Patna High Court
Commr. Of Income-Tax vs Bhurangiya Coal Co. on 28 April, 1953
Equivalent citations: AIR1953PAT298, [1953]24ITR306(PATNA), AIR 1953 PATNA 298
JUDGMENT Ramaswami, J.
1. Legislation dealing with capital gain was first introduced in India by Section 6, Income-tax (Amendment) Act of 1947 (Act 22 of 1947). Section 12B(1) which was newly enacted provided that "in respect of any profit or gain arising in the sale, exchange or transfer of capital asset effected after 31-3-1946"
income-tax was payable by the assessee and "such profits and gains shall be deemed to be income of the previous year in which sale, exchange or transfer took place."
The section was amended by virtue of Section 8, Finance Act of 1949 and the phrase "and before 1st April 1948" was added after the phrase "after 31st March 1946". The result therefore is that the assesses is liable to pay income-tax on capital gain in respect of the transfer of capital after 31-3-1946 and before 31-4-1948.
2. The assessee in this case is partnership called Messrs. Bhurangiya Coal Company. By an agreement dated 16-3-1946 the assessee agreed to transfer to a limited company, Bhurangiya Coal Co. Ltd. the properties described in Schedules 1 and 2 of the agreement consisting of all the movable and immovable properties appertaining to the colliery. The agreement was that the limited company would purchase from the assessee all the properties in Schedules 1 and 2 for a sum of Rs. 6,10,000. Out of this amount a sum of Rs. 2,00,600 was the price fixed for the immovable properties like coal land, buildings and structures included in Schedule 1 and a sum of Rs. 4,09,400 was the price of the movable properties like machinery, plants, tram lines and cables included in Schedule 2. The payment of the price was to be made by allotment of 50,000 shares of the value of Rs. 5,00,000 to the nominees of the vendors and the balance was to be paid in cash in equal shares to the two partnership firms Ramsarandas Brothers and D. R. Rathor.
The case of the assessee is that in pursuance of the agreement the limited company took possession of the colliery and of the properties mentioned in the two schedules on 30-3-1946. On the next day entries were made in the books of the limited company to show that the amount of Rs. 5 lacs was paid by adjusting 50,000 shares in the name of the vendees. The balance of the purchase price was actually paid by two cheques on 9-5-1946. It appears that a sale deed was registered on 17-5-1946, with respect to the immovable properties included in Schedule 1. in this state of facts the Income-tax officer held that the sale of both movable and immovable properties took place after 1-4-1946 and a sum of Rs. 4,71,757 was computed to be the capital gain of the assessee liable to be taxed, under Section 12B(1), income-tax Act.
The decision of the Income-tax Officer was affirmed by Appellate Assistant Commissioner in appeal. The assessee took a further appeal to the Income-tax Appellate Tribunal who formed the opinion that so far as the movable properties were concerned the assessee gave possession to the limited company on 30-3-1946 and the transfer of title took place on that date. As regards immovables the Appellate Tribunal considered that the transfer took place on 17-5-1946 when the registration of the sale deed was effected and that the assessee was liable to pay income-tax on the profit made by sale of the immovables under Section 12B(1), Income-tax Act.
3. At the instance of the assessee the following question has been submitted by the Appellate Tribunal for the opinion of the High Court:
"Whether on the facts and circumstances of the case the transfer of movables took place on or before 31-3-1946, and as such any capital gain made by the assessee company on the sale of such movables is not liable to income-tax within the meaning of Section 12B, Income-tax Act?"
4. In my opinion the question should be amended as follows in order to bring out the real controversy between the parties:
"Whether on the facts and circumstances of the case the transfer of properties in the second part of the schedule annexed to the agreement dated 16-3-1946 took place on or before 31-3-1946, and as such any capital gain made by the assessee company on the sale of such assets is not liable to income-tax within the meaning of, Section 12B, Income-tax Act?"
5. I shall first deal with the argument of the Standing Counsel that the sale deed dated 17-5-1946, related not only to the immovable assets mentioned in the first part of the schedule to the agreement of sale but also to the movable assets mentioned in second part of the schedule. The argument is that the assessee transferred the movable properties mentioned in the second part of schedule not by giving possession to the limited company on 30-3-1946 but by executing the registered document of sale on 17-5-1946. The question therefore turns on the proper construction of the various terms incorporated in the sale deed. The Standing Counsel referred to the fact that the schedule to the sale deed consists of two parts, the first part dealing with coal land, building and structures thereon and the second part dealing with machinery, shafts, tram lines, railway siding etc. But this circumstance is immaterial. The schedule cannot enlarge or restrain the effect of the words in the operative part of the document. On the contrary, the operative part of the document or hahendum states that "the vendors do hereby grant, transfer and assign unto the purchaser all their right, title and interest of and in the said lands and mines described in the first part of the schedule hereuuder written."
In this clause there is no reference to the "properties comprising in the second part of the schedule and it is clear that the sale deed only relates to the properties, viz., the colliery, building and structures mentioned in the first part of the schedule. This conclusion is supported by the circumstance that the consideration of Rs. 2,00,600 was fixed. The relevant portion of the document states :
"Now this indenture witnesseth that in consideration of the said sum of Rs. 2,00,000, namely, Rs. 1,10,000 paid to the vendors by the company and of the allotments of 9,060 ordinary fully paid up shares out of the said 50,000 shares of the company as hereinbefore stated the vendors do hereby grant, transfer and assign unto the purchaser all their right, title and interest of and in the said lands and mines described in the first part of the schedule."
From the recital in the sale deed and in the contract of sale, it is evident that the price of Rs. 2,00,600 was the price fixed for the properties described in first part of the schedule. There is also another matter to be taken into account. The stamp affixed on the document is worth Rs. 3,025 which is the proper stamp to be affixed to a sale deed conveying properties for the consideration of Rs. 2,00,600. For these reasons I hold that the registered sale deed dated 17-5-1946, is a sale deed only with respect to the properties comprised in part 1 of the schedule, viz., coal land and the building structures thereon, and by virtue of this sale deed the assessee transferred to the limited company title only with respect to these properties.
6. I next turn to the argument of the Standing Counsel that the contract of sale dated 16-3-1946, is an invalid contract since the limited company was not in existence at that time and Mr. Jayanti-lal Ojha and Mr. B. K. Maitra had no authority to enter into the contract on the company's behalf. To put it differently, the contention is that the contract of 16-3-1946 was null and void since the limited company was incorporated only on the 18th March and the company could not by subsequent ratification affirm or give legal validity to the contract entered into by Mr. B. K. Maitra and Mr. Jayantilal Ojha ostensibly on its behalf. In my opinion this argument proceeds on a misconception. A decisive answer to such an argument is furnished by Sections 23 and 27, Contract Act (Specific Relief Act ?). Section 23 states that specific performance of a contract may be obtained by a company when the promoters have before its incorporation entered into a contract for the purposes of the company, and such a contract is warranted by the terms of incorporation. Section 27 similarly enacts that specific performance of a contract may be enforced against the company when the promoters had entered into the contract before its incorporation. But there are two conditions for the enforcement, viz., the company should have ratified and adopted the contract and the contract should be warranted by the terms of the incorporation. Sections 23 and 27 are based upon the principle developed in the English Court of Equity that the company stands in place of the promoters or to use the language of Lord Jeffery in a Scottish case the fact that "a party having passed from the chrysalis to the butterfly stats" creates no difficulty in the enforcement of such a contract.
The doctrine is not based on the principle of contract through the agency of promoters but on the principle that the Court of Equity will not allow a corporate body to exercise powers acquired by means of a previous contract and arrangement without carrying that contract and arrangement, into full effect. The principle is that the company is bound not by a contractual obligation, but on a ground independent of contract and analogous to estoppel. The doctrine is also placed on the alternative principle that the company is bound, on the ground of a distinct obligation imposed, by the article of its constitution. The Standing Counsel referred to -- 'In re Empress Engineering Co.', (1881) 16 Ch D 125 (A), in which specific performance of a contract to pay a sum of sixty guineas to its solicitors was refused on the ground that the company was not in existence at the time of the contract and that the company could not by mere ratification make the contract binding.
But that case must be distinguished on the ground that the equitable question of estoppel was not considered. It was argued in that case if there was no contractual obligation the claimants could still make out a case on the principle that there was a good equitable claim for services rendered before the formation, of the company of which the company had the benefit. James L. J. remarked that the question had never been tried whether the company has had the benefit of the claimant's services. The decision has been explained and distinguished in a later case -- 'Howard v. Patent Ivory Manufacturing Co.', (1888) 38 Ch D 156 (B), the facts of which are closely parallel to the present case. In that case the company ratified the agreement entered into by the promoter and took possession of the leasehold property which was the subject-matter of the agreement and carried on business thereon. It was held by Kay J. on these facts that the company was bound by the contract. At page 163, Kay J. quoted with approval the judgment of Turner L. J. in the case of -- 'Wilson v. West Hartepool Rly. Co.', (1865) 2 De. G. J. & S. 475 (C):
"It was contended on their part that companies are not bound by acts of part performance, and that the acts which have been done in this case furnish no equity against the defendants, because they are acts to the prejudice of the defendants only, and not of the plaintiff; but I cannot accede to either of these arguments. Neither of them is in my opinion consistent with the principle on which this Court proceeds in cases of part performance. The Court proceeds in such cases on the ground of fraud, and I cannot hold that acts which, if done by an individual, would amount to a fraud, ought not to be so considered if done by a company, nor, can I say that it is no prejudice to the plaintiff to have been permitted to take possession on the faith of an agreement, and afterwards to be held liable to-be treated as a trespasser and turned out of possession on the ground that there was no agreement. There is authority for saying that in the eye of this Court it is a fraud to set up the absence of agreement when possession has been given, upon the faith of it."
7. A similar problem has arisen in connection with the question, whether the promoters can be said to be trustees for a company not in existence. Strictly speaking, a person cannot be a trustee for a beneficiary not in existence, but a line of authorities has laid down the principle that on the company being floated, the relationship between a promoter and the company he has started must be deemed to be a fiduciary relationship from the day the work of floating the company started. In this context it is necessary to cite a passage from the judgment of Lindley L. J. in -- 'Lydney and Wig-pool Iron Ore Co. v. Bird', (1864) 33 Oil D 85 at p. 94 (D) :
"Although the promoter is not an agent of the company nor a trustee for it before its formation, the old familiar principles of the law of agency and of trusteeship have foe-en extended, and very properly extended, to meet such cases; and using the word 'promoter' to describe a person acting as James Bird did, it is perfectly well settled that a promoter of a company is accountable to it for all moneys secretly obtained by him from it just as if the relationship of principal and agent or of trustee and 'cestui que trust had really existed between them and the company when the money was so obtained."
8. Applying the principle in this case I reach the conclusion that the contract of sale dated 16-3-1946 entered into by Mr. B. K. Maitra and Mr. Jaintilal Ojha was binding on the limited company which subsequently entered into possession of the colliery and other assets, movable or immovable, on the faith of that contract. Mr. Dutt on behalf of the assesses also produced the memorandum of association of the limited company from which it is apparent that Article 4 empowered the company to adopt and give effect to and carry out the agreement dated 16-3-1946. The resolution, Ex. D also shows that the Directors of the limited company ratified and adopted the contract on 29-3-194S.
9. The Standing Counsel submitted in the next place that in reaching the finding that the limited company had taken possession of the movables comprised in part 2 of the schedule, the Appellate Tribunal has misappreciated the evidence. The Standing Counsel referred to the sale deed, Ex. E, in which there is a recital that "the vendors are now seized and possessed of the coal lands and mines and collieries and the machinery, appliances and structures fully described in the second part of the schedule."
There is another recital in the document that "the sum of rupees four lacs nine thousand and four hundred is fixed as the value of the machineries, stores, furnitures, fixtures, and other movables which are capable of passing to the purchasers by delivery."
It was therefore argued that on 17-5-1946 the limited company had not taken possession of the machineries, appliances and structures mentioned in second part of the schedule of that document. The Standing Counsel complained that the Appellate Tribunal had not applied their mind to this aspect of the matter. But I am unable to accept the argument of the Standing Counsel that the finding of the Appellate Tribunal on the question of possession is vitiated by any error of law. The finding of the Appellate Tribunal that the limited company had taken possession of the movable assets on 30-3-1946 is a finding on a question of fact and unless the Standing. Counsel is able to establish that there is no evidence to support the finding or that the Appellate Tribunal has applied a wrong legal principle the High Court has no power to interfere.
In this connection Mr. Dutt pointed out that on 29-3-1946 the Board of Directors had resolved that the vendor's agreement dated 16-3-1946 should be confirmed and the managing agents "should take possession of the movable forthwith". Mr. Dutt also referred to letter, Ex. C, written by the managing agents stating that "they had taken possession of the Bhurangiya colliery as per terms of the agreement dated 16-3-1946". The Appellate Tribunal based their finding on these two documents and it-is difficult to accept the contention of the Standing Counsel that the finding is not supported by any material. As I have already stated the finding of the Appellate Tribunal is a finding on a question of fact and it is not open to the Standing Counsel to challenge its propriety during the hearing of this reference.
10. In truth the Standing Counsel is faced with a dilemma in this case. It is not sufficient for him to establish that the contract of sale of 16-3-1946 is not binding upon the limited company or that the possession of the movable was not delivered to the limited company on 30-3-1946 as alleged by the assessee. That would only lead to the inference that there was no transfer of movables to the limited company before 1-4-1946. But the Department cannot support the assessment of capital gain in this case unless the Standing Counsel goes further and establishes that the sale of movables took place after 1-4-1946 by virtue of the sale deed dated, 17-5-1946. On this point I have already rejected the argument of the Standing Counsel on the construction of the sale deed of 17-5-1946 and I have held that the sale deed did not transfer title of the movable properties in the second part of the schedule. It is manifest that there is no warrant or justification for the Income-tax Department to treat the profit on the transfer of the movables as capital gain and assess the amount of profit to income-tax.
11. The next question raised by the Standing Counsel is that the items of properties included in Schedule 2 were not movable but immovable properties and that no transfer of title took place by virtue of the execution of contract and the subsequent transfer of possession to the limited company on 30-3-1948. The Standing Counsel referred in this connection to the definition of 'immovable property' in the General Clauses Act. That definition is as follows :
"Immovable property shall include land, benefits to arise out of land, and things attached to the earth."
The Standing Counsel also referred to Section 3, T. P. Act which defines the phrase "attached to earth" to mean "imbedded in the earth, as in the case of walls or buildings." The phrase "attached to earth" also occurs in the definition of "movable property" in the General Clauses Act. In this connection the Standing Counsel read the various items mentioned in second part of the schedule to the contract of sale. He referred in particular to tram lines, shafts, engines, railway siding and transformers. It was argued that all these items were immovable properties and could be validly sold only by a registered sale deed. It was contended that title could not pass by execution of the contract of sale and subsequent delivery of possession.
In my opinion this argument cannot be entertained at this stage. The point was never taken before the departmental authorities or before the Appellate Tribunal. The question whether a particular machinery or any particular item of part 2 of the schedule is imbedded in the earth within the meaning of Section 3, T. P. Act is a question which depends upon the circumstances of each case. No evidence was adduced by the parties in this connection and the facts have not therefore been properly investigated by the Appellate Tribunal. As stated by Blackburn J. in -- 'Holland v. Hodgson', (1872) LR 7 CP 328 at p. 334 (E) :
"There is no doubt that the general maxim of the law is that what is annexed to the land becomes part of the land; but it is very difficult if not impossible, to say with precision what constitutes an annexation sufficient for this purpose. It is a question which must depend on the circumstances of each case, and mainly on two circumstances, as indicating the intention, viz., the degree of annexation and the object of the annexation. When the article in question is not further attached to the land than by its own weight it is generally to be considered a mere chattel see -- 'Wiltshire v. Cottrell', (1853) 1 E1 & B1 674 (F). But even in such a case if the intention is apparent to make the articles part of the land, they do become part of the land: See -- 'D. Eyncourt v. Gregory', (1866) LR 3 Eq 382 (G)."
The question raised by the Standing Counsel is in truth a question of fact which is raised for the first time in the High Court on reference. The question was not raised before the Appellate Tribunal and the facts necessary for deciding the question are not found in the statement of the case prepared by the Appellate Tribunal. It is important to remember in this context that in the matter of income-tax reference the jurisdiction of the High Court is an advisory jurisdiction and under the Indian Income-tax Act the decision of the Appellate Tribunal on facts is final. The High Court has no authority to investigate facts raised for the first time at the stage of the reference nor is it possible for the High Court to take the arguments of the Standing Counsel as if they were facts and to base its conclusion on those arguments. Such a practice has been deprecated by the Supreme Court in -- 'Commr. of Income-tax. West Bengal v. Calcutta Agency Ltd.', AIR 1951 SC 108 (H). It is manifest that in the present case the necessary facts have not been investigated or established before the Appellate Tribunal and it is not possible to entertain the argument raised by the Standing Counsel on this point.
12. In the light of these considerations I think that the question referred by the Income-tax Appellate Tribunal must be answered in favour of the assessee. The Income-tax Department must pay the cost of the reference; hearing fee Rs. 250/-.
Choudhary, J.
13. I agree.