Commissioner Of Income-Tax vs Bhurangya Coal Co.

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 23 September, 1958

Coram: A.K. Sarkar, P.B. Gajendragadkar, Venkatarama Aiyar

In this appeal, the matter before the Supreme Court concerned a decision of the Patna High Court that had been referred under section 66 of the Indian Income‑tax Act, 1922. The respondent was a firm that owned a coal colliery situated at a location called Bhurangya. On 16 March 1946 the firm entered into a written agreement to sell the colliery together with the land, super‑structures, machinery and fixtures to a newly formed company identified as Bhurangya Coal Co. Ltd. The consideration stipulated in the agreement amounted to six lakh ten thousand rupees. The agreement was accompanied by a detailed schedule that enumerated the property to be transferred. The schedule was divided into two parts. The first part listed the immovable assets, namely the land, buildings and associated structures, and assigned to them a total value of two lakh six hundred rupees. The second part comprised the movable assets, including machinery, trucks, pipes, motor cars and other similar items, and valued these at four lakh nine hundred and forty rupees. The agreement expressly stated that the movable assets described in the second part could be transferred by delivery. It is noteworthy that Bhurangya Coal Co. Ltd. had been incorporated only two days after the agreement, on 18 March 1946. Nevertheless, two promoters of the company had signed the agreement on behalf of the corporation on 16 March. After incorporation, the directors of the company formally approved the transaction by passing a resolution dated 29 March 1946. The following day, on 30 March 1946, all assets covered by the agreement, both movable and immovable, were placed under the possession of the company. Subsequently, on 17 May 1946 a deed of sale was executed and registered concerning only the immovable assets described in part I of the schedule. This sale deed referenced the original agreement of 16 March 1946 and reiterated the two categories of property. However, the conveyance effected by the deed was limited to the immovable assets, and the price recorded therein was two lakh six hundred rupees, which corresponded precisely to the amount allotted to the immovable portion in the original agreement. These facts formed the material background for the present appeal.

On 1 April 1946 section 12B of the Indian Income‑tax Act came into force. The provision stipulated that an assessee would be liable to tax under the head “Capital gains” for any profit or gain arising from the sale, exchange or transfer of a capital asset that was effected after 31 March 1946 and before 1 April 1948. The point that required determination in these proceedings was the extent to which the profits arising from the transaction that had been entered into on 16 March 1946 and subsequently completed by the sale deed dated 17 May 1946 were assessable under the aforesaid section. The determination involved assessing whether the transfer of the immovable assets, which became effective only upon execution of the sale deed on 17 May 1946, fell within the operation of section 12B, and similarly whether the transfer of the movable assets, which was effected by delivery on 30 March 1946, attracted tax liability under the same provision. This issue formed the core of the Court’s consideration.

In the present dispute, the Court considered the question of whether the profits arising from the transaction documented in the deed dated 17 May 1946 were subject to income‑tax under section 12B of the Income‑tax Act. Section 12B, which had come into force on 1 April 1946, provides that any profit or gain arising from the sale, exchange or transfer of a capital asset effected after 31 March 1946 and before 1 April 1948 is chargeable to tax under the head “Capital gains”. The Court first examined the status of the immovable properties that formed part of the sale. It observed that legal title to those immovable assets passed to the purchaser only at the moment when the sale deed was executed on 17 May 1946, and not at the earlier date when the parties had concluded their agreement on 16 March 1946. Because the transfer of title occurred after the commencement of section 12B, the sale of the immovable assets fell directly within the operation of that provision. The Court then turned to the movable properties that were also included in the transaction. It held that title to the movable items transferred to the buyer at the time of actual delivery, which took place on 30 March 1946. Since this delivery, and consequently the transfer of title, occurred before the effective date of section 12B, the sale of the movable property was outside the ambit of the capital‑gains provision. Accordingly, based on the terms of the agreement dated 16 March 1946 and the subsequent sale deed dated 17 May 1946, the respondent was liable to pay tax on the profits earned from the immovable properties covered by the deed, but was not liable for tax on the profits attributable to the movable properties whose delivery was effected on 30 March 1946. This precise conclusion was the finding of the Appellate Tribunal.

The question then proceeded to the High Court of Patna, where it was placed before the Court on a reference made under section 66(1) of the Income‑tax Act at the instance of the appellant. The appellant raised the contention that the Tribunal’s judgment rested on a distinction between movable and immovable property that had never been examined at any earlier stage of the proceedings. The appellant argued that, because this distinction had not been addressed earlier, further evidence was necessary to ascertain the parties’ intention, and that the matter should therefore be remitted to the Appellate Tribunal for additional enquiry. The learned judges of the High Court declined to accede to this submission. Their reasoning was that no application seeking such a fresh inquiry had been made to the Tribunal, and that a new issue could not be introduced for the first time in the High Court. On the appellant’s behalf it was submitted that the precise question of what constitutes an immovable versus a movable asset arose only upon the Tribunal’s decision, and consequently an opportunity should be given for investigation of this aspect. The Court was not persuaded by this argument. It observed that the parties must have discussed the distinction between the movables and immovables before the Tribunal, and that if the appellant believed that further investigation was required, it was incumbent upon the appellant to apply to the Tribunal itself for such a direction. Since no such application had been filed, the appellant had no right to ask the High Court to remand the matter for that purpose. In the Court’s view, the High Court was correctly justified in refusing to entertain the appellant’s request for remand.

In this case the appellant contended that the items identified as movables in part 2 of the schedule were in reality fixtures, which under the General Clauses Act and section 3 of the Transfer of Property Act are immovable property, and that those fixtures passed to the purchaser by the sale deed dated 17 May 1946. The appellant therefore argued that the value of those fixtures ought to be included in the assessment of chargeable income under section 12B of the Income‑Tax Act. The argument was set out in several steps. First, section 2(7) of the Sale of Goods Act defines “goods” as every kind of movable property other than actionable claims and money, and it also includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. According to that definition, the fixtures mentioned in part 2 of the schedule could be regarded as movables only if the parties had intended them to be severed and sold separately; the parties, however, had not intended that. The collieries were sold as a going concern and the intention was that the fixtures should pass together with the land, so there was no valid sale of the fixtures as movables. Secondly, section 85 of the Contract Act states that when an agreement provides for the sale of both immovable and movable property together, ownership of the movable property does not pass before the transfer of the immovable property. Although that provision was later repealed by the Sale of Goods Act 1930, the principle it embodied could still be applied to the facts. Because the transaction involved both movables and immovables, title to the movables could pass only on the execution of the sale deed of 17 May 1946. Thirdly, regarding the sale of the immovables, section 8 of the Transfer of Property Act governs. That section provides that, unless a different intention is expressly stated or necessarily implied, a transfer of property conveys to the transferee all the interest the transferor is capable of passing in the property and its legal incidents, and those incidents include all things attached to the earth. Consequently, fixtures pass to the purchaser under this provision unless the deed provides otherwise. Hence, the deed dated 17 May 1946 operated to vest title in the fixtures in the purchaser. The only point for determination in the appeal, therefore, was whether the property transferred under the deed of 17 May 1946 consisted solely of the items described in part 1 of the schedule or also included the fixtures listed in part 2. That issue required a construction of the sale deed itself.

The Court noted that fixtures attached to land ordinarily pass with the land under section eight of the Transfer of Property Act. However, that rule applies only unless the document expresses a different intention or implies such an intention. The Court examined both the sale deed dated 17 May 1946 and the preceding agreement to sell dated 16 March 1946. From a careful reading of those documents, the Court concluded that the parties actually intended two separate transactions: one for movable property and another for immovable property, as reflected in the two parts of the schedule. Accordingly, different consideration amounts were fixed for each transaction, and the conveyance effected by the sale deed of 17 May 1946 related solely to the immovable property described in part one of the schedule. The price recorded in that deed was Rs 2,00,600, which corresponded only to the value of the immovable items listed in part one. The Court also observed that the parties were aware that title to the movable items would pass by delivery, and they expressly referred to those movable items, including the fixtures, in part two of the schedule.

The Court held that to read the 17 May 1946 deed as also conveying some of the items listed in part two would require rewriting the document, which is not permissible. In its view, such a construction could not be adopted. On construing both the deed and the agreement, the Court found that the only property intended to be sold and actually transferred under the 17 May deed were the items specified in part one of the schedule. The fixtures, however, were intended to be treated as movables. Consequently, the question whether the movables had been validly sold did not arise, because if the purported sale of those movables were invalid, there was no sale at all concerning them. Accordingly, section twelve‑B could not apply. The Court affirmed the Tribunal’s determination that only the profits arising from the sale of the immovable property described in part one were taxable under section twelve‑B. Accordingly, the appeal was dismissed with costs.