Income Tax Appellate Tribunal - Delhi
Marchon Textile Ind. P. Ltd. vs Inspecting Assistant Commissioner Of ... on 7 May, 1990
Equivalent citations: [1992]41ITD15(DELHI)
ORDER
S.P. Kapur, Judicial Member
1. The assessee, a resident-company, appeals for the assessment year 1983-84, for which the previous year is stated to have ended on March 31, 1983. Feedback of the facts as it stands reproduced verbatim from the assessment order is as under :
" 3. (i) The assessee has claimed in the return a deduction of Rs. 23,26,204 out of net profit as per profit and loss account, on account of capital gain on sale of machinery. In the report of the board of directors to the shareholders of the company dated September 2, 1983, a copy of which has been enclosed with the return of income, the assessee has explained as under :
'After meeting all the expenses and providing Rs. 1,69,448.03 towards depreciation for the year, the year's working has resulted in a net surplus of Rs. 27,91,629.58, which includes capital gains and depreciation written back as under :
Rs.
Net profit 27,91,629.58 Rs.
Less : Capital gain 23,26,204.17 Depreciation written back 4,98,521.20 28,24,725.37 Net deficit on regular business 33,095.79"
2. Further in the same report, it is explained as under :
'Even though the company has not incurred any production loss, it was forced to pay heavy interest on bank advances, hence the poor working result :
Rs.
Net profit 27,91,629.58 Carry forward from the last year 7,17,067.53 35,08,697.11 This year directors recommend to appropriate as follows :
Rs.
Less :
Provision for income-tax 3,25,000 Income-tax paid for the earlier years 1,48,520 Capital gain reserve 23,26,204 27,99,724.17 7,08,892.94 Your directors propose to reinvest the entire capital gain of Rs. 23,26,204 earned on disposal of the capital assets of machinery, on capital machines itself within the stipulated time.'
3. From the above, it will be very clear that a capital asset, namely, machinery, has been disposed of in this year and on the same, a capital gain of Rs. 23,26,204 as per accounts has been made.
(ii) The Schedule of fixed assets clearly indicates that machinery of the original cost of Rs. 26,23,795 has been disposed of. The sale price of the machinery sold has been reflected at Rs. 49,'50,000, thereby resulting in a capital gain of Rs. 23,26,204. Even in the profit and loss account on the credit side capital gain on sale of machinery of Rs. 23,26,204 has been reflected. In the profit and loss appropriation account, the assessee has shown capital gain reserve of Rs. 23,26,204. The assessee was asked to show why capital gain of Rs. 23,26,204 should not be brought to tax in this year keeping in view that the said machine has been sold on March 1, 1983, and the amount of capital gain till August 23, 1985, has been held by the assessee-company without being invested in the approved list of investment. On August 23, 1985, the assessee purchased 2,25,860 units under the Capital Gains Unit Scheme-1983 of the U. T. I., amounting to Rs. 23,26,358 at the value of Rs. 10.30 per unit. In this regard, the following extract from the directors' report dated August 22, 1985, is reproduced below :
' Capital gain reserve of Rs. 23,26,204.17 on sale of machinery on March 1, 1983, under guarantee of two years.
The terms of the guarantee have been fulfilled by March 1, 1985, and the company has the right to utilise this capital gain now of Rs. 23,26,204.17.'
4. Shri Verma, C. A., for the assessee argued that the sale could not be said to have been effected on March 1, 1983, as there was two years' guarantee on this machine and this two year period expired only on March 1, 1985. As such, he averred that this issue of capital gain could be considered only in the assessment year 1985-86. According to Shri A. R. Verma, as the assessee has purchased the said units on August 23, 1985, the said capital gain was exempt. In this regard, the assessee was asked to explain how it could be said that the machine was sold only on March 1, 1985, when the sale had been effected on March 1, 1983, and the said machine had been delivered to the purchaser on March 1, 1983.
(iii) Under its letter dated September 25, 1985, the assessee contended as under :
' In November, 1980, we imported a prototype draw texturising machine from Messrs. Davide Giudici and Figli s. n. c. of Italy to enable us to assemble and manufacture similar machines in India with applying the technology obtained from the foreign manufacturers under a technical collaboration agreement. On the basis of the above and demonstrating the prototype machine, we made a few machines on the above model successfully and supplied them to Indian Textile Goods Manufacturers. When we had assembled and manufactured such machines, we became confident to make such machines without the help of the prototype machine. Since we are not manufacturing textile goods, we decided to sell the imported prototype machine locally.
One of the conditions of the import licence was that we should retain the machine for our purpose at least for two years and after that only the machine is to be resold. But, for reselling also, the seller as well as the buyer should get prior permission and approval from the Textile Commissioner, Bombay. The machine could not be easily sold due to cost structure and when Messrs. Garware Nylons Ltd. showed some interest in the machine, we offered the same to them. Accordingly, ourselves as seller and Messrs. Garware Nylons Ltd. as buyer applied for permission from the Textile Commissioner, Bombay, and, after obtaining the approval, we sold the machine to them on March 1, 1983.'
5. From the above, it is clear that the machinery was actually sold on March 1, 1983. The assessee has confirmed that the possession of this machine was taken over by Messrs. Garware Nylons Ltd. on March 1, 1983. The permission of Government of India, Ministry of Commerce, for sale of this machinery to Garware Nylons Ltd., was given under the Deputy Director's letter No. TXM/1011/DT/190, dated March 17, 1982. The sale bill of this machine was raised under Bill No. 1/82-83/121, dated March 1, 1983, and the narration clearly spelt out the following :
Amount "Giudisi-Merchem TG-IOF High speed Draw Texturising Machine with diamond seated friction spindles FAN FTS-144 spindles Rs. 49,50,000 Sale of prototype machine as per permission received from office of CCI and E-New Delhi, vide their letter No. CG in/186/80/81/1268, dated January 12, 1983.
No excise duty as imported machine countervailing duty already paid at the time of import. "
6. The two years' limitation on the sale of this machine expired on November, 1982. Messrs. Garware Nylons P. Ltd. only wanted two years' guarantee for this machine. This position has been affirmed by both the seller and the buyer under their written agreement not on stamp paper dated February 24, 1983, a copy of which has been filed by the assessee. The relevant portion which gives the facts of the transaction are as under :
' As per the discussions, the undersigned had with your goodself for the sale of the above machine at the price of Rs. 49,50,000, whereby it is agreed between us that, because this is a prototype machine which we were running for demonstration purpose at Messrs. Nirlon Synthetic Fibres and Chemicals Ltd., Pahadi Village, Goregaon (E), Bombay-63, for a long period and also for about three months at your works for demonstration purpose with the prior permission from the office of the Textile Commissioner, Bombay.
Since this is an imported demonstration machine, it is agreed between us as insisted by you we will extend the two years' guarantee for the satisfactory performance of the machine from the date of sale.'
7. The above clearly shows that the guarantee period starts from the date of sale. This is a clear admission that the sale took place on March 1, 1983, and the assessee had only provided guarantee of two years.
(iv) The above position has been confirmed by the assessee under its letter dated September 25, 1985, the relevant portion of which is reproduced below :
' Usually for machines assembled and manufactured by us, we used to give guarantee for one year for proper performance and we used to rectify the machines.
Since this prototype machine was an imported one and maintained by us for manufacture for similar machines and not used for manufacturing textile items, the buyer insisted for two years' guarantee for proper running. ..."
8. The assessee was also asked to file the following information :
(i) When sale proceeds of Rs. 49,50,000 were received. Complete details of payment, mode of payment and receipt to be filed.
(ii) Whether any sale price was refunded in the ' guarantee period'.
9. By now it had become clear to the assessee that its attempt to blatantly conceal the income by resorting to gimmicks had failed. So the assessee changed its stand under its letter dated March 4, 1986, and said that the said machine had been given on approval basis and, therefore, it changed hands only on March 1, 1985. This averment is totally false. The statement of accounts of the assessee filed with the return of income clearly established that sale had been effected on March 1, 1983, and the assessee had only given a guarantee of two years on this machine. It would be pertinent and extremely important to highlight that, for similar machines manufactured by the assessee, the assessee usually gives a guarantee of one year. Clearly, the assessee has never taken the stand that, only on the expiry of guarantee period does it become entitled to the sale proceeds of the machines manufactured by it. The condition that the said machine could be returned in two years does not alter the fact that the sale indeed took place on March 1, 1985. If the assessee wanted capital gains to be exempt, it should have invested in the approved list of investments within six months after the date of sale, i.e., in the specified asset, as envisaged by Section 54E of the Income-tax Act, 1961. This clearly has not been done, as the units were purchased only on August 23, 1985.
(v) As regards the realisation of sale proceeds, the assessee has admitted as under under its letter dated March 4, 1986 :
'For selling also, the seller and buyer should get prior permission from the import authorities. Ourselves and Messrs. Garware Nylons Ltd., approached the import authorities for getting the permission for transfer of the machinery to Messrs. Garware Nylons Ltd., and after getting the permission we delivered the machine to Messrs. Garware Nylons Ltd. on March 1, 1983, with the conditions agreed upon and realised the proceeds.'
10. A copy of the running account of Messrs. Garware Nylons Ltd., from the books of the assessee-company has been filed which shows the total realisations from Messrs. Garware Nylons Ltd. at Rs. 1,31,89,094 during the year. The assessee is having several business transactions with Messrs. Garware Nylons. The above amount of Rs. 1,31,89,094 includes the sale proceeds of Rs. 49,50,000 on this machine. Therefore, it will be seen that the following facts are clearly established :
(a) That the said machine was validly sold on March 1, 1983, after obtaining the requisite permission from the Government of India.
(b) That possession of this machine was given to Messrs. Garware Nylons Ltd. on March 1, 1983.
(c) That the sale proceeds were realised in full in this year by the assessee on this sale of machine.
(d) That no part of the sale proceeds was refunded by Messrs. Garware Nylons Ltd.
11. In view of the above facts and circumstances, it is clear that capital gains of Rs. 23,26,204 are chargeable to tax in this year. There has been a blatant and wilful attempt by the assessee to evade the said capital gain tax on the sale of this machine.'
12. The learned Commissioner of Income-tax (Appeals) upheld the finding of the Assessing Officer and the assessee met with failure, hence this appeal, and we have heard the parties at length. The stand of the Revenue is reflected in the reasoning of the learned lower authorities, whereas the stand of the assessee is that the transaction became a sale not in the accounting year relevant to the assessment year under appeal but subsequently when the two years' condition/guarantee period was over, i.e., on March 1, 1985.
13. With the feedback as reproduced above, the only issue which merits adjudication at this level is as to whether there was any sale of the machine in question during the accounting period relevant to the assessment year under appeal as between the assessee as vendor and Messrs. Garware Nylons Ltd. as vendees.
14. The learned lower authorities have mainly relied on the date of receipt of the consideration as also the facts that the purchasers have simultaneously included the machinery in the gross block of their own machine and having claimed depreciation thereon on the same, as also the seller having reduced its gross block of the machinery to corresponding extent in its books of account, and as such, the sale was on March 1, 1983, and letter dated February 24, 1983, was a device to evade/avoid tax.
15. For proper adjudication of the issue, we reproduce hereunder, the " Statement of account" of Messrs. Garware Nylons Ltd. for the accounting period relevant to the assessment year under appeal as appearing in the books of account of the assessee-appellant and as it stands placed on our file as assessee's paper book pages 20 and 21 :
Debit Side 1982 Rs. P. April To balance brought forward 39,77,683.66 " 1 S. B. No. .1 8,748.00 " 10 S. B. No. 5 12,960.00 " 23 S. B. No. 7 13,154.40 " 24 S. B. No. 8 1,350.00 " 24 S. B. No. 9 8,251.20 " 24 S. B. No. 10 1,981.80 " 24 " S. B. No. 11 669.60 May 8 S. B. No. 12 1,674.00 " 8 S. B. No. 13 1,620.00 " 8 S. B. No. 14 1,539.00 " 16 S. B. No. 16 6,480.00 " 16 S. B. No. 24 16,070.40 June 5 S. B. No. 28 660.00 July 3 S. B. No. 57 1,650.00 " 29 S. B. No. 51 69,696.00 Rs. P. August 8' " S. B. No. 54 8,140.00 " 8 S. B. No. 55 14,190.00 " 23 S. B. No. 59 31,625.00 Sept. 2 S. B. No. 60 6,231.50 " 7 S. B. No. 61 58,91,200.00 " 18 S. B. No. 65 38,720.00 " 20 S. B. No. 75 2,794.00 " 20 S. B. No. 77 66.00 " 22 S. B. No. 79 2,475.00 Oct. 1 S. B. No. 84 21,714.00 Nov. 7 S. B. No. 91 4,042.50 March 1, 1983 S. B. No. 121 55,20,000.00 Nov. 22, 1982 Debit Note No. 38 4,421.00 Mar. 1983 No. 59 25,000.00 Total 1,56,94,807.06 Credit Side 1982 Rs. P. April 1 By Bank 2,311.20 " 8 " "
11,08,750.00 " 17 "
5,65,000.00 May 3 " "
1,512,00 " 5 " "
11,08,750.00 " 11 " "
4,636.44 " 20 " "
8,154.00 " 21 " "
6,053.40 June 2 " "
34,687.40 " 7 " "
11,08,750.00 " 8 12,231.00 " 18 " "
4,833.00 July 5 6,480.00 " . 7 " "
11,08,750.00 " 30 " "
16,070.40 August 4 " "
11,08,750.00 " 6 " "
1,61,506.71 Sept. 6 " "
2,310.00 " 22 " "
69,696.00 Rs. P. Oct. 1 By Bank 22,330.00 " 5 " "
4,00,000.00 " 9 " "
5,00,000.00 " 12 " "
31,625.00 " 25 " "
9,025.50 Nov. 3 " "
5,00,000.00 Dec. 14 " "
4,421.00 " 20 " "
20,958.00 " 30 " "
10,25,000.00 1983 Jan. 27 " " .
25,00,000.00 March 4 " " 5,00,000.00 " 8 " " 4,66,200.00 " 11 " " 25,000.00 " 22 " " 4,042.50 " 24 " " 41,195.00 " 25 " " 7,00,000.00 Nov. 9 1982 " " 66.00 March 31, 1983 By balance carried down 25,05,712.51 Total 1,56,94,807.06
16. We will also reproduce hereunder verbatim the remand report as it stands submitted by the Office of the Deputy Commissioner of Income-tax, Special Range 15, Bombay, to the learned Commissioner of Income-tax (Appeals) XVI, Bombay :
"No. DC/Special Range 15/88-89 Office of the Deputy Commissioner of Income-tax, Special Range 15, Bombay.Dated : 27th June, 1988.
The Commissioner of Income-tax (Appeals)-XVI, Bombay.
Sub : Messrs. Marchon Textile Industries (P.) Ltd.--Appeal against penalty order passed under Section 271(1)(c) of the Income-tax Act, 1961, for the assessment year 1983-84--Submission of remand report -- Regarding.
17. This has reference to your letter No. CIT(A) XVI/A. R. III/179/ 87-88, dated April 27, 1988, on the above subject.
(2) In paragraph 2 of the said letter, I was required to examine Shri Ashok Garware under Section 131 of the Income-tax Act, 1961, besides any other representative of Messrs. Garware Nylons Limited to ascertain the facts regarding all the surrounding circumstances of the deal. I was also required to ascertain the treatment assigned to the deal in the books of account of Messrs. Garware Nylons Ltd. and the other necessary correct details like the claim of depreciation, etc. I was further required to obtain a copy, of the printed balance-sheet of Messrs. Garware Nylons Limited for the relevant period and two later years.
(3) In this connection, a notice under Section 131 of the Income-tax Act, 1961, was issued to Shri Ashok Garware on June 7, 1988, wherein he was required to attend personally to give evidence and furnish the necessary information on June 20, 1988. The following information was called for :
(i) Fixed assets register of Messrs. Garware Nylons Ltd. for the period 1980 to 1984.
(ii) Copies of balance-sheets of Messrs. Garware Nylons Ltd. along with depreciation charts for the above period.
(iii) Entire correspondence for purchase/sale, lease, etc., on machineries with Messrs. Marchon Textile Industries Pvt. Ltd., or its allied concern, including agreement, if any, for purchase/lease, etc., was required to be produced.
(iv) Particulars of monies advanced during 1980 to 1984 by way of loan/advances for purchase, etc., to Messrs. Marchon Textile Industries Pvt. Ltd., or its allied concern or its directors for the above three years were called for.
(v) They were also required to furnish the details of orders placed with Messrs. Marchon Textiles or its allied concern for the above period for purchase of machinery.
(vi) The copy of account of Messrs. Marchon Textiles in the books of Messrs. Garware Nylons Ltd., for the above period was also called for.
(4) A copy of the summons was sent to Mr. T. R. Kapur/Mr. K. G. Menon of Messrs. Marchon Textiles Pvt. Ltd., to attend if they desired to cross-examine Shri Ashok Garware.
(5) Shri Ashok Garware attended on June 20, 1988, and his statement, on oath was recorded. The information called for in the summons was furnished on June 20 and 22 of 1988. I am enclosing herewith a copy of the statement on oath of Shri Ashok Garware recorded on June 20, 1988. The statement covers all the aspects and the surrounding circumstances relevant to the deal. I am producing below the reply of Shri Ashok Garware on the terms of sale, etc. Q. : Were any terms for sale decided on October, 1981?
A. : The main term for sale was the Government permission allowing the sale.
Q. : Once the Government permission was received, did you go for outright purchase of this machine ?
A : After receipt of Government permission which had certain terms and conditions in it, it was discussed with Marchon and an agreement was reached that Garware Nylon will have the right of returning the machine to Marchon and obtaining from Marchon the payments made. This condition is embodied in Marchon's letter dated February 24, 1983, No. MTI/Works/148 other guarantees/conditions are also embodied in the letter.
Q. : What was the necessity of recording the condition for refund of amounts, when the machine was with you all along since October, 1981?
A. : This arose as the Government permission to sell the machine to Garware Nylon embodied a condition that' No guarantee can be given by the Government that the party to whom the goods mentioned have been transferred will be granted an import licence, for other materials, if any, required by them in connection with the use of the goods'.
Q. : Why was the condition for refund made applicable for two years only ? What would have happened if necessity for import of components arose immediately thereafter ?
A. : This was recommended by the factory engineers.
Q. : Is the imposition of such conditions for refund, etc.--normal trade practice ?
A : We considered putting such conditions as reasonable. Sale and purchase of imported prototype machine is not a normal trade.
Q. : From the letter of Mr. T. R. Kapur addressed to Messrs. Garware Nylons Ltd. - Letter No. MTI/Works/148, dated February 24, 1983, it appears that the agreement for refund of sale price, etc., was arrived at prior to February 24, 1983. By signing the said letter, you have merely confirmed the proposal of Mr. Kapur. Here, I would like to know that did you ever impress on Mr. Kapur for such a proposal or it came from him suo motu?
A : The conditions of this letter were discussed (i.e., the Government letter dated January 21, 1983), soon after its receipt with Mr. Kapur of Marchon, when Clause No. 3 mentioned therein was highlighted in these discussions ; as at the time of making the application to the authorities, such a Clause was not envisaged by either, therefore, a suggestion under the circumstances, after receipt of Government letter emanated 'from Marchon, as mentioned in their letter of February 24, 1983. As can be seen, the discussions took place on more than one occasion with intervals of several days. Marchon's letter dated February 24, 1983, symbolises these discussions and the accord reached. Therefore, it is not correct also to state that the letter dated February 24, 1983, from Marchon is suo motu.
(6) From the records, it is seen that in all, Messrs. Garware Nylons purchased five machines from Messrs. Marchon Textiles. The first three machines, i.e., Machines Nos. 19, 20 and 21 of the fixed assets register were capitalised in the year 1981-82, while Machines Nos. 22 and 26 were capitalised in the year 1983-84. The prototype machine in question was Machine No. 4, which was capitalised along with the other machine in March, 1984. The date of installation, March 1, 1984. I am enclosing as annexure 2 the working of the depreciation on these machines as furnished by Messrs. Garware Nylons Limited.
(7) I am also enclosing copies of the printed balance-sheets of Messrs. Garware Nylons Limited for the relevant period and two subsequent years as desired. ( annexure 3 ). "
18. The said remand report was submitted by the learned Deputy Commissioner of Income lax to the learned Commissioner of Income-tax (Appeals) as required by the latter. This has been placed on our file as the assessee's paper book pages 22 to 24.
19. Worth mention is the statement of Shri Ashok Garware which was recorded on oath by the learned Deputy Commissioner of Income-tax, Assessment Range III-B, Bombay. The said Shri Ashok Garware was required to appear before the said learned Deputy Commissioner of Income-tax and was examined in his capacity as joint managing director of Garware Nylons Ltd. -- the vendee of the machine in question. This has been placed on our file as the assessee's paper book pages 25 to 27 and is to the following effect :
" Statement of oath of Shri Ashok Garware, aged 49 years, S/o.
B. D. Garware and joint managing director of Messrs. Garware Nylons Ltd., recorded in the case of Messrs. Marchon Textiles Pvt. Ltd. in the presence of Mr. T. R. Kapur, M, D. of Messrs. Marchon Textiles Pvt. Ltd., Bombay.
Q. : In the year 1981, you took one machine from Messrs. Marchon Textiles Pvt. Ltd. to which the latter have referred as a prototype. I would like to know if there was any correspondence or negotiation preceding this in connection with the said prototype, with any of the directors of Messrs. Marchon Textiles Pvt. Ltd. ?
A. : There were discussions with the late Mr. K. G. Menon, and Mr. T. R. Kapur, directors of Messrs. Marchon Textiles regarding the Intention to purchase the prototype machine and shifting of the same to Messrs. Garware Nylons Ltd. for demonstration/trial in the "intervening periods. This is borne out by Marchon's letter No. MTI/Works/540 dated October 5, 1981, to Garware Nylons Ltd. It was also decided to simultaneously apply to the Government authorities for shifting the machine to Garware Nylons Ltd. and sale of the same to Garware Nylons Ltd.
Q. : You got this machine transported from Messrs. Marchon Textiles Ltd. premises or they arranged the same, when it was delivered to you in October, 1981 ?
A : To the best of my knowledge, the machine was transferred from the premises of Nirlon Synthetics, Goregaon. I do not know whether it came directly from Nirlon's premises or from Marchon. Whether the transportation was arranged by Marchon or Garware, I do not recollect. Incidentally, letter dated October 5, 1981, referred to above does request Garware to arrange the transport.
Q. : How long was the machine with you for demonstration ?
A : Soon after October, 1981, Garware Nylon and Marchon both applied to the authorities for sale of the machine to Garware Nylons. This permission was eventually received in January, 1983. The machine was in the premises of Garware Nylon in this period for demonstration/ testing.
Q. : When was the purchase order placed with Marchon Textile and what is the date of their sale bill ?
A. : The written date of the purchase order is March 14, 1983, and the date of their bill is March 1, 1983. However, it was orally decided to purchase the machine soon after receipt of permission from the authorities in January, 1983.
Q. : When was the sale consideration settled?
A : In October, 1981, when the intention to purchase was also conveyed subject to Government agreeing to the same.
Q. : Is there any evidence with you to show that the price of Rs. 55.20 lakhs was settled in October, 1981?
A. : Not to the best of my memory.
Q.: Were any terms for sale decided in October, 1981?
A : The main terms for sale was the Government's permission allowing the sale.
Q. ; Once the Government's permission was received, did you go for outright purchase of this machine ?
A. : After receipt of Government's permission which had certain terms and conditions in it, it was discussed with Marchon and an agreement was reached that Garware Nylon will have the right of returning the machine to Marchon and obtaining from Marchon the payments made. This condition is embodied in Marchon's letter dated February 24, 1983, No. MTI/Works/148. Other guarantees/condition are also embodied in the letter.
Q. : What was the necessity for recording this condition for refund of amounts when the machine was with you all along since 1981 ?
A : This arose as the Government's permission to sell the machine to Garware Nylon embodied a condition that 'No guarantee can be given by the Government that the party to whom the goods mentioned have been transferred will be granted an import licence for other material, if any, required by them in connection with the use of the goods'.
Q. ; Why was the condition for refund made applicable for two years only ? What would have happened if necessity for import of components arose immediately thereafter?
A. : This was recommended by the factory engineers.
Q. ; Is the imposition of such condition for refunds, etc., a normal trade practice ?
A. : We considered putting such condition as reasonable as sale and purchase of imported prototype machine is not a normal trade.
Q. ; From the letter of Mr. T. K. Kapur addressed to Garware Nylon Ltd. letter No. MTI/Works/148, dated February 24, 1983, it appears that the agreement for refund of sale price, etc., was arrived at prior to February 24, 1983. By signing the said letter, you have merely confirmed the proposal of Mr. Kapur. Here, I would like to know that did you ever impress on Mr. Kapur for such ;, proposal or it came from him suo motu ?
A : The conditions of this letter were discussed (the Government letter dated January 12, 1983 ) soon after its receipt with Mr. Kapur of Marchon, when the Clause No. 3 mentioned therein was highlighted in these discussions as at the time of making the application to authorities such a Clause was not envisaged by either. Therefore, a suggestion under the circumstances after receipt of Government letter emanated from Marchon, as mentioned in their letter of February 24, 1983. As can be seen, the discussion took place on more than one occasion with interval for several days. The Marchon letter dated February 24, 1983, symbolised these discussions and the accord reached. Therefore, it is not correct also to state that the letter dated February 24, 1983, from Marchon is suo -motu.
Q. : When did you start making payment for this purchase ?
A. : From the records, I find that the first payment was made on October 3, 1981, for this machine. This payment was in the form of a deposit. Thereafter, the next payment as evident from records was on December 17, 1981, and so on, as is clear from the chart filed.
(Sd.) A. K. Gautam/27-G-1988 Deputy Commissioner, Assessment Range III-B, Bombay."
20. The assessee has (at our behest) placed the following information on our file during the course of the hearing of the appeal :
"Messrs. Marchon Textile Industries Private Limited comparative chart of six machines sold to Garwares.
Sl. No. Invoice No. Date Indigenous/ Imported Ex-works price (Rs.) Total sale price (Rs.) No. of machines
1. MTI/81-82/98 7-10-81 Indigenous 50.50,000 59.65,320 1
2. MTI/81-82/80 1-10-81 Indigenous 70,00,000 83, 14,800 MTI/81-82/104 3-11-81 Indigenous 12,70.000 14,81,328 MTI/81-82/115 16-11-81 Indigenous 26,30,000 30,67,632 1,09,00,000 1,28,63,760 2
3. MTI/82-83/61 7-09-82 Indigenous 49,00,000 58,91,200 1
4. MTI/82-83/64 15-09-82 Indigenous 49,00,000 58,91,200 1
5. MTI/82-83/121 1-03-83 Imported 49,50,000 55,20.000 1 (Prototype)
21. Copies of the sale bills of the above machines are enclosed herewith..
22. The indigenous machines are covered by the following guarantee.
'The Sellers guarantee that the equipment delivered will strictly adhere to the technical specifications listed out in annexures 'A' and 'B'. The seller guarantees free replacement of defective parts of the machine or remove defects in the machinery parts for a period of nine months from the date of erection and commissioning of the machine or twelve months from the date of despatch, whichever is earlier'.
23. The machine at Sr. No. 1 is one machine, Sr. No. 2 are two machines, Sr. No. 3 is one machine, Sr. No. 4 is one machine that are indigenous and assembled in India.
24. Machine at Sr. No. 5 was a prototype imported machine that had been used very loosely for demonstration purposes. It was also shifted from one place to another.
25. All the machines are sold after inspection by their (Messrs. Garwares) engineers.
26. In the case of imported machine, the buyer's engineers wanted minimum guarantee of two years since it had been used very loosely."
27. From the above, viz., statement of account, the remand report as also the statement of Shri Ashok Garware and the comparative chart of six machines sold by the assessee to Messrs. Garwares, the following facts have emerged :
(i) That the purchase order for the machine in question is dated March 14, 1983, whereas the invoice of the assessee as seller is dated March 1, 1983 ;
(ii) That, from the records of Messrs. Garware Nylons produced by Shri Ashok Garware in his capacity as joint managing director of the said Messrs. Garwares, it is revealed that five machines have been purchased by Messrs. Garwares from the assessee. The first three machines were capitalised in the fixed assets register of Messrs. Garwares in the year 1981-82, while two were capitalised in the year 1983-84. The machine in question was capitalised in March, 1984, since, according to Messrs. Garwares, the date of installation of the said machine is March 1, 1984 ;
(iii) That, in respect of the machine in question, which has not been capitalised and not taken into the fixed assets register of Messrs. Garwares, in relation to the accounting period relevant to the assessment year under appeal, depreciation has also not been claimed because Messrs. Garwares did not claim the ownership over the machine ; and
(iv) that the assessee and Messrs. Garwares were having a current account in between themselves as the statement of account of Messrs. Garware Nylons Ltd. reveals and, accordingly, although the assessee has debited the account of Messrs. Garware Nylons Ltd. with a sum of Rs. 55,20,000 on March 1, 1983, payment has not been received because the balance due from Messrs, Garwares to the assessee as on March 31, 1983, was Rs. 25,05,712.51.
28. With the above factual position being on the file and the assessee having always been giving guarantee/warranty of twelve months from the date of despatch of the machine or else, nine months from the date of erection and the commissioning of the machine, since, according to the assessee, this was a prototype imported machine, having been loosely used for demonstration purposes as also having been loosely shifted from one place to another very often, two years' guarantee/warranty was given which, on these facts, stands to reason.
29. Section 4 of the Sale of Goods Act defines, " sale and agreement to sell" and reads as under :
"4. Sale and agreement to sell. --(1) A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another.
(2) A contract of sale may be absolute or conditional.
(3) Where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell.
(4) An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred."
30. Section 5 of the said enactment defines, " contract of sale how made " and it reads as under :
" 5. Contract of sale how made. -- (1) A contract of sale is made by an offer to buy or sell goods for a price and the acceptance of such offer. The contract may provide for the immediate delivery of the goods or immediate payment of the price or both, or for the delivery or pay-merit by instalments, or that the delivery or payment or both shall be postponed.
(2) Subject to the provisions of any law for the time being in force, a contract of sale may be made in writing or by word of mouth, or partly in writing and partly by word of mouth or may be implied from the conduct of the parties."
31. Section 11 deals with conditions and warranties and, "stipulations as to time ". The said Section reads as under :
" 11. Stipulations as to time. - Unless a different intention appears from the terms of the contract, stipulations as to time of payment are not deemed to be of the essence of a contract of sale. Whether any other stipulation as to time is of the essence of the contract or not depends on the terms of the contract."
32. Section 12 deals with the topic, "condition and warranty" in the following terms :
" 12. Condition and warranty. -- (I) A stipulation in a contract of sale with reference to goods which are the subject thereof may be a condition or a warranty.
(2) A condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated.
(3) A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated.
(4) Whether a stipulation in a contract of sale is a condition or a warranty depends in each case on the construction of the contract. A stipulation may be a condition, though called a warranty in the contract."
33. In terms of Section 13 of the Sale of Goods Act, when a condition is to be taken as a warranty has been put in the following words :
"13. When condition to be treated as warranty. -- (1) Where a contract of sale is subject to any condition to be fulfilled by the seller, the buyer may waive the condition or elect to treat the breach of the condition as a breach of warranty and not as a ground for treating the contract as repudiated.
(2) Where a contract of sale is not severable and the buyer has accepted the goods or part thereof, the breach of any condition to be fulfilled by the seller can only be treated as a breach of warranty and not as a ground for rejecting the goods and treating the contract as repudiated, unless there is a term of the contract, express or implied, to that effect.
(3) Nothing in this Section shall affect the case of any condition or warranty fulfilment of which is excused by law by reason of impossibility or otherwise."
34. Section 19 of the Sale of Goods Act deals with the topic "property passes when intended to pass " and reads as under :
" 19. Property passes when intended to pass. -- (1) Where there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred.
(2) For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case.
(3) Unless a different intention appears, the Rules contained in Sections 20 to 24 are Rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer. "
35. The above Section says that, unless a different intention appears, the Rules contained in Sections 20 to 24 are the Rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer.
36. Then the relevant Rule is contained in Section 24 which speaks of " goods sent on approval or ' on sale or return ' ". It says that when goods are delivered to the buyer on approval or on sale or return or other similar terms, the property therein passes to the buyer -
(a) when he signifies his approval or acceptance to the seller or does any other act adopting the transaction ;
(b) if he does not signify his approval or acceptance to the seller but retains the goods without giving notice of rejection, then, if a time has been fixed for the return of the goods, on the expiration of such time, and if no time has been fixed, on the expiration, of a reasonable time.
37. In the context of facts which have emerged (as stand reproduced in paragraph 4 above), when we examine the same in the light of the above Sections of the Sale of Goods Act, it has to be held that, whereas the written date of the purchase order is March 14, 1983, the appellant-assessee as vendor had made an invoice on March i, 1983. This belies the date of invoice and that is incorrect because the invoice date could not be prior to the date of the purchase order hence no sale was there on March 1, 1983. The assessee has debited the amount of Rs. 55,20,000 in his accounts to Messrs. Garware Nylons Ltd. but has not been paid the amount, since in the current account as appearing in the books of account of the assessee, Garware Nylons Ltd. had a debit balance of Rs. 25,05,712.51 as on March 31, 1983. After March 1,1983, the credit entries in the account of Garware Nylons Ltd. are Rs. 5 lakhs, Rs. 4,66,200, Rs. 25,000, Rs. 4,042.50, Rs. 41,195, Rs. 7 lakhs and sixty-six. The vendor had capitalised the machine, the subject-matter of this appeal, as also taken the same into the fixed assets register in March, 1984. All these facts speak of the mind and the intention of the parties to the transaction and it can safely be inferred from these facts and the assessee who has always been giving guarantee/warranty of nine months to one year for all machines as from the date of installation or, alternatively, as from the date of the invoice, this machine being a prototype one, i.e., an old one which was being used loosely for demonstration purposes, even if that period of guarantee/ warranty is taken into account, still property was not intended to pass on any date in the accounting period relevant to the assessment year under appeal. The findings of the learned lower authorities that the date of the sale is March 1,1983, cannot be taken as correct because the written date of the purchase order is March 14, 1983, hence the date of invoice could be subsequent and not earlier. That apart, Garware Nylons Ltd. had not claimed the ownership of the machine, since they have not claimed depreciation thereon for the previous year ending March 31,1983, because, according to the sworn statement of Shri Ashok Garware, joint managing director of Messrs. Garware Nylons Ltd., the machine was taken into the fixed assets register and, accordingly, capitalised in March, 1984. Paragraph 6 of the remand report submitted by the Deputy Commissioner of Income-tax, Range 15, Bombay, to the learned Commissioner of Income-tax (Appeals) XVI, Bombay, reveals that fact. It further speaks that the date of installation of the machine was March 1, 1984.
38. In view of the above discussion, the factual position that emerges is that there was only an agreement to sell in terms of Section 5 read with Sections 11, 12, 13, 19 and 24 of the Sale of Goods Act, in the accounting period relevant to the assessment year under appeal and that there cannot be said to be any sale of the machine in question by the assessee as vendor to Messrs. Garware Nylons Ltd. as vendee. As a sequel to these findings, the orders of learned lower authorities stand reversed on the above issue.
39. The next ground of the assessee is about the disallowance of Rs. 30,912, which has been disallowed as being expenditure in the nature of entertainment expenses. The assessee claims it to be wholly and exclusively incurred for the purposes of the business and, alternatively, that the employees of the assessee have partaken in the courtesies, the disallowance has to be reduced accordingly. We will make the disallowance as 50 per cent, in terms of the decisions of the various Benches of the Income-tax Appellate Tribunal as also the Bombay Benches of the Income-tax Appellate Tribunal, since, on identical facts, the Income-tax Appellate Tribunal has been holding that employees of an assessee who have been partaking in the courtesies in terms of refreshments, etc., cannot be the subject-matter of disallowance and in the absence of any evidence for the parties, we will estimate it at 50 per cent. On this issue, the assessee succeeds partially.
The third ground relates to disallowance of the amount of Rs. 7,210 claimed by the assessee to be an expenditure incurred on advertisement. The assessee presses into service circulars issued by the Central Board of Direct Taxes which stand published on pages 508 and 509, Vol. 1 --Central Board of Direct Taxes' Circulars by Taxman. Following the same, we allow this expenditure as one in the nature of revenue. The disallowance stands deleted. On this issue, the assessee succeeds.
40. The appeal stands allowed partly in the above terms.
R.N. Singhal, Accountant Member
41. I have had the benefit of reading the order proposed by my senior brother--Shri S. P. Kapur, Judicial Member. The assessee has raised three points out of which I agree with the decisions given on two points in paragraphs 9 and 10 of the proposed order on pages 24 and 25 thereof. However, I have not been able to persuade myself to agree with the view taken in that proposed order on one point which is about the existence of capital gains in assessment year 1983-84. I proceed to consider that point.
42. The assessee is a private limited company having a business of assembling and erecting textile machines. The previous year relevant to this appeal is the financial year 1982-83. The assessee-company imported one prototype draw texturising machine from Italy for a sum of Rs. 26,23,795 in November, 1980. Around that very time, there was some collaboration agreement also entered into for manufacturing/assembling of similar machines by the assessee in India. The imported prototype machine was kept for demonstration purposes for about a year at the premises of another company (Nirlons). In October, November, 1981, that prototype machine was shifted to the premises of Messrs. Garware Nylons Ltd. for the purposes of demonstration. Soon thereafter, negotiations started between the assessee and Messrs. Garware Nylons Ltd. for the said imported prototype machine being also sold by the assessee to Messrs. Garware Nylons Ltd. There was a restriction imposed by the Government that the imported prototype machine would not be sold by the assessee for two years. Hence, permission for the sale of the same was obtained from the Government of India in January, 1983, but that permission was granted subject to certain conditions. Thereupon, the assessee sold that prototype machine to Messrs. Garware Nylons Ltd. through a sale bill No. MTI/82-83/121 dated March 1, 1983, for a sum of Rs. 49,50,000 (ex-works price). The assessee received the sale price of that imported prototype machine from Messrs. .Garware Nylons Ltd. up to March, 1983, itself through its running ledger account. Naturally, in its books, the assessee-company first took capital gains of Rs. 23,26,204. However, ultimately', the assessee showed that sum as capital gains reserve. All the same, the assessee-company filed a return of tax and paid tax on the deemed profit under Section 41(2) of the Income-tax Act, 1961, which, in effect, provides for taxation of depreciation allowed in preceding years when the machinery is sold at a higher price. It is claimed, on behalf of the assessee, that the sale bill dated March 1, 1983, in respect of prototype imported machine was subject to an agreement between the assessee-seller and Messrs. Garware Nylons Ltd. (as buyers) which is contained in the assessee's letter dated February 24, 1983. It is, therefore, claimed that, in the eye of law, the sale had taken place only on March 1, 1985, i.e., after expiry of two years of the date of sale bill of March 1, 1983. It may be further mentioned that the assessee is claiming benefit under Section 54E of the Income-tax Act, 1961, on the footing that the sale took place on March 1, 1985, and the capital gains chargeable would be on the asset other than short-term capital asset (commonly spoken of as long-term capital gains). The Department has not accepted its claim and held that the sale took place on March 1, 1983, itself and the whole of the capital gains is exigible to tax as on sale of a short-term capital asset.
43. It may also be noted that, in pursuance of the collaboration agreement, the assessee assembled similar machines which the assessee termed as " indigenous". To M/s. Garware Nylons Ltd., first the " indigenous " machine was sold through a bill dated October 7, 1981, for ex-works price of Rs. 50,50,000 and in between from October/November, 1981, to September, 1982, four more machines had been sold--all being termed " indigenous " machines at ex-works price falling in the same range of Rs. 49,50,000 to Rs. 54,50,000.
44. Before going to the arguments and submissions for drawing an inference as to the date of sale, it would be better to clear the decks regarding two basic facts, viz., (i) the dates and period of receipt of sale price, and (ii) dates and periods of shifting of the prototype machine from the premises of Nirlons to that of Messrs. Garware Nylons Pvt. Ltd.
45. In regard to the date of receipt of sale price, we should first have a look at the current account of Messrs. Garware Nylons Ltd. as per the account books of the assessee. The total sum of sale price of Rs. 55,20,000 (including ex-works price of Rs. 49,50,000) is debited on March 1, 1983. In that ledger account, the opening debit balance as on April 1, 1982, is Rs. 39,77,684 and the closing debit balance as on March 31, 1983, is Rs. 25,05,712.51. Thus, in spite of a debit of Rs. 55,20,000 for the sale price of the said machine, the debit balance had decreased during the year by about Rs. 14.72 lakhs. The assessee has received during the year, a total sum of Rs. 131.89 lakhs and these figures clearly indicate that the sale price was received by the assessee by the end of March, 1983.
46. On this point, even the assessee claims that the payment had been received up to March, 1983. We may say so firstly, because, in its paper book filed before the Tribunal, the facts of the case are described on pages 1 to 9. On the top of page 2 at paragraph marked (3), the assessee has stated the fact itself as follows :
" (3) The machine was transferred to the purchaser and the payments were received in the form of the current account of the purchaser, as per the books of account of the assessee. The copy of the account of Messrs. Garware Nylons Ltd. in the books of the assessee, i.e., Messrs. Marchon Textile Industries (Pvt.) Ltd. is enclosed, (kindly see pages 20 and 21 of the compilation) (emphasis* supplied)."
Note : It may be noted that, on pages 20 and 21 of the compilation is contained the entry wise summary of the said ledger account for the financial year 1982-83. Further, even in the ground of appeal before the Tribunal, the assessee has stated at SI. No. 7 as follows :
" 7. That the learned Commissioner of Income-tax, (Appeals) erred in concluding that merely because the amount of Rs. 49,50,000 was received by the appellant in the assessment year 1983-84 and that no part was refunded to Garware Nylons Ltd., the transaction became ' a sale' in the assessment year 1983-84, and he ought to have appreciated that the appellant was liable to refund the said amount if the said machine did not give satisfactory performance." (emphasis * supplied ),
47. This also is a clear admission of the fact even by the assessee that the money was received before March 31, 1983, and, in the above-mentioned ground of appeal, all that the assessee is saying is that merely on that basis, the Commissioner (Appeals) should not have held it as sale completed on March 1, 1983. The factum of sale price having been received during the financial year 1982-83 itself is admitted by the assessee.
48. Then, we have the statement of Shri Ashok Garware, joint managing director of Messrs. Garware Nylons Ltd., recorded on June 27, 1988, and put on pages 25 to 27 as item No. 7 of the assessee's paper book filed before the Tribunal. The last question on page 27 of the assessee's compilation and answer thereto are as follows :
" Q. : When did you start making payment for this purchase ?
A : From the records, I find that the first payment was made on October 3, 1981, for this machine. This payment was in the form of deposit. Thereafter, the next payment as evident from records was on December 17, 1981, and so on, as is clear from the chart filed." (emphasis * supplied).
49. Thus, the buyer admits and claims to have made the first payment on October 3, 1981, as a deposit and thereafter from December 17, 1981, onwards. It is nobody's case that the buyer did not pay or the assessee did not receive the sale price of the machine up to March 31, 1983. Actually, as per the assessee's books of account, payments received from Messrs. Garware Nylons Ltd. in lump sum amounts from October, 1982, to March, 1983, are as follows :
Sl. No. Date Amount (Rs.)
1.
October 5, 1982 4,00,000
2. October 9, 1982 5,00,000
3. November 3, 1982 5,00,000
4. December 30, 1982 10,25,000
5. January 27, 1983 25,00,000
6. March 4, 1983 5,00,000
7. March 8, 1983 4,66,200
8. March 25, 1983 7,00,000
50. These figures were analysed in the context of the statement of Shri Ashok Garware so that from October, 1982, to March 4, 1983, the assessee had received Rs. 54,25,000 against the total sale price of that machine on March 1, 1983, Rs. 55,20,000.
51. As already mentioned, the second aspect to be cleared is regarding the dates/periods of shifting of the prototype machine from the premises of Nirlons to that of Garware Nylons Ltd.
52. In the course of hearing of this appeal, before us, on the first very day, viz., December 12, 1989, the factual background was narrated first by the learned advocate for the assessee and what was, inter alia, stated before us, was to the effect, that the said machine had been shifted to Garware Nylons Ltd. in October, 1981.
53. Then, in this regard, the first two questions and answers in the statement of Shri Ashok Garware dated June 27, 1988, put on page 25 of the assessee's compilation as SI. No. 7 are as follows :
" Q.: In the year 1981, you took one machine from Messrs. Marchon Textiles Pvt. Ltd. to which the latter have referred as a prototype. I would like to know if there was any correspondence or negotiation preceding this in connection with the said prototype, with any of the Directors of Messrs. Marchon Textiles Pvt. Ltd. ?
A. : There were discussions with the late Mr. K. G. Menon and Mr. T. R. Kapur, directors of Messrs. Marchon Textiles regarding the intention to purchase the prototype machine and shifting of the same to Messrs. Garware Nylons Ltd, for demonstration/trial in the intervening periods. This is borne out by Marchon's letter No, MTI/Works/540, dated October 5, 1981, to Garware Nylons Ltd. It was also decided to simultaneously apply to the Government authorities for shifting the machine to Garware Nylons Ltd. and sale of the same to Garware Nylons Ltd.
Q. ; You got this machine transported from Messrs. Marchon Textiles Ltd. premises or they arranged the same, when it was delivered to you in October, 1981 ?
A : To the best of my knowledge, the machine was transferred from the premises of Nirlon Synthetics, Goregaon. I do not know whether it came directly from Nirlon's premises or from Marchon. Whether the transportation was arranged by Marchon or Garware, I do not recollect. Incidentally, the letter dated October 5, 1981, referred to above does request Garware to arrange the transport. " ( emphasis * supplied ).
54. From the above, it is clear that the machine was shifted to Garware Nylons Ltd. in October, 1981, and this was referred to also in the assessee's letter No. MTI/Works/540 dated October 5, 1981.
55. It is rather strange that the assessee has made different statements at different places and at different times in this regard. In the Inspecting Assistant Commissioner's assessment order dated March 20, 1988, on page 6, there is sub-paragraph (v), which refers to the assessee's letter dated March 4, 1986, and extracts of that letter of the assessee appear on the top of page 7 of the assessment order in the following terms ;
" For selling also, the seller and buyer should get prior permission from the import authorities. Ourselves and Messrs. Garware Nylons Ltd. approached the import authorities for getting the permission for transfer of the machinery to Messrs. Garware Nylons Ltd. and after getting the permission we delivered the machine to Messrs. Garware Nylons Ltd. on March 1, 1983, with the conditions agreed upon and realised the proceeds." (emphasis * supplied ).
56. Obviously, the assessee is claiming in that letter that the machine was delivered to Messrs. Garware Nylons Ltd. on March 1, 1983.
57. Then, we have the assessee's letter No. MTI/Works/148 dated February 24, 1983, addressed to Messrs. Garware Nylons Ltd. and the preamble thereto reads as follows :
"As per the discussions the undersigned had with your goodself for the sale of the above machine at the price of Rs. 49,50,000, whereby it is agreed between us that because this is a prototype machine which we were running for demonstration purpose at Messrs. Nirlon Synthetic Fibres and Chemicals Ltd., Pahadi Village, Goregaon (East), Bombay-400 063, for a long period and also for about three months at your works for demonstration purpose with the prior permission from the office of the Textile Commissioner, Bombay." (emphasis * supplied ).
58. So, in this letter, the assessee claims that the prototype machine was running for demonstration at Nirlon and also for about three months at the works of Messrs. Garware Nylons Ltd. As per this narration, it would mean that the machine would be running for demonstration at the premises of Garware Nylons Ltd. for about three months prior to the date of that letter February 24, 1983, i.e., at least from November, December, 1982.
59. It has been necessary to highlight this aspect because the fact of the matter is that the prototype machine was shifted to the premises of Garware Nylons Ltd. in or about October, 1981, and it had been there even up to February, March, 1983, for about one year and four months (i.e., October, 1981 to February, 1983) against less than one year at Nirlon (i.e., November, 1982 to October, 1983).
60. Now, we can come to the assessee's arguments which are based almost solely on the assessee's letter dated February 24, 1983, addressed to Messrs. Garware Nylons Ltd. The preamble of that letter has already been extracted above and for the sake of brevity need not be reproduced again. The next two paragraphs of that letter are relevant and may be extracted below :
" Since this is an imported demonstration machine, it is agreed between us as insisted by you we will extend two years guarantee for the satisfactory performance of the machine from the date of sale.
It is further agreed if we are unable to fulfil our guarantee for the satisfactory running of the machine for the period of two years, we undertake that we shall refund you the above sale price of the referred machine and will take back our machine to our factory premises without charging any compensation for the use of the referred machine by you. " (emphasis * supplied ).
61. On the basis of this statement contained in that letter, it is the assessee's case that, in view of that letter dated February 24, 1983, the sale had not been completed in March. 1983, but it should be treated as completed as on March 1, 1985, i.e., after expiry of two years from the date of sale bill. The assessee's contention is that the two-year period was specified for the satisfactory running of the machine and the assessee was duty-bound to refund the sale price and take back the machine if the assessee was " unable to fulfil the guarantee for the satisfactory running of the machine".
62. In the course of hearing, before us, the learned advocate for the assessee drew our specific attention to the assessee's letter dated February 24, 1983, and also to the letter from the Government of India dated January 12, 1983, which specifies the conditions while giving the permission for sale of the prototype machine. In particular, he drew our attention to the last condition to the effect that no guarantee can be given by the Government that the buyers, viz., Messrs. Garware Nylons Ltd., will be granted an import licence " for other materials, if any, required by them in connection with the use of the goods". It was argued that the condition of satisfactory running for two years was inserted firstly, because it was a prototype machine which was used loosely for demonstration purposes and secondly, because it had been shifted from one place to another and, thirdly, because the Government of India had laid down the above-mentioned condition of no guarantee of grant of an import licence to Messrs. Garware Nylons Ltd.. Shri Dastur, the learned advocate, for the assessee, then, drew our attention to a part of the remand report dated June 27, 1988, and questions-answers recorded in paragraph 5 thereof. He further emphasised that Messrs. Garware had not capitalised and had not claimed depreciation on that machine up to March 1, 1984. On this basis, he argued that the buyer also had not treated it as its asset up to the end of March, 1983. He drew our attention to the provisions of the Sale of Goods Act of 1930. From Section 4(4), he wanted us to infer that, in February/March, 1983, it was merely an agreement to sell and it would become a sale, only after the specific time elapses or the conditions are fulfilled. In this context, he drew our attention also to the final accounts of the assessee company, in particular, Schedule 8 of the Annual Report (relevant to the financial year 1982-83). He pointed out that from the sale price, the original cost was deducted to arrive at the capital gains at Rs. 23,26,204, which were taken to the capital gain reserve account but the excess of cost of machine Rs. 26,23,796 above the written down value Rs. 21,25,275 came to Rs. 4,98,521 which was treated as part of profit. After referring to the sale bill and depreciation charges, etc., he drew our attention to Section 19 of the Sale of Goods Act and, in particular, Sub-section (2) thereof to claim that the property in goods passes when it is intended to pass and the intention of the parties in this regard should be ascertained after considering the "terms of the contract, the conduct of the parties and the circumstances of the case". He pleaded that, by applying this test, it must be held that the property in goods did not pass in March, 1983, but it passed only in March, 1985. He drew our attention to Section 24 of the Sale of Goods Act also which deals with the aspect of goods sent on approval or on sale or return and claimed that the time of two years has been fixed up to which the goods could have been returned and, therefore, the sale should be taken as completed only in March, 1985, in this case. He cited, in support, the Calcutta High Court decision in Hall and Anderson (Pvt.) Ltd. v. CIT [1963] 47 ITR 790 and the Supreme Court decision in Alapati Venkataramiah v. CIT [1965] 57 ITR 185. Actually, it can be recorded here itself that none of these two decisions helps the assessee. In both of them, transfer of immovable property was involved and it was held that the date of transfer would be only after a valid transfer deed was executed. Before us, in the instant case, it is common ground that the immovable property was not involved at all. The learned advocate for the assessee has further cited the Supreme Court decision in the case of State of Gujarat (Commissioner of Sales Tax) v. Variety Body Builders, [1976] 38 STC 176 ; AIR 1976 SC 2108. Actually, that decision also does not help the assessee in this case. In the text of the Reports, three aspects, A, B and C have been taken. 'A' is regarding Section 19 and specifies that for the construction of written contract, the intention of the parties should be gathered after considering the contract. The aspects of 'B' and 'C' are just not applicable to this case, and aspect 'A' mentioned above is basically in general terms.
63. In the course of hearing, the question arose as to how the sale bill was prepared by the assessee on March 1, 1983, while the specific purchase order from Messrs. Garware Nylons Ltd. was dated March 14, 1983. It was stated that the agreement for the machine being bought by Messrs. Garware Nylons had already been reached orally. Our specific attention was drawn to the questions and answers appearing on page 26 of the compilation which is on page 2 of the said statement dated June 27, 1988, of Shri Ashok Garware. They are in the following terms :
" Q. : When was the purchase order placed with Marchon Textile and what is the date of their sale bill ?
A. : The written date of the purchase order is March 14, 1983, and the date of their bill is March 1, 1983. However, it was orally decided to purchase the machine soon after receipt of permission from the authorities in January, 1983. (emphasis * supplied ).
64. Thus, the discrepancy of dates between the purchase order and the sale bill was put to Mr. Ashok Garware by the departmental authorities and Mr. Ashok Garware stated that the purchase of the machine had already been decided soon after the receipt of permission from the Government in January, 1983, meaning thereby, that much importance need not be attached to the date of purchase order being March 14, 1983, when the sale bill had already been prepared on March 1, 1983. In the context of conditions of two years, we specifically asked for whether there were any reports on the working of that machine from October, November, 1981, to February, 1983, and we were told that no such report was available. In regard to the discrepancy of profit under Section 41(2) being returned for taxation but not the capital gains in assessment year 1983-84 when both the items emerged from the same transaction, it was explained that perhaps there was a mistake on the part of the assessee to return for taxation profit under Section 41(2) and further there was material difference also in the exigibility of tax on profit under Section 41(2) on the one hand, and the capital gains tax on the other hand. The point made out was that, under Section 41(2), liability to tax arises when the amounts become payable while capital gains arise on the date of transfer. As already indicated, the assessee furnished (at the behest of the Bench) the compilation for sale of machines of this type showing in all, sale of six machines from October, 1981 to March, 1983. The conditions in the sale of the other five machines were there for technical specification and contained a guarantee for free replacement of the parts for a period of nine months from the date of commissioning or from the date of despatch, whichever is earlier. The learned advocate for the assessee distinguished this condition from the condition laid down in the assessee's letter dated February 24, 1983. In respect of the other five machines which were termed indigenous, the assessee has admitted that the sale stood completed on the dates of the respective sale bills themselves.
65. On behalf of the Department, reliance was placed on the order of the Commissioner (Appeals) and seven specific points were made out as follows :
(1) Purchase price was received in full by March, 1983.
(2) The assessee had reduced the gross block of assets in the depreciation schedule.
(3) The assessee could not take machine back but the Garware Nylons Ltd. could give back the machine, i.e., the option was not with the assessee.
(4) The machine was never actually taken back.
(5) In cases of sales of other machines, guarantee was there, though slightly different, but the assessee treated the sale of each of those other machines as on the date of sale bill itself.
(6) Government's approval had been taken for the sale.
(7) Profit under Section 41(2) had been shown by the assessee itself.
66. The learned Departmental Representative also relied on the Kerala High Court decisions in K.N. Narayanan v. ITO [1988] 173 ITR 61 and in Neroth Oil Mills Co. Ltd, v. CIT[1987] 166 ITR 418. In reply, the learned advocate for the assessee tried to distinguish the cases relied on by the Department and pressed his point that, in view of the letter dated February 24, 1983, it was merely an agreement to sell and the sale got actually completed only on March 1, 1985.
67. Thus, there is no doubt that the transaction would be covered by the Sale of Goods Act, 1930. Section 19 thereof needs very careful consideration for application to the facts of this case and the first two subsections thereof are relevant which may be reproduced as follows :
" 19. Property passes when intended to pass. -- (1) Where there is a contract for the sale of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred.
(2) For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case."
68. So, the intention has to be gathered, from the terms of the contract, the conduct of the parties and the circumstances of the case, meaning thereby, that the totality of the circumstances has to be taken into account. For this purpose and even at the cost of repetition, it may be noted that the assessee had taken in its own account book, this transaction as sale completed in the year ending on March 31, 1983. Capital gains had been shown in the books though taken as capital gains reserve and profit under Section 41(2) was returned for taxation also. The buyer had started paying for the machine though initially as a deposit right from October, 1981, and full sale price had been recovered before March 31, 1983. The machine stood already shifted to the premises of the buyer in October, 1981, i.e., one year and four months before the date of sale bill. A closer scrutiny would show that the aspect of the date from which Messrs. Garware Nylons Ltd. had claimed depreciation does not help the assessee but actually goes against it.
69. The factual background is contained in paragraph 6 of the remand report dated June 27, 1988, which finds place on pages 22 to 24 of the assessee's compilation. Paragraph 6 of that report deals with this aspect and is reproduced as follows :
" 6. From the records it is seen that in all, Messrs. Garware Nylons purchased five machines from Messrs. Marchon Textiles. The first three machines, i.e., Machines Nos. 19, 20 and 21 of the fixed assets register were capitalised in the year 1981-82, while Machines Nos. 22 and 26 were capitalised in the year 1983-84. The prototype machine in question was Machine No. 4 which was capitalised along with the other machine in March, 1984. The date of installation is March 1, 1984. I am enclosing an annexure 2 the working of the depreciation on these machines as furnished by Messrs. Garware Nylons Limited."
70. Thus, the buyer --Messrs. Garware Nylons Ltd.-- capitalised this machine in their chart for depreciation, etc., in March, 1984, and the date of a installation was March 1, 1984. It means that for and from March 1, 1984, Messrs. Garware Nylons Ltd. treated it as their property. Now, there is dispute about a time gap of two years, i.e., from March 1, 1983 to March 1, 1985. There is no doubt left that, for the second half of that period, the buyers treated it as their property and, for that last period, the ownership in that property cannot vest in the assessee as well as the buyer -- Messrs. Garware Nylons Ltd. So, the assessee's plea that the property in the goods passed only in March 1, 1985, cannot be supported on this basis. This leaves the period from March 1,1983, to March 1, 1984. For that, a possible explanation is that Messrs. Garware Nylons Ltd. installed it and used it for production from March 1, 1984, and, for the intervening period of March 1,1983 to March 1,1984, they had not treated it as installed. It is not the same thing as to say that the property in the goods had not passed to Messrs, Garware Nylons Ltd. before March 1, 1984.
71. Now, let me have a look at the assessee's main contention based on the letter dated February 24, 1983. It is a letter written by the assessee to Messrs. Garware Nylons Ltd., wherein Messrs. Garware Nylons Ltd. has signed with the following remarks :
" We confirm the above proposal."
72. Thus, the contents are proposed by the assessee and confirmed by the buyer -- Messrs. Garware Nylons Ltd. This aspect apart, let me now consider the contents. The preamble to that letter is reproduced in paragraph 5.5 on page 33 (supra p. 90) above. In paragraph 5.6., I have pointed out that misstatements contained in that preamble about the periods for which it was working at the premises of Nirlon and thereafter at the premises of Garware Nylons Ltd. For the sake of brevity, I need not repeat it. The remaining portion of the substantive contents is reproduced in paragraph 6 on page 34 (supra p. 91} above. The first paragraph thereof talks of a two-year guarantee from the date of sale. Obviously, in that paragraph, the date of sale would be meaning as March 1, 1983, because the two-year guarantee is from that date. In that paragraph, the date of sale cannot mean March 1, 1985, because on such a construction, the guarantee would extend for two years beyond March 1, 1985. Then paragraph 2 again talks of refund of sale price. The word again used is sale price and refund thereof. It implies that the price has been realised as on sale. So, even the main plank of the assessee, viz., letter dated February 24, 1983, does not take the assessee's case far enough.
73. The position that finally emerges may now be recapitulated as follows :
I. The assessee imports machines from Italy in November, 1980, and around that time, there is also a collaboration for manufacturing/ assembling such machines in India.
II. In or around October/November, 1981, the following four things happened :
(i) The prototype imported machine is shifted to the premises of the buyer -- Messrs. Garware Nylons Ltd.
(ii) Negotiations are started for the sale of this machine to Messrs. Garware Nylons Ltd.
(iii) Messrs. Garware Nylons Ltd. buys from the assessee there similar machines which are manufactured/assembled in India.
(iv) Messrs. Garware Nylons Ltd. makes first payment on October 3, 1981, though originally as a deposit.
III. Permission is sought from the Government of India for sale of the prototype imported machine. In January, 1983, Government of India's permission is obtained for sale but with certain conditions.
IV. Messrs. Garware Nylons Ltd. makes complete payment for the full price of the imported prototype machine up to March, 1983.
V. The assessee prepares sale bill dated March 1, 1983, though the sale is claimed to be subject to the assessee's letter dated February 24, 1983.
VI. Messrs. Garware Nylons Ltd. claimed it to be their machine in their books for the purpose of quantification of depreciation allowance as installed on March 1, 1984.
VII. In its books of account, the assessee, for the period ending March 31, 1983, treats it as a sale, but the excess of sale price realised over cost is not returned for taxation as capital gains, but is taken to the liabilities side of the balance-sheet as capital gains reserve.
VIII. All the same, in the income-tax return relevant to the assessment for the year ending March 31, 1983, depreciation allowed on this machine in preceding years is offered for taxation under Section 41{2), obviously on the footing that sale took place in March, 1983.
74. On the basis of these basic facts and in view of the weakness in the assessee's case even in regard to the reliance on the assessee's letter dated February 24, 1983, it has to be held that the property in the goods had passed certainly in the month of March, 1983. Hence, consequential capital gains had arisen in the previous year ended on March 31, i983, relevant to the assessment year 1983-84.
ORDER OF REFERENCE TO THIRD MEMBER
75. The following point of difference emerging from the proposed orders of the Members constituting the Bench in I. T. A. No. 2866/Bom of 1988 in the case of Marchon Textile Ind. Pvt. Ltd. v. IAC, Assessment Range III(B), Bombay, involving assessment year 1983-84, is being referred to the Hon'ble President of the Income-tax Appellate Tribunal for making a reference to a Third Member as provided for in Section 255(4) of the Income-tax Act, 1961 :
" Whether, on the facts and in the circumstances of the case, the property in the goods --machine --did not pass on to the vendee and hence there was no sale in the accounting period relevant to the assessment year under appeal ?"
ORDER OF THIRD MEMBER G. Krishnamurthy, President
76. The dispute in this appeal which has come to me as a third Member under Section 255(4) of the Income-tax Act, 1961, is as to whether the sale of a particular machine is complete on March 1, 1983, as claimed by the Department or on March 1, 1985, as claimed by the assessee. On this point, there was a difference of opinion between the learned Members of the Tribunal, who heard this appeal in the first instance, which was referred to me couched in the following words :
" Whether, on the facts and in the circumstances of the case, the property in the goods-machine did not pass on to the vendee and hence there was no sale in the accounting period relevant to the assessment year under appeal ?"
77. As the difference of opinion formulated by the Members referred only to the completion of sale or otherwise within the accounting period relevant to the assessment year under appeal, I do not have to decide as to when the sale has actually taken place. All I have to say is as to whether the sale of the machine had taken place on March 1, 1983, or not.
78. I have heard learned counsel for the assessee, Shri G. C. Sharma, and learned counsel for the Department, Shri Amitabh Mishra, at great length. I have come to the conclusion that, by any reckoning, it is not possible to say that the sale was complete on March 1, 1983.
79. Now let me advert to the facts which have been very succinctly set forth in the opinion prepared by the learned Accountant Member. The assessee is a private limited company carrying on the business of assembling and erecting textile machines at Bombay. The previous year relevant to this appeal is the financial year ending with March 31, 1983. The assessec-company imported one prototype draw texturising machine from Italy in November, 1980, for a sum of Rs. 26,23,795. Around that time, the assessee entered into agreements for manufacturing or assembling of similar machines for other users in India. The imported prototype machine was kept for demonstration purposes for about a year in the premises of another company called " Nirlons". In October/November, 1981, the prototype machine was apparently shifted to the premises of Messrs. Garware Nylons Ltd. for the purposes of demonstration. Now the dispute is whether Messrs. Garware Nylons Ltd. had purchased the machine and whether the assessee had sold the machine to them on March 1, 1983, or not. Soon after the machine was shifted to the premises of Messrs. Garware Nylons Ltd. (hereinafter referred to as " buyer " for the sake of convenience), negotiations started between the assessee and the buyer for the sale of the machine. There was a restriction imposed by the Government that the imported prototype machine would not be sold for a period of two years except with the prior permission obtained from the Government of India. Applications were made to the Government of India for the sale of this machine and it is common ground that the Government of India granted the permission in January, 1983, subject to satisfaction of certain conditions. Thereafter, the assessee raised a bill bearing No. MTI/82083/121 dated March 1, 1983, for a sum of Rs. 49,50,000 as sale price and sent it to the buyer. There was a regular running account between the assessee and the buyer and adjustments were made in this running account, an analysis of which showed apparently that the sale price was received in full by the assessee by March, 1983. In the books of the assessee, the difference between the purchase price and the sale price which worked out to Rs. 23,26,204 was treated as capital gains and was transferred to an account called " Capital gains reserve account". In the return filed for the year 1983-84, the deemed profit that arose under Section 41(2) of the Income-tax Act, 1961, was also shown and was offered for tax. On February 24, 1983, i.e., before the sale bill was raised on March 1, 1983, a letter was written by the assessee to the buyer wherein it was stated that the assessee could give a guarantee of two years for the satisfactory performance of the machine from the date of the sale and further agreed that, in case of failure to fulfil the guarantee obligations, it would refund the entire sale price to the buyer and would take back the machine from the buyer without charging any compensation for the use of the machine by the buyer in the meantime. A true extract of this letter will be given a little later at the appropriate place because much turned upon the interpretation and implication of the condition imposed in that letter. These are the basic facts.
80. Now, on the strength of this letter, the assessee claimed that, even though a sale bill was raised on March 1, 1983, the sale was not complete and that the sale had taken place only after the expiry of the guarantee period stipulated in that letter and, therefore, the sale must be held to have taken place on March 1, 1985, and the capital gains, if any, arising on the sale of this machine should be brought to tax in that year relevant for the previous year in which the date March 1, 1985, fell. It was further submitted that the assessee purchased 2,25,860 units on August 23, 1985, under the Capital Gains Unit Scheme-1983 of the Unit Trust of India amounting to Rs. 23,26,358 and, therefore, no capital gains tax could be levied on the assessee even in that assessment year as the conditions imposed for the exemption of capital gains had been complied with. But these contentions were not accepted by the Assessing Officer. For the reasons given by him in his order, which is very detailed, he came to the conclusion that the sale took place on March 1, 1983, itself and that it was not postponed at all by the stipulation of guarantee given in that letter. He relied upon (a) the raising of the sale bill on March 1, 1983, for the full consideration of the sale price, (b) the delivery of the machine tp the buyer, (c) the reference to the sale of the machine by the directors in their report in the accounts for the year under appeal, particularly the mention of the fact in their report that they propose to reinvest the entire capital gains of Rs. 23,26,204, earned on the disposal of the capital asset, on machinery within the stipulated time and reduction of this asset from the block of their assets. He also referred to the fact that, in the profit and loss account prepared by the assessee for this year, the capital gains on the sale of this machinery was disclosed although the same amount was carried to the capital gains reserve account through the profit and loss appropriation account. Referring to the letter on which reliance was placed by the assessee to contend that the sale had taken place on March 1, 1985, the Assessing Officer observed that the guarantee period started according to that letter from the date of the sale which meant that the sale must have taken place and in fact had taken place preceding the time of reckoning of the guarantee. The assessee also pointed out by letter dated March 4, 1986, that the sale of the machine was only on approval basis. The Assessing Officer declined to accept this stand on the ground that the earlier evidence referred to above showed that the sale was complete on March 1, 1983, itself and that the theory of sale on approval basis was only an afterthought without any factual or legal basis to support it. The mere furnishing of a guarantee, according to the Assessing Officer, did not convert the sale into a sale on approval. The assessee, having failed to invest the sale proceeds in specified assets as mentioned in Section 54E of the Income-tax Act, 1961, was only trying to change its stand. The sale having taken place after obtaining the requisite permission from the Government of India, there was nothing more to say that the sale was not complete. That is how the Assessing Officer concluded and brought the entire sum of Rs. 23,26,204 to the levy of capital gains tax. There was an appeal before the Commissioner (Appeals), but in vain.
81. Before the Tribunal, the same points were reiterated, relying upon the same evidence. The same evidence and material were differently interpreted by the assessee and the Department before the Tribunal. The learned Judicial Member held on the basis of this evidence that there was only an agreement to sell the machine but a concluded contract of sale had taken place not on March 1, 1983, but only on March 1, 1985. For this view, he relied upon the evidence produced by the assessee, copies of accounts, the statements recorded by the Assessing Officer from the joint managing director of the buyer and also the remand report obtained by the Commissioner (Appeals) from the Assessing Officer at the time of the disposal of the appeal. The learned Accountant Member agreed with the View of the Revenue and held that there was a completed sale on March 1, 1983, and that the guarantee given was no more than an assurance for the due performance of the machine and nothing turned upon the guarantee to postpone the parting of the title in the machine from March 1, 1983, to March 1, 1985. The learned Accountant Member drew his own inferences and conclusions from the very same material from which the learned Judicial Member drew his own conclusions. As it has turned out now, before me, as a third Member, the entire case revolves on the true and correct interpretation of Section 24 of the Sale of Goods Act and whether the material on record would support a conclusion of a completed sale or sale on approval. The most important evidence is the letter dated February 24, 1983, a copy of which was faithfully reproduced by the learned Judicial Member in his order and the other circumstantial evidence like depositions of the joint managing director of the buyer.
82. I shall first deal with the evidence on record, whether it could be inferred there from that the parties intended that the transfer would take place on March 1, 1983, or later. Section 19 of the Sale of Goods Act deals with a contract for the sale of specific or ascertained goods and provides that the property in those goods is transferred to the buyer at such time as the parties to the contract intend it to be transferred. Then, Sub-section (2) provides that, for the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case. Then, Sub-section (3) provides that, unless a different intention appears, the Rules contained in Sections 20 to 24 are Rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer. The governing or determinative principle, therefore, is to find out the intention of the parties as to when the property in the goods is to pass from the seller to the buyer. It is open to the parties to agree that the property shall pass ipso facto immediately the goods are ascertained or it shall pass at some time after the delivery is effected. Thus, as per the provisions of Sub-sections (1) and (2) of Section 19, the intention of the parties" is crucial and I have to ascertain as to what is the intention of the parties as to when the property in the goods (in the machine) is to pass from the seller to the buyer. As stipulated in Sub-section (2) of Section 19, for ascertaining the intention of the parties, the aids are the terms of the contract, the conduct of the parties and the circumstances of the case. It is only when there is no other intention, then the Rules contained in Sections 20 to 24 would apply.
83. First in the series of aids to discover the intention are the terms of the contract. They are to be found necessarily from the letter dated February 24, 1983. I would like to reproduce it here in whole for the sake of ready reference :
" As per the discussions the undersigned had with your goodself for the sale of the above machine at the price of Rs. 49,50,000, whereby it is agreed between us that because this is a prototype machine which we were running for demonstration purpose at Messrs. Nirlon Synthetic Fibres and Chemicals Ltd., Pahadi Village, Goregaon (East), Bombay-400 063, for a long period and also for about three months at your works for demonstration purposes with the prior permission from the office of the Textile Commissioner, Bombay.
Since this is an imported demonstration machine, it is agreed between us as insisted by you, that we will extend the two years' guarantee for the satisfactory performance of the machine from the date of sale.
It is further agreed that if we are unable to fulfil our guarantee for the satisfactory running of the machine for the period of two years, we undertake that we shall refund to you the above sale price of the referred machine and will take back our machine to our factory premises without charging any compensation for the use by you of the referred machine.
Hope this is in order and request your goodself to send us the duplicate copy duly signed by you as a token of your acceptance to the above proposal."
84. This letter clearly proves that the machine was a prototype machine which was used rather loosely for a considerable time for demonstration purposes and which needed the prior permission of the Government (Textile Commissioner) for its sale, and that the buyer insisted upon a guarantee for the satisfactory performance of the machine and that the required guarantee was given. This letter further points out that, if the assessee was unable to fulfil its guarantee obligations, it would undertake to refund the entire sale price of the machine to the buyer and would take back the machine to the assessee's factory premises without charging any compensation for the user of the machine in the meantime. This letter would further show that it was on the insistence of the buyer that a guarantee of two years was given undertaking at the same time to take back the machine without charging any compensation for the user of the machine by the buyer and to refund the entire amount of sale price. In essence, these are the terms of the contract. Thus, the contract provided for refund of the sale price and return of the machine to the assessee during the period of guarantee. The question of refunding the sale price and taking the machine back would not arise if there had been a completed sale unless there is a separate and independent contract to buy back the machine. Once the sale is complete, the transaction is complete and the transaction of taking the machine back and refunding the sale price would not be regarded as another contract of buying back the machine as these are all integrated parts of the same single transaction of sale of the machine subject to the condition of return of the machine within two years. The agreement does not appear to be a buy-back agreement notwithstanding that it provided that, if the machine had not satisfactorily run during the stipulated period of guarantee, the sale price would be returned and the machine would be taken back. This inference gains strength and support from the averment made by Shri Ashok Garware when he was examined by the Deputy Commissioner of Income-tax on the remand of the case. The questions put to him and the answers given by him were all faithfully recorded in the order of the learned Judicial Member and I would refer to only a few of them. In response to the following question, the answer given was very specific that the buyer reserved the right to return the machine to the assessee and to get the sale price back. The question was :
" Q. : Once the Government permission was received, did you go for outright purchase of this machine ?
A. : After receipt of Government permission which had certain terms and conditions in it, it was discussed with Marchon and an agreement was reached that Garware Nylon will have the right of returning the machine to Marchon and obtaining from Marchon the payments made. This condition is embodied in Marchon's letter dated February 24, 1983, No. MTI/Works/148. Other guarantees/conditions are also embodied in the letter."
85. In response to another question as to whether imposition of such a condition for refund, etc., was normal trade practice, Shri Ashok Garware replied :
" We considered putting such condition as reasonable as sale and purchase of imported prototype machine is not a normal trade."
86. There are some other questions having a bearing on this issue and all of them point to the conclusion that these conditions were agreed upon on the insistence of the buyer, all because the machine sold was an imported prototype machine which had become old on account of continuous user and no one was sure as to its good and satisfactory performance. The suggestion to put this condition came from the engineers. This fact also came out in the statement made by Shri Ashok Garware. So, the letter and the subsequent statement of Shri Ashok Garware seen in the above background point out that the parties intended that the "sale should be a sale on approval basis as the machine was old and much used subject to a limitation of time and not a completed sale. Thus, the circumstances of the case also abundantly prove this point.
87. Now, it has to be considered as to what is the effect of raising a sale bill, receiving the payment in full, delivery of the machine and reducing the cost of this machine from the total cost of the block of assets shown in the balance-sheet and in not claiming depreciation thereon, etc. These aspects, by themselves, establish a complete sale transaction. In order that there is a sale, these are the necessary ingredients. But, if these ingredients are subject to another condition as to the time of passing of the title in the goods, then, notwithstanding the presence of these aspects, the title in the goods passes only as intended by the parties in accordance with those conditions. Therefore, raising of a bill, fixing a sale price, receipt of full consideration, reduction of the value of the asset from the books and delivery of the machine and user of the machine by the other party, i.e., the buyer enjoying the income yielded by it exclusively by themselves are all consistent with the "sale on approval". For "a sale on approval", there must be a sale first and a sale is complete when the above ingredients are present. The condition of approval subject to a limitation of time is the condition that will postpone the time for the passing of the title from the seller to the buyer as provided for in Section 19(1) of the Sale of Goods Act. It is only when an intention to the contrary was not available that the Rules mentioned in Sections 20 to 24 would apply. But, if the intention of the parties is available otherwise, that intention gets primacy and should prevail upon every other provision of the Sale of Goods Act governing the passing of the title in the goods from the seller to the buyer. This is the effect of Section 19(1) of the Sale of Goods Act. Keeping the provisions of Section 19(1) of the Sale of Goods Act in view, when I examined the letters, correspondence and every other material that was brought on record by the authorities below and referred to by the learned Accountant Member in his order very vividly and elaborately, a different picture than a picture of "sale on approval" does not emerge. When the assessee is parting with the machine costing about Rs. 49,50,000, he must have his safeguards in order that he is not put to a loss at a later date. Similarly, when a buyer is purchasing a machine for such a huge sum, he must also have his own remedies in law to safeguard his interest. When both the parties, i.e., the seller and the buyer, have to safeguard their respective interests, the kind of evidence that is now brought on record becomes absolutely inevitable. Therefore, a conclusion cannot be drawn from those circumstances that the sale was complete which would mean ignoring the conditions imposed by the letter. The fact that the buyer-company had not claimed depreciation on the machine as and from March 1, 1983, is also consistent and is in accord with the view that it had not become the owner of the machine so as to claim depreciation with effect from March 1, 1983.
88. I can say here that furnishing of a guarantee does not, in my opinion, postpone the date of passing of the title in the goods from the seller to the buyer till the period of guarantee expires. Guarantee given in the Sale of Goods Act is not different from a warranty spoken of in Section 12 of the Sale of Goods Act. Section 12 of the Sale of Goods Act is in the following words :
" 12. Condition and warranty. -- (1) A stipulation in a contract of sale with reference to goods which are the subject thereof may be a condition or a warranty.
(2) A condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated.
(3) A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated.
(4) Whether a stipulation in a contract of sale is a condition or a warranty depends in each case on the construction of the contract. A stipulation may be a condition, though called a warranty in the contract."
89. A warranty is, therefore, a stipulation collateral to the main purpose of the contract the breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated. Where a condition is stipulated it gives rise on its breach to a right to treat the contract as repudiated. Thus, the essential difference between a condition and a warranty is the right to treat the contract as repudiated. Now, in this case, the guarantee given is for due performance of the machine. Normally, if it had stopped there, that would have been construed only as a warranty giving rise to a claim for damages but not a right to repudiate the contract. It is to convert this guarantee into a condition that the further stipulation was mentioned in the letter that the assessee would take back the machine by returning the entire amount of sale price without charging any compensation. It is this condition that converts this sale into a sale on approval and this condition does not remain a mere warranty giving rise to a claim for damages because, on the failure of the assessee's guarantee, there is no question of payment of any damages because the assessee is bound to take back the machine and return the entire amount of sale price. So much about the intention of the parties gathered from the terms of the contract, the conduct of the parties and the circumstances of the case.
90. Now, coming to Section 24 of the Sale of Goods Act, which deals with goods sent on approval or on sale or return basis, it provides :
" 24. Goods sent on approval or 'on sale or return'. -- When goods are delivered to the buyer on approval or 'on sale or return' or other similar terms, the property therein passes to the buyer -
(a) when he signifies his approval or acceptance to the seller or does any other act adopting the transaction ;
(b) if he does not signify his approval or acceptance to the seller but retains the goods without giving notice of rejection, then, if a time has been fixed for the return of the goods, on the expiration of such time, and, if no time has been fixed, on the expiration of a reasonable time."
91. This clearly shows that, in a case of goods sent on approval or on sale or return basis, there is generally no completed sale until the buyer has either signified his approval either expressly or by dealing with the goods as owner or kept the goods until the lapse of the prescribed or a reasonable time without returning them or made the return impossible by his own act or default. Now, in this case, the letter clearly provided that the machine shall be returned to the seller within a period of two years. Until the period of two years is over, the property therein does not pass to the buyer and the seller remains the owner of the goods although he received the sale price in full and parted with the possession of the machine because the Section says that, when goods are delivered to the buyer on approval or on "sale or return" basis or other similar terms, the property therein passes to the buyer only when the buyer signifies his approval or acceptance to the seller. So the delivery of the goods to the buyer under a contract of sale on approval or on " sale or return " basis or other similar terms does not ipso facto complete the sale, much less the receipt of sale consideration concludes the sale, both of which in this case were, in my opinion, mistakenly construed by the Department as amounting to sale ignoring the other conditions imposed. Regard, therefore, must be had to Section 24 of the Sale of Goods Act to determine the time when the property in the machine passes from the assessee to the buyer. This can only be after the period of two years is over.
92. I am, therefore, of the opinion that, having regard to the above, the property in the goods passed from the assessee to the buyer only on March 1, 1985, as, by then, the buyer must be held to have signified his approval or acceptance to the seller having retained the goods with him without giving notice of rejection. It is, therefore, wrong to say, on the peculiar facts of this case, that the sale was complete on March 1, 1983, itself when the machine was delivered and sale price received because, as I have mentioned earlier, even under a contract for sale on approval basis, there must be delivery of goods or machine. I, therefore, hold that, on the facts- and circumstances of this case, the property in the goods, i.e., the machine did not pass on to the vendee and hence there was no sale in the accounting period relevant to the assessment year under appeal.
93. The matter will now go before the regular Bench for decision according to the majority opinion.