Supreme Court of India
DALMIA CEMENT LTD., RAJASTHANversusCOMMISSIONER OF INCOME TAX, NEW DELHI
- Citation
- 1999 INSC 193
- Decided
- 16 April 1999
- Disposal
- Appeal(s) allowed
- Bench
- M SRINIVASAN
Holding
Profits arising from the two cement factories are not taxable in the hands of Dalmia Cement Ltd. because the income was diverted by an overriding title to the transferee, and Section 60 does not apply as the agreement constitutes a transfer under Section 63.
Summary
Dalmia Cement Ltd., owner of two cement factories in Pakistan, entered into a sale agreement on 24 July 1962 and a supplemental agreement on 2 November 1962 that stipulated profits and losses from the factories after 30 September 1962 would be credited to the buyer, Mr. Maneckji. The actual transfer of assets occurred on 30 September 1964. Dalmia excluded the factories' profits from its income‑tax returns for the assessment years 1962‑63 and 1963‑64; the tax officer included them, and the assessments were upheld by the Assistant Commissioner, the Tribunal and the Delhi High Court. The Supreme Court examined whether the profits were taxable in Dalmia’s hands, the applicability of Sections 60 and 63 of the Income‑Tax Act, 1961, and the concept of “overriding title”. It held that the agreement created an overriding title in favour of the transferee, diverting the income before accrual, and that Section 60 does not apply because the agreement constitutes a transfer under Section 63. Consequently, the profits are not chargeable to Dalmia. The appeal was allowed, setting aside the orders of the High Court and the Tribunal.
Issues considered
- Whether profits from the two cement factories for the periods 1‑Oct‑1962 to 30‑Sep‑1963 and 1‑Oct‑1963 to 30‑Sep‑1964 are taxable in the hands of Dalmia Cement Ltd.
- Whether Section 60 of the Income‑Tax Act, 1961 applies where the income‑earning asset is transferred later but the agreement provides for profit diversion.
- Whether Section 63’s definition of “transfer” includes the sale agreement and supplemental agreement, thereby excluding the operation of Section 60.
- When does profit accrue for tax purposes – at the time of receipt or at the end of the accounting year?
Legislation cited
- Income Tax Act, 1961s. 28, s. 60, s. 63
Subjects
Income taxTransfer of incomeOverriding titleSection 60Section 63Profit accrualSale agreementCapital gainsAssessment yearCement factoriesPakistan
Judgment
DALMIA CEMENT LTD., RAJASTHAN A
v.
COMMISSIONER OF INCOME TAX, NEW DELHI
APRIL 16, 1999
[M. SRINIVASAN AND UMESH C. BANERJEE, JJ.] B
Income Tax Act, 1961
S. 28-Income Tax-Assessee-Agreement dated 24. 7.1962, to sell and
transfer two cement factories-Supplemental agreement dated 2.11.1962 C
stipulating in clause 3 that profits and loss arising from the said factories
after 30.9.1962 to go to the account of.transferee-Actual transfer of assets
by sale deed dated 30.9.1964 Profits arising out from the two factories after
agreement to sale hut prior to actual transfer-Liability to pay tax-
Determination of-R~ld, there was diversion of income by overriding title in D
favour of transferee even before actual accrual-Assessee not able to retain
the profits after sale agreement-Thus, profits not taxable in the hands of
aSsessee.
Ss. 60 and 63--Applicability of.
Income Tax-Profits ofbusiness-Accrual of-Held, profits do not accrue E
from day to day but at the end of the accounting year.
Words & Phrases
"Transfer "-Meaning and scope of in the context ofs. 63 of the Income F
Tax Act, 1961.
- Appellant-ass.essee, by an agreement dated 24.7.1962 agreed to sell
and transfer its two cement factories to one 'M'. Subsequently, supplemental
agreement dated 2•.11.1962 was entered into between the parties stipulating
in clause 3 that the profits and loss arising from the two factories subsequent G
to 30.9.1962 shall go to the account of transferee. The agreement was
extended from time to time and ultimately, on 30.9.1964, the parties entered
into a sale deed. Assessee filed his Income-tax return for the Assessment
periods 1.10.1962 to 30.9.1963 and 1.10.1963 to 30.9.1964 excluding the
profits arising out of the said two cement factories. The Income-tax Officer
rejecting the said returns, passed an assessment order by including the H
735
736 SUPREME COURT REPORTS (1999] 2 S.C.R.
A profits arisi01g out from the said two cement factories. The assessee,
unsuccessfully, challenged the said assessment order before the Appellate
Assistant Commissioner and the Tribunal. On Reference, High Court
answered the question in favour of the Revenue. Hence the present appeal.
On behalf of the appellant-assessee it was contended that High Court
B was in clear error by reason of its reliance on the fact of physical control _.......
I
of the factories rather than to the ownership or the title to the profits which
was entirely a matter of agreement between the buyer and the seller; the
High Court has misread and misapplied the law pertaining to accrual of
profits by reason of the fact that the supplemental agreement itself records
C that the profits have to be to the accounts of transferee 'M', the High Court's
finding regarding the applicability of S. 60 of the Act was also totally
unwarranted having due regard to the language of s. 60 and s. 63 of the
Income-tax Act, 1961.
Allowing the appeal, this Court
D
HELD : 1.1. The appellant-assessee cannot be taxed for the profits
arising from the two cement factories situated in Pakistan for the assessment
period 1.10.1962 to 30.9.1963 and 1.10.1963 to 30.9.1964 as there was
diversion of income by overriding title in favour of transferee.
[749-A-B; 738-D-G)
E
1.2. The law is well-settled that in the event of their being a diversion
of income by overriding title, question of the income being assessed in the
hand of the assessee does not and cannot arise. The finding of the High
Court that issue of overriding title on the basis of an event which is yet to
take place, being not available in the facts of the matter under consideration,
F cannot be a correct appreciation of law, since on the date of assessment, the
event has already taken place and an overriding title has in fact been created
by operation of law and there is no escape from it. [746-A-C)
CIT v. Sitaldas Tirathdas, (1961) 41 ITR 367 and Travancore Sugars
G & Chemical, (1973) 88 ITR 1, relied on.
Commissioner of Income Tax v. Jhanzie Tea Association, (1989) 178
ITR 296 and Commissioner of Income Tax v. M.D. Kanoria, (1982) 137 ITR
-
137, approved.
H 1.3. In the instant case, the parties agreed that the relevant date should .~
DALMIA CEMENT v. C.I.T. 737
be 30.9.1962 and not the completion of sale. Clause 3 of the agreement of A·
which, the High Court made a special reference and interpreted that by
reason of the contingent event which would be subsequent to the accrual of
profits, the profit cannot but be treated to be in the hands of the assessee,
does not withstand th•~ test of correctness. There is no question of enabling
the assessee to retain the profit in its own hand after the 'sale agreement'. B
In any event profits of a business do not accrue from day to day but at the
end of the accounting year. Profits were ascertained on 30.9.1964. When the
property was transferred as such for the year 1965-66 the question of profit
accruing to the assessee does not arise. As a matter of fact profit stands
diverted to the purchaser "in terms of and in accordance with the agreement
dated 24.7.1962 read with Supplemental Agreement dated 2.11.1962 and the C
date of actual transfer of the factory in question which, in fact, has taken
place on 30.9.1964 does not alter the situation. The income stands diverted
by an overriding title as a matter of fact even before the accrual.
[743-F-H; 744-A-B}
2. Section 60 of the Income-tax Act has its application only to a case D
where income accrues to the transferee but the income earning asset or
source of income remains with the transferor. Thus, the finding of the High
Court that income accrued to the transferor stands contradicted by the
finding that S. 60 has its due application in the facts of the matter under
consideration. Incidentally, S. 63 contains a rather special definition of E
"Transfer" for the IJ1Urposes of Ss. 60 to 62 and inter alia includes an
"agreement" and in this case the very existence of the agreement to transfer
dated 24th July, 1962 rules out and totally excludes the application of S. 60
of the Act. Thus, the Tribunal's finding as regards the applicability of S. 60
cannot but be ascribed to be otherwise in accordance with the known principles
of law, having due regard to language used therein and the High Court has F
infact misconstrued the provision and thus fell into an error.
[447-E-G; 748-C-D]
3. There appears to be clear inconsistency between the assessment of
capital gains on the transfer of the factories and the finding on accrual of G
income since the computation of capital gains was effected by treating the
gross amount of consideration as the sale price. The Income-tax Officer thus
by implication accepfod the profits as belonging to the transferee and not to
the transferor-otherwise, the net amount paid alone ought to have been taken
as the sale pri<;e. The High Court's judgment therefore, does not only suffer
from apparent inconsistency but on a totality of the situation is inh«;rently H
738 SUPREME COURT REPORTS [I 999) 2 S.C.R.
A contradictory. [748-G-H; 749-A]
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 4632-33 of
i992.
From the Judgment and Order dated 9.10.91 of the Delhi High Court in
B S.C.A. Nos. 1 and 2of1991.
Joseph Vellapally, Ms. Sushmita Banerjee and Tarun Gulati for the
Appellant for Mis Khaitan & Co.
Dr. V. Gauri Shanker, S. Rajappa and B.K. Prasad for the Respondent.
c
The following Judgment of the Court was delivered by :
BANERJEE, J. These appeals by the grant of special leave are directed
against a common order of the High Court in Income-tax Reference Nos.87
and 88of1974 in terms of the order of Reference by the Income-tax Appellate
D Tribunal, Delhi Branch in respect of Assessment Years 1964-65 and 1965-66.
The Tribunal has referred the following two questions to the High Court
for the above-mentioned assessment years 1964-65 and 1965-66.
For the assessment year 1964-65 the question reads as below:
E
"Whether on the facts and in the circumstances of the case,
Income-tax Appellate Tribunal was right in holding that the profit
arising from the working of the two cement factories situated in
Pakistan forthe year 1.10.1962 to 30.9.1963 was taxable in the hands
of the applicant company?"
F
And for the assessment year 1965-66 the question was:
"Whether on the facts and in the circumstances of the case, the
Income-tax Appellate Tribunal was right in holding that the profit
arising from the working of the two cement factories situated in
G Pakistan for the year I.I 0.1963 to 30.9.1964 was taxable in the hands
of the applicant company?"
The High Court however, answered the questions in the affirmative for
both the assessment years and hence these appeals.
H At this juncture, it would be convenient to advert to the contextual
DALMIA CEMENT v. C.I.T.[BANERJEE, J.] 739
facts briefly. The assessee Dalmia Ct:ment Limited, the owner of two cement A
factories situated in Pakistan, by an agreement in writing dated 24th July, 1962
agreed to sell and transfer to one Maneckji, its properties and assets in
· Pakistan represented in thie two cement factories.
The facts depict further that subsequent to the agreement, the parties
did enter into a supplemental agreement on 2nd November, 1962. We would B
refer to both the agreements presently but before so doing, to conclude the
factual aspects be it noted that the assessee in its return of income for the
assessment year 1964-65 on 30th June, 1964 recorded the total income as
Rs.24,28,675/- but subsequently on a revised return, filed on 20th November,
1968, the total income shown was reduced to Rs.l,40,852/-. Similarly for the C
year 1965-66, the return filied on 30th June, 1965 recorded the total income of
Rs.24,58,314/- but the revised return depicted a loss of Rs.2,45, 786/-. The
original return however did not include profits from the working of the two
Pakistan factories but only the interest income for the two years period from.
l.10.1962 to 30.9.1964 which however was deleted in the revised return on the
ground of non-receipt of the· same. D
The lricome-tax Officer did however reject the contention that the profit
from the two factories belong to Mr. Maneckji or his nominee with effect from
l.10.1962 and the Income-tax Officer's assessment included the profits of the
two companies in the total income of the assessee company for both the
years. On an appeal to the Appellate Assistant Commissioner the order of the E
Income-tax Cffir.er stood confirmed for both the years. Similar is the order of
the Tribunal in the appeal by the assesssee by recordi11g a finding that profits
arisen after 30.9.1962 and before 30.9.1964 were taxable in the hands of the
assessee company. Subsequently the matter came up before the High Court
for consideration of the above noted two questions and the High Court as F
noticed above answered the same in the affirmative.
It would be convenient at this juncture however to advert to the terms
of the agreement dated 24th July, 1962 which inter alia contained the following:
" ........... and whereas, the company has agreed to sell and transfer to Mr. G
--- Maneckji all its properties and assets in Pakistan pertaining to the said
business mentioned briefly in the preceding paragraph and set out in detail
hereinafter for the consideration and upon the terms and conditions hereinafter
appearing......"
" ........ The consideration for the said sale shall be ascertained in the H
740 SUPREME COURT REPORTS [1999] 2 S.C.R.
A following manner and the total sum thereby ascertained (less the deduction
of Rs. 20,00,000 (rupees twenty lacs therefrom) is hereinafter called '!the
purchase price".
(a) the price to be paid by Mr. Maneckji for all the fixed assets to
B
be more fully described in the S.chedule hereinbefore mentioned
shall be their value in the books of accounts of the Company on
the 30th day of September, 1962 hereinafter called "assessment
- '
day" subject to adjustments at book prices for fixed assets
c
bought, sold, damaged or destroyed between assessment day
and the date on which the transaction is completed hereinafter
called "completion day" (normal) wear and tear excepted);
-
(b) the price to be paid by Mr. Maneckji for all stores including
firebricks, grinding media, gunny bags, spare parts, general stores, t-
coal and miscellaneous items to be transferred to Mr. Maneckji
shall be their value in the books of account of the Company
upon assessment day, subject to the adjustment at book prices
D
for the above items bought, manufactured, in process damaged,
sold or destroyed between assessment day and completion day;
(c) the price to be paid by Mr. Maneckji for all goods in transit, raw
materials, in process, clinker (half made cement), manufactured
cement, firebricks manufactured by Dandot Factory, shall be
E
their value in the books of account of the Company upon
assessment day, subject to adjustment at book prices for the
above items bought, manufactured, in process, damaged, sold or
destroyed between assessment day and completion day;
(d) cash shall be transferred at par;"·
F
"18 ............ The completion of the transaction is subject to the approval
of the Governmental agencies of both India and Pakistan to the extent
of such approvals as may be necessary and required by law for the
effectuation of this Agreement and Mr. Maneckji will use his best
G endeavours t9 o~tain all the said approvals from the Government of
Pakistan. The Company hereby undertakes on its part to use its best
endeavours to obtain all the said approvals from the Government of
India.
---'
19. The transfer of the subject matter of this Agreement shall be
H completed on or before the 31st December, 1962 and unless otherwise
- DALMIA CEMENT v. C.I.T. [BANERJEE, J.)
. mutually agreed in writing, this Agreement shall expire upon that day.
20. This agreement: and/or the subject matter hereof may be transferred
741
A
to anybody cor{>orate formed and controlled by Mr. Maneckji, if so
required and the Company shall be bound to effect the transfer as if
such body corporate were a party hereto."
B
It would also be convenient at this juncture to note some of the terms
of the Supplemental Agreement as below:
"Now therefore it is agreed by and between the parties that:
Clause 2 of the said agreement shall be deleted and replaced by the
following Clause: c
"The consideration of the said ·sale shall be ascertained in the following
manner and total sum thereby ascertained (less the deduction of Rs.
20,00,000 therefrom) is hereinafter called the purchase price.
(a) The price to be paid by Mr. Maneckji for all the fixed assets sh~ll D
tt be their value in the books of account of the Company on the
30th day of8eptember, 1962 hereinafter called "assessment day" .
...........................................................................................................
(d) All cash held by the Company in Pakistan as on 30th September,
1962 shall be transferred at par. E
(e) Investments and Government securities shall be transferred at
average market price on assessment day except that the shares
held by the Company in Dalmia Cement (Pakistan) Ltd., a wholly
owned subsidiary shall be transferred at the net worth of the
shares detennined with reference to the Balance Sheet of Dalmia F
Cement (Pakistan) Ltd., as on 30th September, 1962.
(t) The price to be paid by Mr. Maneckji for all the Company's
loans, advances outstandings and other debts standing to the
credit of the Company shall be their value in the books of the
Company on assessment day. G
- The interest payable by Mr. Maneckji at six per cent annum on the purchase
price shall be calculated with effect from 1st October 1962 and paid in the
manner provided in para 3 (b) of the said agreement.
The profit and loss arising from the operations of the Company during H
742
-
SUPREME COURT REPORTS (1999] 2 S.C.R.
A the period subsequent to 30th September, 1962 shall, in the event of
the completion of the sale transaction in accordance with the said
agreement, be to the account of Mr. Maneckji. The operations of the
Company's factories and business in Pakistan shall, however, continue
to remain under the full and undisturbed control, and direction of the
Company as hitherto, and nothing stated herein shall be construed as
B permitting in any manner interference on the part of Mr. Maneckji with
the conduct of the b~siness and operations of the factories until the
same are transferred to Mr. Maneckji on the completion of the
transaction.
In supercession of para 5 of the said agreement, it is hereby
c agreed that the all liabilities of the Company relating to the period
uptill 30th September, 1962 which may relate to the properties, assets
and premises hereby transferred shall be the sole responsibility of the
Company and Mr. Maneckji shall be responsible for all such liabilities
in respect of the period commencing 1st October 1962."
D
Incidentally, be it noted that the principal agreement dated 24th .
July, 1962 though had a time limit, the same, by consent of the parties
and by way of supplemental agreement was extended from time to time
"'
and the period of completion of the purchase was extended till 30.9 .1 ~64
and it is on that date the parties did enter into a Sale Deed for transfer
E of rights by the assessee Dalmia Cement Ltd. in favour of Pakistan
Progressive Cement Industry.
Mr. Vellapally, the learned Senior Advocate appearing in support of the
appeal was rather emphatic in his contention that the High Court was in clear
error by reason of.its reliance on the fact of physical control of the factories
F rather than to the ownership or the title to the profits which was entirely a
matter of agreement between the buyer and the seller. The factum of non
interference by Mr. Maneckji in the conduct of the business and operations
of the factory until the same are transferred to Mr. Maneckji on completion
of the transaction, it appears has had weightage with the High Court. The
G Appellant contended that the High Court has otherwise misread and misapplied
the law pertaining to accrual of profits by reason of the fact that the
supplemental agreement itself records that the profits have to be to the
accounts of Mr. Maneckji. The High Court in this context observed: "profits
would arise simultaneously by the conduct of business and running of the
-
factories. It is true that as per clause 3 of the supplemental agreement dated
H 2nd November, 1962, profits have to be to the account of Mr. Maneckji but
DALMIA CEMENT v. C.l.T. [BANERJEE, J.] 743
that would be only in the event of completion of the sale transaction by a A
particular date which would be an event to take place subsequent to the
accrual of the profit."
..............................................,................................................................................ B
" ......... when the business and operation of the factory is to be effected
by the assessee Company without any interference by Mr. Maneckji
or his nominee and the sale transaction is yet to take place which may
take place or may not take place. In such a situation there will be no
stoppage of accrual of profits to the assessee company. It is true that C
cash in hand as well as in the Bank, and all bills and notes of the bank
would also stand transferred but that will take place on a future date
when the Sale Deed is executed. In respect of an event which is yet
to take place overriding title does not come into existence, accrual of
profit can only be stopped if an overriding title is created before the D
accrual of the profits .... ".
While at the first blush the reasoning seems to be rather attractive but
on consideration of the issue on a wider perspective the High Court cannot
but be said to be in clear error. For the year 1965-66 when the order of
assessment was made, the profits w~re ascertained on 30th September, 1964 E
and the property was itself transferred, as such question of accrual of profit,
on account of the transferred assets, does not and cannot arise. Be it noted
that completion of sale transaction ought to be attributed Its normal meaning
and in this regard contextual facts should also be looked into and considered
in the proper perspective. The sale transaction in fact has taken place and as
such there being any contingency, as was there at the earlier point of time, F
does not arise. The event has taken place and the supplemental agreement
dated 2nd November, 1962 makes the situation clear and categorical. The
parties agreed the relevant date to be 30th September, 1962 and not the
completion of sale. Clause 3 of the agreement of which, the High Court made
a special reference and interpreted that by reason of the contingent event G
which would be subsequent to the accrual of profits, the profit cannot but
be treated to be in the hands of the assessee does not withstand the test of
correctness. The High Court has not laid any importance to the event which
stands completed by reason of the sale agreement. There is no question of
enabling the assesssee to retain the profit irt its own hand after the 'sale
agreement'. The event as noticed above, has taken place and by reason of H
744 SUPREME COURT REPORTS [1999] 2 S.C.R.
A the event and in terms of the provisions of the agreement question of tracing
the profit in the hands of the assessee does not and cannot arise. In any
--
event profits of a business do not accrue from day to day ?ut at the end of
the accounting year. Profits were ascertained on 30th Sept~mber, 1964 when
the property was transferred as such for the year 1965-66 as noted above,
B question of profit accruing to the assessee does not arise. As a matter of fact
the profit stands diverted to the purchaser in terms of and in accordance with
the agreement dated 24th July, 1962 read with supplemental agreement dated ·
2nd November, 1962 and the date of actual transfer of the factory in question
which, in fact, has taken place on 30th September, 1964 does not alter the
situation. The income stands diverted by an overriding title as a matter of fact
C even before the accrual.
The concept of diversion of income by an over-ri~ing title ·has been
very lucidly explained by this Court in C/Tv. Sitaldas Tirathdas's case (1961]
41 ITR 367 in the manner following:-
D "In our opinion, the true test is whether the amount sought to be
deducted, in truth, never reached the assessee as his income.
Obligations, no doubt, there are in every case, but it is the nature of
the obligation which is the decisive fact. There is a difference between
an amount which a person is obliged to apply out of his income and
an amount which by the nature of the obligation cannot be said to
E be a part of the income of the assessee. Whereby the obligation
income is diverted before it reaches the assessee, it is deductible; but
where the income is required to be applied to discharge an obligation
after such income reaches the assessee, the same consequence, in
law, does not follow. It is the first kind of payment which can truly
F be excused and nqt the second. The second payment is merely an
obligation to pay another portion of one's own income, which has
been received and is since applied. The first is a case in which the
income never reaches the assessee, who even if he were to collect it,
does so, not as part of his income, but for and on behalf of the person
to whom it is payable."
G
In Travancore Sugars & Chemical's case [ 1973] 88 ITR 1, this Court *
reiterated the same test and observed:-
"It is thus clear that where by the obligation income is diverted
before it reaches the assessee, it is deductible. But, where the income
H is required to be applied to discharge an obligation after such income
DALMIA CEMENT v. [BANERJEE, J.] 745
reaches the assessee it is mereiy a case of application of income to A.
satisfy an obligation of payment and is therefore not deductible."
In this context, reference to a Bench decision of the Calcutta High
Court in the case of Commissioner of Income-tax v. Jhanzie Tea Association
(l 989) 178 ITR 296 also seems to be apposite. S.C. Sen, J. (as His Lordship
then was) in the last noted decision observed:- B
"It is true that the income-tax liability cannot be assigned by any
agreement. The R~~venue is entitled to proceed against the person
who earned the income but where the income has been diverted by
an overriding title even before accrual, then the Income-tax Officer
cannot proceed to assess the income thus diverted as the income of C
the transferor. In this case, not only had the tea estates been
transferred but the income accruing therefrom had also been transferred
to the purchaser with effect from January 1, 1969. All its manufacturing
activities as from that date were on behalf of .the purchaser. The
income attributable to the manufacturing activity accrued to the D
purchaser. The income attributable to the manufacturing activity accrued
to the purchaser. I fail to see how the income realised from sale of
such tea can be assessed as the income of the vendor.
In this connection, :reference may be made to the observations made
by G.K. Mitter, J. in the case of CIT v. Tea Producing Co. of India E
Ltd., (1963) 48 ITR 200 (Cal), where it was stated that before a person
could be assessed under Section 10, it must be shown that it was he
who carried on the business, profession or vocation and in the case
of a business, it was open to any person to put another person in
charge thereof although ostensibly such person appeared to be
carrying on the business, in reality the business was that of the F
person who owned it and under section 10 of the Act such owner of
the business would be the assessee. It was observed in that case that
(at page 206):
"If a business carried on by A is transferred to B as from a certain G
point of time, B alone can be assessed to tax in respect of the period
. subsequent to the change of the ownership. A and B may agree that
any profits or loss of the business as from a date anterior to that of
the change of ownership will be on B's account. In such a case, A
will have to account to B for the income and profits of the business. . ..
covered by the period of the agreement and A may be held to have H
I
746 SUPREME COURT REPORTS (1999] 2 S.C.R.
A carried on the business as B's agent from the agreed date."
Similar is the view expressed by the Bombay High Court in the case
of Commissioner of Income fox v. MD. Kanoria, [1982] 137 ITR 137.
B
The ·law thus seems to be well-settled by a long catena of cases to the
effect that in the event of their being a dive~sion of income by overriding title,
question of the income being assessed in the hand of the assessee does not
and cannot arise.
..
_,
Be it noted here, that at no stage of the proceeding up to the High
Court, there was any dispute as regards assessee's contention of diversion
C by overriding title. The finding of the High Court that issue of overriding title
on the basis of an event which is yet to take place, being not available in the
facts of the matter under consideration, cannot in our view be said to be a
correct appreciation of law, since on the date of assessment, the event has
already taken place and an overriding title has in fact been created by
D operation of law and there is no escape from it and as such we are unable
to record our concurrence therewith.
Mr. Vellapally, on the next count contended that the High Court's
..-
finding as regards the applicability of Section 60 of the Act is also totally
unwarranted having due regard to the language of Section 60 and Section 63.
E For convenience sake Sections 60 and 63 are set out hereunder:
"Section 60. Transfer of income where there is no transfer of assets-
AII income arising to any person by virtue of a transfer whether
revocable or not and whether effected before or after the commencement
of this Act shall, where there is no transfer of the assets from which
F· the income arises, be chargeable to Income-tax as the income of the
transferor and shall be included in his total income."
"Section 63. "Transfer" and "revocable transfer" defined-for the
purposes of Sections 60,61 and 62 of this Section-
G (a) a transfer shall be deemed to be revocable if -
(i) it contains any provision for the re-transfer directly or indirectly
of the whole or any part of the income or assets to the transferor,
or
-.-
'
H (ii) if, in any way, gives the transferor a right to re-assume power
DALMIA CEMENT v. C.I.T. [BANERJEE, J.] 747
- directly or indirectly over the whole or any part of the income
or assets;
A
(b) "transfer" includes any settlement, trust, covenant, agreement or
arrangement."
The High Court while dealing with the matter observed:
B
"Section 60 contemplates as to how the income would be chargeable
to Income-tax when there is no transfer of the assets from which
income has arisen. Section 63 clause (b) defines the word "transfer"
to include any settlement, trust, covenant, agreement or arrangement.
If any document of the nature mentioned in clause (b) exists, it would C
be considered to be a transfer. In the present case, there are agreements
between the parties. The agreements between the parties would be
considered to be transfer but in fact, transfer of assets had not taken
place till 30th September, 1964. So, whatever income has arisen prior
to the transfer of assets, Section 60 clearly contemplates that such an
income which has arisen before the actual transfer of assets has taken D
place, would be chargeable to Income-tax as the income of the
transferor and shall be included in his total income.
In the present case, up to 30th September, 1964, there was ~o transfer
of assets and under clause-3 of the supplemental agreement dated
2.11.62, the profits had to be to the account of the transferee on E
completion of the sale transaction. Even if there is an agreement for
diversion of the profits prior to 30th September, 1964, still, in our
opinion, in the light of the provisions contained in Section ~O, the
profits would be taxable in the hands of the assessee company."
It is this finding of the High Court which has been criticised by the F
appellant and we do find some justification in that regard by reasons of the
specific language used by the legislation Section 60 of the Act, has its
application only to a case where income accrues to the transferee but the
income earning asset or source of income remains with the transferor. As a
matter of fact this finding of the High Court that income accrued to the G
Transferor stands contradicted by the finding that Section 60 has its due
application in the facts of the matter under consideration.
lnci~~ntally, Section 63 contains a rather special definition of "Transfer"
for the purposes of Sections 60 to 62 and inter alia includes an "agreement"
and in this case the very existence of the agreement to transfer dated 24th H
748 SUPREME COURT REPORTS [1999] 2 S.C.R.
A July, 1962 rules out and totally excludes the application of Section 60 of the
Act.
The Tribunal however recorded a finding different from that of the High
Court as regards the issue of applicability of Section 60 of the Act. The
Tribunal recorded:-
B
"Nor are inclined to accept the contention of the departmental
representative that even under Section 60 the profits accruing after
30.9.1962 were chargeable in the hands of the company. For one thing
the underlying assumption of this argument would be that income had
actually accrued to Maneckji or his nominees whereas for reasons
c given earlier we are unable to accept this assumption. Moreover,
according to our reading of Section 60 it relates to an arrangement or
settlement according to which both the transfer of income and the
retention of the ownership of the assets form parts of one scheme."
D In view of the above, we do feel it expedient to record that the Tribunal's
finding as regards the applicability of Section 60 cannot but be ascribed to
be otherwise in accordance with the known principles of law, having due
regard to language used therein and the High Court unfortunately, we are
constrained to record, has in fact misconstrued the provision and thus fell
into an error.
E
Significantly, however, the Tribunal while dealing with the matter has
recorded in its order "we are painfully aware of the fact that the case of the
assessee is a hard one, that the assessee had not received any part of the
purchase price so far and that the position regarding the adjustment of profits
earned earlier is equally bad. But we have to apply the provisions of law as
F we find them uninfluenced by the hardships through which though no fault
of its own some assessee may have to pass."
While we appreciate the sympathy of the Tribunal towards the assessee
and record that hard cases do not make bad laws but both the Tribunal and ·
G the High Court erred in appreciating the true perspective of the factual matrix
of the matter in issue read with the law as noticed above.
The other aspect of the matter ought also not to be lost sight of to wit:
the assessment of capital gains: There appears to be clear inconsistency
between the assessment of capital gains on the transfer of the factories on
H one hand and finding on accrual of income since the computation of capital
DALMIA CEMENT v. C.I.T. [BANERJEE, J.] 749
gains was effected by treating the gross amount of consideration as the sale A
price. The Income-tax Officer thus by implication accepted the profits as
belonging to the transferee and not to the transferor - otherwise, the net
amount paid alone ought to have been taken as the sale price. The High
Court's judgment therefore, does not only suffer from apparent inconsistency
but on a totality of the situation is inherently contradictory.
B
In the contextual facts and having due regard to the provisions of law
as noticed above, the High Court's affirmation to the questions raised st~nds
negated and are thus answered in the negative and in favour of the assessee.
In the premises the appeals succeed. The judgment and order of the
High Court stand set aside along with the order of the Tribunal as also that C
of the Income-tax Authorities.
The respondent-tax authorities are directed to take steps in accordance
with law, having due regard to the observations made herein before in this
judgment. There shall, however, be no order as to costs.
S.V.K.L Appeal allowed.
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