property under adjudication."
18. In Raghunath Keshava Kharkar v. Ganesh, , the question before the Supreme Court was whether an insolvent, after obtaining absolute discharge, can maintain a suit for recovery of property. In that case, the trial court held that the suit was maintainable, but the High Court reversed that order and opined that the suit was not maintainable. In paragraph 27, Justice K.N. Wanchoo, speaking for the Division Bench of the Supreme Court, observed (page 242) :
"An insolvent is entitled to get back any undisposed of property as surplus when an absolute order of discharge is made in his favour, subject always to the condition that if any of the debts provable under the Act have not been discharged before the order of discharge, the property would remain liable to discharge those debts and also meet the expenses of all proceedings taken under the Act till they are fully met."
In Arjun Das Kundu v. Marchia Telini, AIR 1936 Cal 434, a learned single judge of the Calcutta High Court, while dealing with the question of rights of the insolvent, has laid down thus (headnote) :
"An insolvent has no title in the properties in which he had beneficial rights at the date of the presentation of the application or which was acquired subsequently by him at any time before his absolute discharge. All such properties vest in the court or in the receiver appointed by the court."
19. We are in agreement with the above observations of the learned single judge of the Calcutta High Court.
20. In Mg Po Yeik v. Power, AIR 1934 Rangoon 112, a Division Bench of the Rangoon High Court has held that :
"A receiver in bankruptcy is a trustee for the creditors and consequently, if he has withheld sums which properly belong to the creditors, then his conduct can be and should be inquired into by the court at any time, and there is no question of limitation."
21. In Sumitra (V.) v. Lakshminarayanarao, AIR 1977 AP 83, the question before a Division Bench of this court was whether acquisition of property by the insolvent after adjudication and before discharge would vest in the official receiver and in such a case whether a suit by him to recover the property without either permission or without impleading the official receiver was maintainable. It was held that impleading of the official receiver after the period of limitation would not be of any benefit to the insolvent and that as the property vested in the official receiver, he had no title to the property and, therefore, he cannot maintain the suit.
22. From the above discussion, it becomes very clear that on the passing of the order of adjudication by a competent court under section 28 of the Provincial Insolvency Act, the property vests in the official receiver by virtue of section 56 of that Act and, therefore, the insolvent has no right, title or interest in the property which had vested in the official receiver and that he would not be a trustee for that property. The official receiver manages the properties for the benefit of the body of creditors and is a trustee for them.
23. Reverting to section 160(1)(iii) of the Act, we have already recorded the conclusion that it applies to a case where the property is managed on behalf of another. In view of the conclusion reached above, we have to hold that the official receiver held the property for and on behalf of the creditors and not on behalf of the insolvent. Therefore, he cannot be treated as representative assessee of the insolvent.
24. McMeekin, In re [1973] 48 TC 725, which is a case decided by the Queen's Bench Division of the High Court of justice, Northern Ireland, the properties of a bankrupt vested in the official assignee in Northern Ireland. Some of the properties were the subject-matter of mortgage on the date of adjudication. The official assignee sold the properties in the year 1969-70 which resulted in chargeable gain (capital gain) for that year. The official assignee applied to the court for directions, inter alia, on the questions (a) whether capital gains tax was payable in respect of the gains relating to (i) any of the properties, (ii) the mortgaged properties; (b) in the latter case, whether the liability fell on the official assignee or on the mortgagee or partly on each; (c) if and so far as the liability for the tax fell on the official assignee, whether the debt was part of the costs of administration, or a preferred or an unsecured debt, or a debt personal to the official assignee, or what was otherwise the nature of the liability. The stand taken by the official assignee was that the person assessable to capital gains tax was the bankrupt and not the official assignee. The second mortgagee contended that he had no liability for the tax and that the proceeds of sale of the mortgaged property must be applied first of all in payment of the incumbrances. For the Revenue, it was contended that capital gains tax in respect of the gains was payable by the official assignee out of the estate account as part of his costs of administration and, therefore, in priority to all debts. Lowry C.J. held that the official assignee was assessable to capital gains tax in respect of the gains on the sales of all the properties, whether mortgaged or not and that the debt for capital gains tax was part of the costs of administration of the bankruptcy. On the liability of the mortgagees, it was observed that the mortgagees were strangers to the liability to tax and that their position was not affected by the mortgagor's bankruptcy. We are in respectful agreement with the views expressed by the learned Chief Justice.
25. In the matter of the Official Assignee for Bengal [1937] 5 ITR 233, a Division Bench of the Calcutta High Court held that on the adjudication of a person as insolvent under the Presidency Towns Insolvency Act, 1909, the property of the insolvent vested in the official assignee and that the official assignee became the owner of the property and he could rightly be assessed in respect of the income from the said property under section 9 of the Indian Income-tax Act. It was pointed out that by reason of the adjudication of the debtor, the property did not cease to be a subject fit for taxation.
26. In view of the above pronouncements, we are of the opinion that though the capital gains arising on the disposal of the property are liable for tax, yet the person liable to tax is the official receiver and not the debtor. So far as the first question is concerned, in our view, the question as framed does not really bring out the controversy. Therefore, having heard learned counsel for the parties, we reframe the first question as under :
"Whether, on the facts and in the circumstances of the case and in law, the Tribunal is correct in holding that the official receiver is not a representative assessee of the insolvent (debtor) under the provisions of section 160(1)(iii) in respect of the capital gains derived on the sale of the property of the insolvent ?"
27. For the aforementioned reasons, we answer this (the first) question in the affirmative, i.e., in favour of the assessee and against the Revenue and the second question in the negative, i.e., in favour of the Revenue and against the assessee.
28. In view of our answer to questions Nos. 1 and 2 we do not consider it necessary to express any opinion on question No. 3. The Tribunal shall pass necessary consequential orders having regard to the answers to the said questions.
29. The answer to the fourth question, referred to above, is covered by the judgment of this court in CIT v. Smt. Kaziamunnisa Begam . Following that judgment, we answer this question in the negative, i.e., in favour of the Revenue and against the assessee.
30. The referred case is answered accordingly.
31. Before parting with the case, we would like to put on record our appreciation of Mr. S. Ravi, who has so readily and with great devotion assisted this court as amicus curiae.