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PETITIONER:

DALMIA CEMENT LTD., RAJASTHAN

Vs.

RESPONDENT:

COMMISSIONER OF INCOME TAX,

DATE OF JUDGMENT: 16/04/1999

BENCH:

Umesh C. Banerjee, M.Srinivasan

JUDGMENT:

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 88 of 1974 in

terms of the order of Reference by the Income Tax

Appellate 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: "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 for the year

1.10.1962 to 30.9.1963 was taxable in the hands of

the applicant company?"

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 Pakistan

for the year 1.10.1963 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.

At this juncture, it would be convenient to advert to

the contextual facts briefly. The assessee Dalmia

Cement Limited, the owner of two cement 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 the 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

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would 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.1,40,852/-. Similarly for the year 1965-66,

the return filed 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 year period

from 1.10.1962 to 30.9.1964 which however was

deleted in the revised return on the ground of non-

receipt of the same. The Income Tax Officer did

however reject the contention that the profit from

the two factories belong to Mr. Maneckji or his

nominee with effect from 1.10.1962 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 Income Tax Officer stood confirmed for

both the years. Similar is the order of the

Tribunal in the appeal by the assesssee by

recording 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 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.

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 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 be more fully described in the Schedule

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 bought, sold, damaged or destroyed between

assessment day and the date on which the

transaction is completd 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, 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 for the above

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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 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;" "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

endeavours to obtain 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 completed

on or before the 31st December, 1962 and unless

otherwise mutually agreed in writing, this

Agreement shall expire upon that day. 20. This

agreement and/or the subject matter hereof may be

transferred to anybody corporate 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." 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:

"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 shall be their

value in the books of account of the Company on the

30th day of September, 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) 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 determined with reference to the Balance

Sheet of Dalmia Cement (Pakistan) Ltd., as on 30th

September, 1962.

f) 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.

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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 the pe riod 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

permitting in any manner interference on the part

of Mr. Maneckji with the conduct of the business

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 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."

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 30.9.1964 and it is on that date

the parties did enter into a Sale Deed for transfer

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 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 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 2nd November, 1962, profits have to

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be to the account of Mr. Maneckji but that would

be only in the event of completion of the sale

transaction by a particular date which would be an

event to take place subsequent to the accrual of

the profit." ..................... ".........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

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 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 were

ascertained on 30th September, 1964 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, 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

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 in its own hand after the `sale agreement'.

The event as noticed above, has taken place and by

reason of 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 but at the end of the

accounting year. Profits were ascertained on 30th

September, 1964 when the property was transferred

as such for the year 1965-66 as noted above,

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

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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 even before

the accrual.

The concept of diversion of income by an over-riding

title has been very lucidly explained by this Court

in CIT v. Sitaldas Tirathdas's case [1961 (41) ITR

367] in the manner following:-

"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 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 be excused and not 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."

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 is required to

be applied to discharge an obligation after such

income reaches the assessee it is merely a case of

application of income to 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 Vs. Jhanzie Tea Association [ 1989

(178) ITR 296] also seems to be apposite. S.C.Sen,

J. (as His Lordship then was) in the last noted

decision observed:-

"It is true that the income-tax liability cannot be

assigned by any agreement. The Revenue 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 the

transferor. In this case, not only had the tea

estates been transferred but the income accruing

therefrom had also been transferred to the

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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 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 Vs.Tea Producing Co. of India 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 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 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 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 Commisisioner of Income Tax Vs.

M.D. Kanoria [1982 (137) ITR 137]. 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

diversion 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 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 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

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Section 60 and Section 63. For convenience sake

Sections 60 and 63 are set out hereunder: "Section

60. Transfer of income where there is no transfer

of assets- All 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 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-

(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

(ii) it, in any way, gives the transferor a right to

re-assume power directly or indirectly over the

whole or any part of the income or assets;

(b) "transfer" includes any settlement, trust,

covenant, agreement or arrangement."

The High Court while dealing with the matter observed:

"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 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

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 no 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

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

60, the profits would be taxable in the hands of

the assessee company."

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It is this finding of the High Court which has been

criticised by the 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 Transferor stands contradicted by the finding

that Section 60 has its due application in the

facts of the matter under consideration.

Incidentally, 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 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:-

"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 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."

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.

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 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 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

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transfer of the factories on one hand and finding

on accrual of 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 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. 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 stands 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 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.