judgement:
Appeal Nos. 38 and 39 of 1964.
Appeals from the judgment and order dated April 10, 1961 of the Madhya Pradesh High Court in Miscellaneous Civil Case No. 63 of 1961.
C. K. Daphtary, Attorney General, R. Ganapathy Iyer and R. N. Sachthey, for the appellant (for both the appeals).
N. D. Karkhanis, Rameshwar Nath, section N. Andley and P. L. Vohra, for the respondent (in both the appeals).
The Judgment of the Court was delivered by Subba Rao, J.
These two appeals by certificate arise out of the judgment of the High Court of Madhya Pradesh, Jabalpur, in Miscellaneous Case No. 63 of 1961 from a reference under section 66(2) of the Indian Income tax Act, 1922, made by the Income tax Appellate Tribunal, Bombay.
To appreciate the contention of the parties the following genealogy will be useful: Kalooram Todi : : : : Govindram Gangaprasad (d. in January 1943) (d. in 1933) : : : : : Bachhulal : : : : : : Madanlal (predeceased his Nandlal Babulal father) (d. 9 12 1945) (b. 25 1 1935) : : Jankibai Banarsibai : : : : Radheyshyam (predeceased Venkatlal his father) (b. 13 12 1931) : : Shantibai : : Vishwanath (adopted) (b. 13 4 1941) 490 After the death of Kalooram Todi, his two sons by name Govindram and Gangaprasad constituted a joint Hindu family which owned extensive property in Jaora State and a sugar mill called "Seth Govindram Sugar Mills" at Mahidpur Road in Holkar State.
In the year 1942 Bachhulal filed a suit for partition against Govindram and obtained a decree therein.
In due course the property was divided and a final decree was made.
We are concerned in these appeals only with the Sugar Mills at Mahidpur Road.
After the partition Govindram and Bachhulal jointly worked the Sugar Mills at Mahidpur Road.
After the death of Govindram in 1943, Nandlal, the son of Govindram, and Bachhulal, as kartas of their respective joint families, entered into a partnership on September 28, 1943 to carry on the business of the said Sugar Mills.
Nandlal died on December 9, 1945, leaving behind him the members of his branch of the joint family, namely, the three widows and the two minor sons shown in the genealogy.
After the death of Nandlal, Bachhulal carried on the business of the Sugar Mills in the name of "Seth Govindram Sugar Mills".
For the assessment year 1950 51, the said firm applied for registration on the basis of the agreement of partnership dated September 28, 1943.
The Income tax Officer refused to register the partnership on the ground that after the death of Nandlal the partnership was dissolved and thereafter Bachhulal and the minors could be treated only as an association of persons.
On that footing he made another order assessing the income of the business of the firm as that of an association of persons.
Against the said orders, two appeals one being Appeal No. 21 of 1955 56 against the order refusing registration and the other being Appeal No. 24 of 1955 56 against the order of assessment were filed to the Appellate Assistant Commissioner.
The Appellate Assistant Commissioner dismissed both the appeals.
In the appeal against the order of assessment, the Appellate Assistant Commissioner exhaustively considered the question whether there was any partnership between the members of the two families after the death of Nandlal and came to the conclusion that in fact as well as in law such partnership did not exist.
Two separate appeals, being Income tax Appeal No. 8328 of 1957 58 and Income tax Appeal No. 8329 of 1957 58, preferred to the Income tax Appellate Tribunal against the orders of the Appellate Assistant Commissioner were dismissed.
The assessee made two applications to the Tribunal for referring certain questions of law to the High Court, but they were dismissed.
Thereafter, at the instance of the assessee the High Court directed the Tribunal to submit the following two questions for its decision and it accordingly did so: "(1) Whether on the facts and in the circumstances of the case, the status of the assessee, "Seth Govindram Sugar Mills, Mahidpur Road, Proprietor Nandlal Bachhulal, Jaora", is an Association of Persons or a firm within the meaning of Section 16(1)(b) of the Income tax Act.
" 491 "(2) Whether the order of the Appellate Tribunal is illegal on account of the Tribunal having committed an error of record and having omitted to consider the relevant material in the case.
" The High Court, for reasons given in its judgment, held on the first question that in the assessment year 1949 50 the status of the assessee was that of a firm within the meaning of section 16(1),(b) of the Income tax Act and on the second question it held that the Tribunal misdirected itself in law in reaching the conclusion that the parties could not be regarded as partners.
The present two appeals are preferred against the said order.
At the outset we must make it clear that the question of registration could not be agitated in these appeals, as that question was not referred to the High Court.
We shall, therefore, only consider the points raised by the questions referred to the High Court and held by the High Court against the appellant.
Indeed, the only effective question is whether during the assessment year 1950 51 the assesee was a firm or an association of persons.
The first question raised by the learned Attorney General is that on the death of Nandlal the firm of Seth Govindram Sugar Mills was dissolved and thereafter the income of the said business could only be assessed as that of an association of persons.
To appreciate this contention some more necessary facts may be stated.
The deed of partnership dated September 28, 1943, was executed between Nandlal and Bachhulal.
It is not disputed that each of the said two partners entered into that partnership as representing their respect;, joint families.
Under cl.
(3) of the partnership deed, "The death of any of the parties shall not dissolve the partnership and either the legal heir or the nominee of the deceased partner shall take his place in the provisions of the partnership" The question is whether on the death of Nandlal his heirs, i.e., the members of his branch of the family, automatically became to partners of the said firm.
The answer to the question turns upon section 42 of the (Act 9 of 1932).
the material,part of which reads: "Subject to contract between the partners a firm is dissolv ed by the death of a partner.
" While for the appellant the leaned Attorney General contended that section 42 applied only to a partnership consisting of more than two partners, for the respondent Mr. Karkhanis argued that the section did not impose any such limitation and that on its terms it equally applied to a partnership comprising only two partners.
It was argued that the contract mentioned in the over riding clause was a contract between the partners and that, if the parties to the contract agreed that in the event of death of either of them his successor would be inducted in his place, the said contract would be binding 492 on the surviving member.
On the death of one of the partners, it was said, his heir would be automatically inducted into the partnership, though after such entry he might opt to get out of it.
This conclusion the argument proceeded was also supported by section 31 of the Partnership Act.
Section 31 of the Partnership Act reads: "(1) Subject to contract between the partners and to the provisions of section 30, no person shall be introduced as a partner into a firm without the consent of all the existing partners." Converting the negative into positive, under section 31 of the Partnership Act if there as a contract between the partners, a person other than the partners could be introduced as a partner of the firm without the consent of all the existing partners.
A combined reading of sections 42 and 31 of the Partnership Act, according to the learned counsel, would lead to the only conclusion that two partners of a firm could by agreement induct a third person into the partnership after the death of one of them.
There is a fallacy in this argument.
Partnership, under section 4 of the Partnership Act, is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.
Section 5 of the said Act says that the relation of partnership arises from contract and not from status.
The fundamental principle of partnership, therefore, is that the relation of partnership arises out of contract and not out of status.
To accept the argument of the learned counsel is to, negative the basic principle of law of partnership.
Section 42 can be interpreted without doing violence either to the language used or to the said basic principle.
Section 42(c) of the Partnership Act can appropriately be applied to a ' partnership where there are more than two partners.
If one of them dies, the firm is dissolved; but if there is a contract to the contrary, the surviving partners will continue the firm.
On the other hand, if one of the two partners of a firm dies, the firm automatically comes to an end and, thereafter, there is no partnership for a third party to be introduced therein and, therefore, there is no scope for applying cl.
(c) of section 42 to such a situation.
It may be that pursuant to the wishes of the directions of the deceased partner the surviving partner may enter into a new partnership with the heir of the deceased partner, but that would constitute a new partnership.
In this light section 31 of the Partnership Act falls in line with section 42 thereof.
That section only recognizes the validity of a contract between the partners to introduce a third party without the consent of all the existing partners: it presupposes the subsistence of a partnership; it does not apply to a partnership of two partners which is dissolved by the death of one of them, for in that event there is no partnership at all for any new partner to be inducted into it without the consent of others.
There is a conflict of judicial decisions on this question.
The decision of the Allahabad High Court in Lal Ram Kumar vs 493 Kishori Lal(1) is not of any practical help to decide the present case,.
There.
from the conduct of the surviving partner and the heirs of the deceased partner after the death of the said partner, the contract between the original partners that the partnership should not be dissolved on the death of any of them was inferred.
Though the partnership there was only between two partners, the question of the inapplicability of section 42(c) of the Partnership Act to such a partnership was neither raised nor decided therein.
The same criticism applies to the decision of the Nagpur High Court in Chainkarcin Sidhakaran Oswal v Radhakisan Vishwnath Dixit(2).
This question was directly raised and clearly answered by a Division Bench of the Allahabad High Court in Mt. Sughra vs Babu(3) against the legality of such a term of a contract of partnership consisting of only two partners.
Agarwala, J., neatly stated the principle thus: "In the case of a partnership consisting of only two partners, no partnership remains on the death of one of them and, therefore, it is a contradiction in terms to say that there can be a contract between two partners to the effect that on the death of one of them the partnership will not be dissolved but will continue . .
Partnership is not a matter of status, it is a matter of contract.
No heir can be said to become a partner with another person without his own consent, express or implied.
" This view accords with that expressed by us earlier.
In Narayanan vs Umayal(4).
Ramachandra lyer J., as he then was, said much to the same effect when he observed thus: ". . . if one of the partners died, there will not be any partnership existing to which the legal representatives of the deceased partner could be taken in.
In such a case the partnership would come to an end by the death of one of the two partners, and if the legal representatives of the deceased partner joins in the business later, it should be referable to a new partnership between therein." But Chatterjee J., in Hansraj Manot vs Messrs. Gorak Nath Pandey(5) struck a different note.
His reasons for the contrary view are expressed thus: "Here the contract that has been referred to s the contract between the two partners Gorak Nath and Champalal Therefore, it cannot be said that the contract ceased to have effect because a partner died.
The contract was there.
There was no new contract (1) A.T.R. 1946 All. 259.
(2) A.T.R.1956 nag.
46 (3) A.I.R. 1952 All. 506, 507.
(4) A.I.R, 1959 Mad. 283,284.
(5) , 264.
(N)4SCI 5 494 with the heirs and there was no question of a new contract with the heirs because of the original contract, and by virtue of the original contract the heirs become partners as soon as one of the partners died. . .
As soon as there is the death, the heirs become the partners auto matically without any agreement between the original Partners by virtue of the original agreement between the Partners while they were surviving.
there is no question of interregnums.
As soon as the death occurs the right of somebody else occurs.
The question of interregnums does not arise.
The heirs become partners not because of a contract between the heirs on the one hand and the other partners on the other but because of the contract between the original partners of the firm.
" With great respect to the learned Judge, we find it difficult to appreciate the said reasons.
The learned Judge seems to suggest that by reason of the contract between the original partners, the heirs of the deceased partner enter the field simultaneously with the removal by death of the other partner from the partnership.
This implies that the personality of the deceased partner projects into that of his heirs, with the result that there is a continuity of the partnership without any interregnums.
There is no support either on authority or on principle for such a legal position.
In law and in fact there is an interregnums between the death of one and the succession to him.
We accept the view of the Allahabad and Madras High Courts and reject the view expressed by Nagpur and Calcutta High Courts, The result of the discussion is that the partnership between Nandlal and Bachhulal came to an end on the death of Nandlal on December 9, 1945.
The next question is whether after the death of Nandlal a new partnership was entered into between the representatives of the two branches of the families, i.e., Nandlal 's and Bachhulal 'section Before we consider this question it is as well that we advert to incidental questions of law that were raised.
One is whether the widow of Nandlal could under Hindu law be a karta of the joint Hindu family consisting of three widows and two minors.
There is conflict of view on this question.
The Nagpur High Court held that a widow could be a karta: see Commissioner of Income tax, C. P. & Berar vs Seth Laxmi Narayan Raghunathdas(1); Pandurang Dahke vs Pandurang Gorle(2), The Calcutta High Court expressed the view that where the male members are minors and their natural guardian is the mother, the mother can represent the Hindu undivided family for the purpose of assessment and recovery of taxes under the Income tax Act: see Sushila Devi Rampurla vs Income tax Officer(2); and (3) 495 Sm.
Champa Kumari Singhi vs Additional Member, Board of Revenue, West Bengal(1) The said two decisions did not recognize the widow as a karta of the family, but treated her as the guardian of the minors for the purpose of income tax assessment.
The said.
decisions, therefore, do not touch the question now raised.
The Madras and Orissa High Courts held that coparcenership is a necessary qualification for the managership of a joint Hindu family and as a widow is not admittedly a copartner, she has no legal qualifi cations to become the manager of a joint Hindu family.
The decision of the Orissa High Court in Budhi Jena vs Dhobai Naik(2) followed the decision of the Madras High Court in V.M.N. Radha Ammal vs Commissioner of Income tax, Madras(2) wherein Satyanarayana Rao J., observed: "The right to become a manager depends upon the fundamental fact that the person on whom the right devolved was a copartner of the joint family Further, the right is confined to the male members of the family as the female members were not treated as copartner though they may be members of the joint family.
" Viswanatha Sastri J., said: "The managership of a joint Hindu family is a creature of law and in certain circumstances, could be created by an agreement among the copartner of the joint family.
Coparcenership is a necessary qualification for managership of a joint Hindu family.
" Thereafter, the learned Judge proceeded to state: "It will be revolutionary of all accepted principles of Hindu law to suppose that the senior most female member of a joint Hindu family, even though she has adult sons who are entitled as copartner to the absolute ownership of the property, could be the manager of the family . . . .
She would be the guardian of her minor sons till the eldest of them attains majority but she would not be the manager of the joint family for she is not a copartner.
" The view expressed by the Madras High Court is in accordance with well settled principles of Hindu law, while that expressed by the Nagpur High Court is in direct conflict with them.
We are clearly of the opinion that the Madras view is correct.
Another principle which is also equally well settled may be noticed.
A joint Hindu family as such cannot be a partner in a firm, but it may, through its karta enter into a valid partnership with a stranger or with the karta of another family.
This Court in Kshetra (1) (2) A.I.R. 1956 Orissa 6.
(3) , 230, 232, 233.
496 Mohan Sanyasi Charan Sadhukhan vs C.E.P.T.(1) pointed out that when two kartas of different families constituted a partnership the other members of the families did not become partners, though the karta might be accountable to them.
The question, therefore, is whether after the death of Nandlal the representatives of the two families constituted a new partnership and carried on the business of the Sugar Mills.
Admittedly no fresh partnership deed was executed between Banarsibai, acting as the guardian of the minors in Nandlal 's branch of the family and Bachhulal.
It is not disputed that partnership between the representatives of two families can be inferred from conduct.
Doubtless the accounts produced before the income tax authorities disclosed that Bachhulal was carrying on the business of "Seth Govindram Sugar Mills Ltd." in the same manner as it was conducted before the death of Nandlal.
Therein Kalooram Govindram and Gangaprasad Bachhulal were shown as partners, Govindram having 10 annas share and Bachhulal having 6 annas share.
There were separate current accounts for the two parties.
The Appellate Assistant Commissioner, who examined the accounts with care, gave the following details from the accounts ason November 1, 1948: Joint capital account of Kalooram Govindram and Gangaprasad Bachhulal in the ratio of 10 : 6 Rs. Credit balance 10,78,660 Current Accounts: Gangaprasad Bachhulal Do.
10,46,797 Kalooram Govindram Do.
8,30,348 Profit & Loss Account Debit balance 14,01,669 No profit or loss was adjusted to the current account of the parties.
Thereafter the accounts were closed as on 31 3 1950, when the capital account was squared up by transferring that much loss from the profit and loss account and balance in the profit and loss account was transferred in the ratio of 10:6 to the current accounts of the two parties.
Thus the profit and loss account showed: Net debit balance including current Rs. year 's loss 17,51,992 Loss set off against capital account 10,78,666 . . . .
Rs. 6,73,326 Transferred to partners ' accounts: Messrs. Kalooram Govindram 4,20,829 Messrs. Gangaprasad Bachhulal 2,52,497 6,73,326 . . . .
Balance Nil (1)[1954] S.C.R. 497 The accounts only establish that Bachhulal was doing the business of Govindram Sugar Mills Ltd. But Banarsibai 's name was not found in the accounts.
If she was a partner, her name should have found a place in the accounts.
Not a single document has been produced on behalf of the assessee which supports the assertion that Banarsibai acted as a partner or was treated by the customers of the firm as a partner.
There is not a little of evidence of conduct of Bachhulal, Banarsibai or even of third parties who had dealings with the firm to sustain the plea that Banarsibai was a partner of the firm.
Indeed, the conduct of the parties was inconsistent with any such partnership between Banarsibai and Bachhulal.
After the death of Nandlal, Banarsibai and Shantibai applied to Jaora District Court for the appointment of guardians to look after the properties and the persons of the two minors; and on January 21, 1946, four persons other than these two widows were appointed as guardians of the minors.
If Banarsibai was acting as a guardian of the minors representing the family in the business, she would not have applied for the appointment of others as guardians.
On October 4, 1952, a partnership deed was drawn up between Bachhulal on the one hand and the minors represented by the said four guardians on the other.
If Banarsibai was the representative of the family in the business, this document would not have come into being Banarsibai also had no place in another partnership deed which was executed on March 27, 1953, between Venkatlal represented by the aforesaid guardians and Bachhulal.
The evidence, therefore, demonstrates beyond any reasonable doubt that Banarsibai was nowhere in the picture and that Bachhulal carried on the business of the Sugar mills on behalf of the two families.
Nor is there any evidence to show that from 1943 till the assessment year the guardians of the minors appointed by the District and Sessions Judge, Jaora, in 1946 representing the minors entered into a partnership with Bachhulal.
The partnership deeds of 1952 and 1953 were subsequent to the order of assessment and they contain only self serving statements and they cannot, in the absence of any evidence, sustain the plea of earlier partnership.
Indeed, the guardians were only appointed for the properties situated within the jurisdiction of the District Judge, Jaora, and they could not act as guardians in respect of the properties outside the said jurisdiction.
If they were acting as partners with Bachhulal, their names would have been mentioned either in the accounts or in the relevant documents pertaining to the business.
The conflicting version given by the assessee in regard to person or persons who actually represented the family in the partnership in itself indicates the falsity of the present version.
It must, therefore, be held that the Court guardians did not enter into a partnership with Bachhulal.
But, Venkatlal became a major on December 13, 1949, i.e., during the accounting year 1949 50.
On October 17, 1951, an application for registration was received by the Income tax Officer 498 signed by Venkatlal and Bachulal who are shown as partners representing their respective joint families.
The return of income submitted along with the application for registration was signed by Venkatlal on August 29, 1951.
After Venkatlal became a major, there was no obstacle in his representing his branch of the family, in the partnership.
Indeed, it was conceded in the High Court that there was a partnership from December 13, 1949, when Venkatlal, attained majority.
Having regard to the said circumstances and the concession, we must hold that from December 13, 1949, the business was carried on in partnership between Venkatlal, representing his branch of the family, and Bachhulal, representing his branch of the family.
In the result we set aside that part of the finding of the High Court holding that the partnership business was carried on by the representatives of the two families after the death of Nandlal, but confirm the finding to the extent that such a partnership came into existence only after December 13, 1949.
In this view, we answer the two questions referred to the High Court as under: (1)For the assessment year 1950 51 the status of the, assessee was that of a firm within the meaning of section 16 (1)(b) of the Income tax Act, 1922.
(2)The Tribunal misdirected itself in law in reaching the conclusion that the parties could not be regarded as partners.
In the result the appeals are dismissed.
But as the respondent failed in its main contentions, the parties will bear their own costs in this Court.
Appeals dismissed.

dataset_name: IN-Abs

summary/full:
A joint Hindu family consisting of two branches owned a sugar mill.
After partition, the two kartas entered into a partnership in 1943, to carry on the business of the sugar mill.
The two partners represented the respective joint families, and the partnership deed provided that the death of any of the parties shall not dissolve the partnership and either the legal heir or the nominee of the deceased partner should take his place.
One of the kartas died in 1945 leaving as members of his branch of the family, three widows and two minor sons.
The other partner continued the business of the sugar mill in the firm name.
For the assessment year 1950 51, the assessee (respondent firm) applied for registration on the basis of the partnership agreement of 1943.
The Income tax Officer, Appellate Assistant Commissioner and the Tribunal held that there was no partnership between the members of the two families after the death of one of the kartas.
On a reference to the High Court, it was held that the partner ship business was carried on by the representatives of the two families after the dent), of one of the kartas.
In the appeal to this Court, on the question as , to whether during the assessment year 19 50 51, the assessee, was a firm within the meaning of section 16(1) of the Income tax Act, 1922, or an association of persons.
HELD: The High Court was wrong in its finding.
But, as a result ,of the concession by the appellant, that there was a partnership from 13th December 1949, when one of the minor sons had become a major, the status of the assessee was that of a firm for the assessment year 1950 51.
[498B] A joint Hindu family as such cannot be a partner of a firm, but it may through its karta enter into a partnership with the karta of another family.
[495H] Kshetra Mohan Sanyasi Charan Sadhukhan v, Commissioner of Excess Profits Tax, [19541 S.C.R. 268.
followed.
A widow, though a member of a joint family, cannot become its manager.
[495B] Commissioner of Income tax, C.P. & Berar vs Seth Lakshmi Narayan Raghunathdas, and Pandurang Dakhe vs Pandurang Gorle.
I.L.R. overruled.
Therefore, in the instant case, when one of the kartas died, the partnership had come to an end.
There was no scope for applying section 42(c) of the Partnership Act, 1932, because, the section is applicable only to a partnership with more than two partners.
In such a case.
if one of them dies, the firm is dissolved, but if there is a contract to 488 489 the contrary, the surviving partners will continue the firm.
On the other hand, if there are only two partners and one of them dies, the firm automatically comes to an end and, thereafter, there is no partnership for a third party to be introduced.
Section 31, which deals with the validity of a contract between the partners to introduce a third party into the partnership without the consent of all the existing partners, presupposes the subsistence of a partnership and does not apply to a partnership of two partners, which is dissolved by the death of one of them.
[492E H] Hansraj Manot vs Messrs, Gorak Nath Pandey, , disapproved.
Further, there was no evidence that the representatives of the two families constituted a new partnership and carried on the business of the sugar mill before 13th December 1949, when, it was conceded a new partnership had come into existence.


judgement:
Appeal No. 21 of 1963.
Appeal from the judgment and order dated August 1, 1961 of the Rajasthan High Court in Civil Writ No. 86 of 1960.
C. C. Kasliwal Advocate General for the State of Rajasthan and M. M. Tiwari, for the appellants.
Rameshwar Nath section N. Andley, and P. L. Vohra, for the respondent.
The Judgment of the Court was delivered by Raghubar Dayal, J.
This appeal, on certificate granted by the Rajasthan High Court, raises the question of the applicability of the provisions of Chapter IV and thereby of r. 30 of the Rajasthan Minor Mineral Concession Rules, 1955, hereinafter called the rules, to the grants of mining leases under the provisions of Chapter V of the rules.
The facts leading to this appeal are briefly these.
The respondent obtained the mining lease for extracting sand stone from the mines in certain area from the Government of Rajasthan in 1956.
The lease was granted as a result of auction.
The period of the lease was from April 1, 1956 to July 31, 1959.
The respondent applied for extension of the period upto two years in view of the mandatory nature of the main provision of r. 30 and Simultaneously also applied for the renewal of the lease for a further period in accordance with the provisions of the proviso to r. 30.
The first prayer was refused and the State Government extended the period of the lease at first by six months and later by another two months.
The respondent thereafter filed a writ petition under article 226 of the Constitution in the High Court and prayed for issue of a writ of mandamus directing the striking down of the order of the Government renewing the lease for 8 months and directing the State of Rajasthan further to extend the lease in the first instance for two years from July 30.
1959 to bring, it unconformity with the period of lease specified in r. 30 and to renew.
after the expiry of such extended period, for a further period of 5 years under r. 30 of the rules.
The State of Rajasthan, appellant, contested the petition on the ground that the provisions of Chapter IV of the rules did not apply to the grant of mining leases by auction or tender provided for by Chapter V of the rules and that in any case the initial period short of 5 years must be deemed to have been at the desire of the respondent and that any further extension of the period of the lease under the proviso was in the discretion of the Government and consequently, the respondent could not claim to have the period of the lease extended for a period of 5 years.
The High Court held that the provisions of Chapter IV of the rules were applicable as far as possible to the grant of mining M/B(N) 3SCI 13 404 leases by auction under Chapter V. that though the State Government had to give a lease for 5 years in view of r. 30, yet the shorter period of the lease in favour of the respondent must, in the circumstances, be deemed to have been at his request and that the respondent was entitled to an extension of the lease by a further period of 5 years in accordance with the provisions of the proviso.
It therefore directed the State Government to renew the lease for a period of 5 years from the expiry of the original lease with option of further renewal, if so desired, by another period of 5 years subject to the conditions mentioned in r. 30.
It is against this order that this appeal has been filed.
Two questions are raised for the appellant in this Court.
The first is that the provisions of Chapter IV of the rules do not govern the grant of mining leases by auction under the provisions of Chapter V of the rules.
The other is that the proviso to r. 30 gives discretion to the State Government to extend the period of the lease for any period not exceeding 5 years that it is not mandatory that the State Government must extend the lease by a period of 5 years as held by the High Court.
We are of opinion that the High Court has come to a right conclusion on these two points.
Section 5 of the Mines and Minerals (Regulation and Develop ment) Act, 1948 (Act LIII of 1948) empowered the Central Government to make rules, by notification in the official Gazette, for regulating the grant of mining leases or for prohibiting the grant of such leases in respect of any mineral in any area.
In the exercise of its power the Central Government framed the Mineral Concession Rules, 1949, hereinafter referred to as the Central rules.
Clause (ii) of r. 3 of the Central rules defined 'minor mineral ' to mean 'building stone ' etc., which admittedly included sand stone Rule 4 stated that the rules would not apply to minor minerals the extraction of which would be regulated by such rules as the State Government might prescribe.
The State of Rajasthan made the rules in 1955 in the exercise of the powers conferred by r. 4 of the Central rules.
Chapter IV of the rules deals with grant of mining leases and consists of rr.
19 to 32.
Chapter V deals with grant of mining leases and royalty collection contracts by auction or by inviting tenders or by other methods and consists of rr.
33 to 42.
Apart from the heading of Chapter IV being in general terms and so applicable to the grant of all mining leases by whatever process, a comparison of the provisions of rules in Chapter IV and those in Chapter V shows that all the incidents of a grant of a mining refuse contemplated and provided for in Chapter IV ire not provided for by Chapter V.
This leads to the irresistible conclusion that matters not provided for by rules in Chapter V with regard to mining leases will be covered by provisions relating to those matters in chapter IV, as these provisions deal with the essential incidents affecting grant of mining lease.
405 We may therefore go through the provisions of Chapter IV to have a comprehensive view of what the rules provide and to see whether all of them are such that the Legislature could have intended their not applying to leases granted under Chapter V or whether they, by their nature, can apply to leases granted under Chapter IV only.
Rule 19 deals with restrictions on grant of mining leases.
There is no corresponding rule in Chapter V.
It is inconceivable that the restrictions mentioned in r. 19 be not applicable to the grant of mining leases by auction or tender or any other method.
The matters of substance are the contents of the lease, the persons to whom the minerals about which leases can be granted and not the procedure to be followed in granting the lease.
Chapter IV deals with the grant of mining leases on applications for such a grant.
Chapter V mainly deals with grant of mining leases by auction or by inviting tenders or by other methods.
It is clear that the procedure to be followed for the grant of leases is left to the discretion of the Government though, ordinarily, in the absence if general or special orders, the procedure laid down in Chapter IV is to be followed.
Sub r.
(3) of r. 33 provides that leases by public auction or tender under sub r. (1) shall be given only in such a case as the Government may, by general or special order, direct and r. 42 gives discretion to Government to adopt any other method for leasing out minor mineral deposits in the interest of industry and development of the deposit.
The restrictions laid down by r. 19 are that no mining lease is to be granted in respect of any minor mineral notified by Government in that behalf, that no mining lease for the notified mineral will be granted to a person unless he holds a valid certificate of approval and that no mining lease shall be granted to an individual person unless he be a citizen of India except with the prior approval of Government.
These restrictions are of a general nature and salutary in effect and the Legislature, in our view, could not have made them inapplicable to the grant of mining leases under the rules in Chapter V. Rules 20 to 23 are applicable to applications for grant of mining leases.
They mention the person to whom an application is to be made, the fee which is to accompany such application, what the application should contain and how priority is to be given if there be more than one application in respect of the same land.
These rules cannot, by their nature, apply to the grant of mining leases by auction or tender or by any other method.
Rule 24 provides for the Register of Mining Leases.
Most of the particulars to be noted in this Register relate to the grant of mining leases on application but some of the particulars could be entered with respect to the mining leases granted by following the other procedure and therefore its provisions can partially apply to the mining leases granted under Chapter V. Rule 25 will also usually apply to applications only, as in the case of granting a mining lease otherwise, the Government would have ordinarily already decided 406 the area for which the lease is to be given.
Rule 26 lays down a restriction on the length and breadth of an area to be leased, but gives discretion to the Government to relax the provisions of the rule.
This rule is of general application, subject to the discretion in the Government to relax its provisions and there is no reason why it would have been made inapplicable to mining leases granted under Chapter V. Rule 27 provides that the boundaries of the area covered by a mining lease shall run vertically down below the surface towards the centre of the earth.
Such a specification of the boundaries of the area is very essential in connection with mining leases and the rule about it must apply to all mining leases granted under Chapter V. Rule 28 deals with deposit of security and applies to applicants for mining leases and not to those who are to get leases under Chapter V.
There is a specific provision for security under r. 37 (iv), in Chapter V. Rule 29 deals with transfer of mining leases and provides that a lessee with the previous sanction of the Government and subject to certain conditions could transfer his lease or any right or interest therein.
There is no corresponding rule in Chapter V.
This indicates that r. 29 will apply to the transfer of mining leases granted under Chapter V. There is no good reason why such a lessee be deprived of his right to transfer or be free from any restriction laid down in r 29.
Rule 30 deals with the period of lease and is the rule which is to be considered by us.
Rule 31 lays down the conditions subject to which the mining lease is granted.
This rule has 24 clauses dealing with various matters.
It is clear from r. 41 in Chapter V dealing with the execution of lease that the terms and conditions mentioned in r. 31 would be included in the lease executed by the lessee to whom a mining lease is ranted under Chapter V. of course, r. 41 provides that Such terms and conditions would be so modified as might be necessary by reason of the provisions of rr. 33 and 34.
Sub.r, (2) of r. 23 provides that in cases of grant of mining leases by auction or by inviting tenders the annual dead rent of the lease would be determined in the auction or by tend as the case may be and may exceed the rate give in the Second Schedule to the rules.
Rule 34 deals with payment of royalty through the contractor for royalty collection.
These provisions of rr.
33(2) and 34 would re quire modification in conditions (3) and (4) of r. 31.
It has been urged that the specific mention of r. 31 in r. 41 indicates that the other rules in Chapter IV are not applicable to the grant of mining leases under Chapter V.
We do not agree and 407 are of opinion that the specific mention of r. 31 is made in r. 41 In view of the fact that it was to apply with suitable modifications.
Rules in Chapter IV which apply as they stand do require no specific mention for their applicability to the rant of mining leases under Chapter V. Rule 32 deals with the currency of the lease and provides that the currency of the lease shall be from the date of communication to the party unless otherwise stated, that the lessee shall have no right to continue work or to accumulate stock on or after the date of termination of the lease however unless otherwise sanctioned by Government and that all accumulated stock and immovable property left in the leased out area after the date of expiry of the lease shall be deemed to be Government property.
The provisions of this rule are essential to define the currency of the mining lease granted under Chapter V and to the rights of the lessee and the State in regard to continuing the work after the date of termination of the lease or to the matter lying in the leased out area after the expiry of the lease.
There is no corresponding rule in Chapter V. Rule 32 must be deemed to apply to the leases granted under Chapter V.
It would thus appear that the provisions of rr. 19, 26, 27 29 and 32, by their nature, must apply to the leases granted under Chapter V as they are expressed in general terms and can apply to all mining leases.
If they were not intended to apply to mining leases granted under Chapter V, the legislature would have made an express provision about it and would have also made some suitable corresponding provisions for the leases granted under Chapter V. We are therefore of opinion that the contention that the rules under Chapter IV do not apply to mining leases granted under Chapter V is not sound and that the High Court rightly held that they do apply so far as applicable to mining leases granted tinder Chapter V. Rule 30 deals with the period of lease.
This rule will apply to leases granted under Chapter V both because the rules under Chapter IV apply to such leases and because there is no corresponding rule in Chapter V. Reference has been made to rr.
38 and 39 in Chapter V which deal with certain payments if the period of lease is not more than 1 year or is more than one year respectively.
The fixing of the period of the lease is an essential term of the lease, Rule 32 in Chapter IV provides when the lease is to commence.
The lease should also provide the time when it should terminate.
That can be done either by setting down the actual date or by expressing the period of the lease.
Rules 38 and 39 provide for different matters.
They apply when the period of the lease is already fixed tinder the terms of the lease and in accordance with the rules.
408 The next matter to be considered is the construction of r.30 which reads: Period of lease A mining lease may be granted for a period of 5 years unless the applicant himself desires it shorter period; Provided that the period may be extended by the Government for another period not exceeding 5 years with option to the lessee for renewal for another equivalent period in case the lessee guarantees investments in machinery equipments and the like, it least to the tune of 20 times the value of annual dead rent within 3 years from the of such extension.
The value of the machinery, equivalent and the like shall be determined by the Government.
Were the lease is so renewed, the dead rent and the surface rent shall be fixed by the Government within the limits given in the Second Schedule to these rules, and shall in no case exceed twice the original dead rent and surface rent respectively, and the royalty shall be charged at the rates in force at the time of renewal".
It is urged for the appellant that the State Government has discretion to fix the initial period of the lease as well as to fix the of the extension of the lease after the expiry of the initial period.
The High Court did not agree with this submission of the and, we think, rightly.
The word 'may ' in the main provision of the rule must mean shall ' and make the provision mandatory.
This is obvious from the last portion of the provision.
If the State Government had discretion to fix any period of the lease, the last portion of the provision would be redundant.
The Government could fix the period of the lease at any period shorter than live yea AS.
But the provision requires the fixing of the period shorter than 5 years only when the applicant desires a shorter period.
The period of the lease therefore can be shorter than five years only when the applicant desires and not when the Government desires.
Government must fix the period of the lease at 5 years in the absence of any expression of desire by the applicant for taking the lease for a shorter period.
The word 'may ' in the proviso in regard to the extension of the period by Government should also be construed as 'shall so as to make it incumbent on Government to extend the period of the lease if the lessee desires extension.
Of course no question for the extension of the lease can arise if the lessee himself does not wish to have the lease for a further period.
It is on account of this option existing in the lessee that the word 'may ' has been used in this context.
The lessee has been given a further option to have the lease extended by another five years but such an option is to be respected only if he gives the guarantee referred to in the proviso.
If he is not prepared to give such a guarantee, he cannot exercise the option for 409 the extension of the lease and the lease must automatically expire at the end of the first extended period.
The first extension has to be for five years.
Government has no option in that regard as well.
This appears from what is provided in connection with the option of the lessee for a second extension.
The second extension, at his option, is to be for a period equivalent to the period of the first extension.
The guarantee to be given is to the effect that the lessee would invest in machinery etc.
, at least to the tune of 20 times the value of the annual dead rent within 3 years from the grant of such extension.
There is no point in, taking a gurantee to make certain investments within three years if the second extended period of the lease is of a shorter duration as it can be if Government has a discretion in granting extension for a period shorter than 5 years.
If the first extension be for less than three years the second extension cannot be for a longer period.
If that expression 'such extension ' refers to the extension on the exercise of the option of the lessee at the end of the first extension, it would be a preferable construction of the proviso to hold that the Government is bound to extend the period of the lease for five years at the expiry of the initial period of the lease and that the lessee will have the option for renewal of the lease for another five years in case be guarantees the requisite investment as mentioned in the proviso.
Another way of looking at the provision and a better way is that the expression 'such extension ' refers to the first extension which the Government grants at the expiry of the initial term of the lease.
This means that at the time of granting the first extension the lessee has to choose whether he should also ask for the option for a second extension.
The option would then be an integral part of the agreement about the first extension.
This is also indicated from the language of the proviso linking the period of extension with the option for renewal of the lease for an equivalent period If no option as such is given at the time and is not a term of the lease, the lessee may not be able to ask for a second extension at the end of the first extended period of the lease.
When he secures the exercise of such an option as a term of the lease, he has to guarantee that within the first three years of the extended period of the lease he will make the heavy investment mentioned in the proviso with the resultant confidence that he will have undisturbed lessee rights for a period of 10 years from the expiry of the initial term of the lease: Whichever construction be put, with respect to the time when the term about option is to be settled between the parties, it must follow that the period of the first extension must be five years and not less.
We are further of opinion that the High Court is right in holding that the respondent 's taking the lease for a period upto July 31, 1959 must amount to his expressing a desire for having a lease for that period.
If he did not so desire, he need not have bid and taken the lease for the period for which it was to be given by auction.
410 it has been argued for the State that the High Court granted relief to the respondent in excess of what he had prayed, inasmuch as the High Court had directed the Government to renew the respondent 's first lease for a period of 5 years with option to further renewal if so desired for another period of 5 years subject to the condition mentioned in r. 30 when the respondent had not prayed for any direction with respect to the option for a second extension of the lease.
The contention is not sound.
The relief claimed after the expiry of the period of the first lease, which, according to the respondent, was also to be extended by two years, reads: " and then, after the expiry of the period of five years the lease be renewed for a period of five years under Rule 30 ,of Rajasthan Minor Mineral Concession Rules, 1955".
The renewal was to be under r. 30.
Rule 30 itself requires extension of the lease with option in the lessee for obtaining another extension for an equivalent period.
This option must be a term of the lease and therefore must be incorporated in the lease at the time when the first extension is granted.
The prayer therefore should be deemed to include a prayer for an extension of 5 years with the necessary option.
Even if the prayer was not so made, the High Court was competent to make the direction in accordance with the requirements of the proviso to r. 30.
The direction for renewal is, in our view.
in full accordance with what the proviso requires.
The result is that the appeal fails and is dismissed with costs.
Appeal dismissed.

summary/full:
The respondent who had as a result of auction obtained a mining lease from the appellant State, applied for extension of the lease period in view of the mandatory nature of the main provision of rule 30 and simultaneously also applied for renewal of the lease in accordance with the provisions of the proviso to rule 30.
The appellant refused the first prayer but extended the period by a few months.
The respondent thereafter, filed a writ petition in the High Court for striking down the order of the Government renewing the lease by a few months and for directing the appellant to extend the lease in the first instance for two years to bring it in conformity with the period of lease specified in rule 30 and to renew after the expiry of such extended period, for a further period of 5 years under rule 30.
The appellant contended that the provisions of Chapter IV of the rules did not apply to the grant of mining leases by auction or tender provided for by Chapter V of the rules and that in any case the initial period short of 5 years must be deemed to have been at the desire of the respondent and that any further extension of the period of lease under the proviso was in the discretion of the appellant and consequently, the respondent could not claim to have the period of the lease extended for a period of 5 years.
The High Court disagreed with the appellant 's contentions and allowed the petition.
In appeal by certificate; HELD: Matters not provided for by rules in Chapter V with regard to mining leases will be covered by provisions relating to those matters in Chapter IV, as these provisions deal with the essential Incidents affecting grant of mining leases.
[404 H] Rule 30 applies to leases granted under Chapter V both because the rules under Chapter IV apply to such leases and because there is no corresponding rule in Chapter V. [407 G H] The word "may" in the proviso in rule 30 in regard to the extension of the period by, Government should also be construed as 'shall ', so as to mike it incumbent on Government to extend the period of the lease if the lessee desires extension.
Of course no question for the extension of the lease can arise if the lessee himself does not wish to have the lease for a further period.
It is on account of this option existing in the lessees that the word 'may ' has been used in this context.
But the option given to the lessee to have the lease extended by period of another five years is to be respected only if the lessee gives the guarantee referred to in the proviso.
[408 H] The first extension must be five years and not less.
The period of lease can be shorter than five years only when the applicant desires and not when the Government desires.
[409 B] 403


judgement:
Appeal No. 5 of 1964.
Appeal by special leave from the judgment and order dated December 1, 1961 of the Andhra Pradesh High Court in Case Referred No. 21 of 1960.
A.V. Viswanatha Sastri, K. Jayaram and R. Vasudeva Pillai for the appellant.
K.N. Rajagopal Sastri and R.N. Sachthey, for the respondent.
The Judgment of the Court was delivered by Sikri, J.
This appeal by special leave is directed against the judgment of the High Court of Andhra Pradesh answering the question referred to it under section 66 of the Income Tax Act, 1922, against the appellant.
The question referred to was "whether on the facts and in the circumstances of the case a sum of Rs. 79,494/ is assessable as capital gains in the assessment year 1948 49.
" The facts relevant to the question are as follows.
The assessment year in question is 1948 49 and the accounting year is the official year 1947 48.
The appellant, hereinafter referred to as the assessee, Alapati Venkataramaiah, was the proprietor of Mohan Tile Works, engaged in the manufacture of tiles and bricks and owned the factory buildings, plant and machinery.
The assessee entered into an agreement dated March 17, 1948.
with one Shri Manthena Venkata Raju agreeing to sell to the Mohan Industries Limited, hereinafter called the Company, the aforesaid factory, plant, machinery, furniture, stocks and goodwill for a sum of Rs. 2,00,000/ .
The agreement recited that the assessee had been carrying on business under the name and style of Mohan Tile Works at Tenali and that the company to be called the Mohan Industries Limited is to be formed under the indian Companies Act, having for its object among other things the acquisition and the working of the said business.
It appears that this agreement was drafted before the Company was incorporated and the recital clause was not modified when the agreement was actually executed.
It is common ground that the Company was incorporated on July 5, 1947, before the date of the agreement.
Since the answer to the question turns in part on the construction of the agreement it would be convenient to set out the relevant clauses, which are as follows: "1.
The vendor shall sell and ' the company shall purchase: First the Goodwill of the said business (with the exclusive right to represent the company as carrying on such business in continuation of the Vendor or in succession thereto).
569 Secondly all the immovable properties specified in Schedule hereto; Thirdly all the plant, machinery, offices furniture, licences, livestocks, carts, implements and utensils to which the vendor is entitled in connection with the said business specified in the Second Schedule hereto; Fourthly all materials and semi processed materials in stock described in the third schedule.
The consideration for the said sale shall be the sum of Rs. 2,00,000.00 which shall be paid and satisfied by payment in cash soon after the capital Rs. 3,00,000.00 has been raised or in any other manner agreed upon between the Directors of the Company and Vendor.
The purchase shall be completed by Seventeenth day of March, 1948 at Tenali when possession of the premises shall as far as practicable be given to the company and ' the consideration aforesaid shall be paid and satisfied subject to the provisions of the agreement and thereupon the Vendor and all other necessary parties, if any, shall at the expense of the company execute and do all the assurances and things for vesting the said premises in the company and giving to it the full benefit of this Agreement as shall be reasonably required.
If from any cause whatever other than the wilful default of the vendor the purchase shah not be completed by the said 17th day of March 1948 the company shall pay interest on the said sum of Rs. 2,00,000.00 (Two lakhs) cash at the rate of . . p.c. per annum.
Upon the adoption of this agreement by the company in such manners as to render the same binding on the company the said Manthena shall be discharged from all liability in respect thereof.
Unless before the day the company shall have become entitled to commence business either of the parties hereto may by notice in writing to the other, determine this agreement and after adopting this agreement the company shall stand in the place of the said vendor for the purpose of this clause.
If this agreement shall not be adopted by the company in the manner aforesaid before and day next, either of the parties may by notice in writing to the other determine the same.
" The assessee was appointed managing agents of the company on July 15, 1947, and on March 11, 1948, he wrote a letter on behalf of the company to the Director of Industries and Commerce.
Madras, furnishing a detailed list of land, building and machinery comprising the assets of the company together with their value, in 570 connection with the grant of loan by Government.
On March 20, 1948, the assessee was credited with the price of Rs.200000/ in the books of the company.
On November 22, 1948, sale deed in respect of land was executed in favour of the company.
On December 9, 1948, the company mortgaged the land with all its buildings and structures thereon and the machinery.
plant and other property for Rs. 1,00,000/ to the State of Madras.
On March 16.
the Board of Directors, by resolution No. 22 approved the agreement dated March 17, 1948, and on April 10, 1949, the agreement was approved at the annual general meeting of the company.
In the first annual report dated March 22, 1949, it was stated as follows: "The company was registered on 5th July 1947.
The Memorandum of Association and Articles alongwith the prospectus of the company were published and the shareholders and the public are well aware of the objects and the prospectus of this industry in Andhra.
To achieve their objects the directors entered into an agreement called vendor 's agreement, with Sri Alapati Venkatramiah, Proprietor of Mobart Tile Works on 17 3 1948.
" It appears that the assessee had returned this income as capital gains in his return and the Income Tax Officer, without any discussion, held that the assessee realised an excess of Rs.79,494/over and above the original cost and this was capital gains assessable under section 12B of the Act.
The assessee appealed to the Appellate Assistant Commissioner and in the grounds of appeal stated that "the Income Tax Officer erred in determining the excess over the original cost in respect of the building at Rs. 79,494/ as attracting tax to capital gains.
As a matter of fact the building was sold at Rs. 1,69,950, but a sum of one lakh alone was received and ' the balance is yet to be received.
The transaction therefore cannot be said to be complete nor can it be said that the profits had been realised.
Therefore, the sum of Rs. 79,494/ as attracting capital gains is absolutely justified.
" The Appellate Assistant Commissioner observed that the fact that a part of the sale amount had not been realised was irrelevant.
Then he said that "at one stage it was contended that there was no legal transfer of the buildings.
machinery, etc.
to the limited company.
There is no substance in this contention also.
The limited company is said to have obtained a loan of more than a lakh of rupees from the Madras Government on the basis that they were the owners of the buildings.
machinery, etc.
which they had purchased from the appellant.
The statement therefore that there was no legal transfer cannot be true.
I am satisfied that the sum of Rs. 79,494/ as returned by the appellant under the head capital gains was rightly included in the assessment.
" The assessee then appealed to the Appellate Tribunal.
The Tribunal, by its order dated ' November 24, 1955, held that "there 571 was in fact no sale, much less legal transfer of lands, buil dings, machinery etc., to the limited liability company which was promot ed to take over the tiles business.
There was only an agreement to sell .
In fact, the assessee did not receive a single pie during the ye ar of account or even during the period when the capital gains was in force.
He received in all Rs. 1 lakh in several instalments beginning from 25 3 1949, which is beyond the year of account.
The point tha t the assessee himself returned the sum of Rs. 79,494/under the capital gains leads us nowhere.
He might have done it under the advice of some "income tax expert".
The assessee cannot be tied down to an inadv isably made wrong statement.
In the circumstances, we delete the additio n." It appears that the Commissioner of Income Tax filed an appli cation under section 35 of the Act for the correction of the Tribunal 's Order on the ground that the Tribunal had not mentioned in the order c ertain documents which, if they had been considered, would perhaps supp ort a conclusion different from the one arrived at by the Tribunal.
The Tribunal thereupon came to the conclusion that its earlier de cision deleting the amount from taxation was based on non considerati on of various materials on record and it proceeded to rectify this order as a mistake apparent from the record.
Accordingly it deleted para 4 i n its order dated November 24, 1955, and substituted its order dated Mar ch 8, 1957.
The Tribunal held that in pursuance of cl. 6 of the agr eement dated March 17, 1948, the possession of the entire factor y was immediately handed over to Mohan Industries and that the sale deed dated November 22, 1948 was executed for consideration of Rs. 4,500/ on ly and refers only to the land on which the factory is situated, and di d not refer to the factory, machinery and plant, etc.
which had been taken possession of by Mohan Industries on March 17, 1948.
Further it held that the entries in the account books of Mohan Industries under date March 20, 1948, showed that a sum of Rs. 2,00,000/ was credit ed in favour of the assessee and the asset accounts were debited as foll ows: Plant & Machinery a/L.P.27Rs.
15,989 0 0 Furniture account 2918,80500 Electric goods 31 1,289100 Site & Construction amount331,26,47O00 Stock amount 34 30,05000 Goodwill account 407,39660 Total 'Us.2,00,00000 572 Further it noticed that the assessee also made corresponding entries in the books on March 20, 1948, by debiting Rs. 2,00,000/ to Mohan Industries and crediting the various accounts in the same way.
The Tribunal also relied on the letter dated March 11, 1948, from Mohan Industries to the Director of Industries, and the first annual report dated March 22, 1949.
As stated above, the Tribunal referred the question set out above.
The High Court came to the conclusion (1) that in the circumstances of the case it is immaterial as to when the money was actually paid because the transfer had already been made by putting the company in possession; (2) that the words used in section 12B are sale, exchange, relinquishment or transfer.
If transfer is equivalent to sale, in that it should only be by a registered instrument, the Legislature would not have used two different words for that purpose.
All that is required for the purpose of this section is that the assessee should have a right to receive the profits and not that he should have in fact received it.
The assessee, in their view, had a right to receive the two lakh of rupees under the agreement immediately and in fact he treated it as having been received; (3) the entire movable and immovable property was transferred by giving possession to the company in the year of account and in order to perfect the title the only thing that is required was a registered conveyance in respect of land which was done subsequently; and (4) that it is apparent from the entire transaction and the method of accounting adopted both by the assessee and the company that the income had ,risen to the assessee in the year of account and there is no justification even for the contention that atleast immovable assets should be deemed to have been transferred only in the year in which the actual sale deed was executed.
Accordingly, it answered the question in the affirmative.
Mr. A.V. Vishwanatha Sastri, the learned counsel for the assessee contends that under section 12B of the Income Tax Act, as it stood at the relevant time, profits and gains are deemed to be the income of the previous year in which the sale, exchange or transfer took place.
He says that the sale took place when on March 16, 1,949, the Board of Directors ratified the agreement dated March 17, 1948; till then there was only an agreement to sell and that an agreement to sell is neither a sale nor a transfer of a capital asset.
The relevant part of section 12B was in the following terms: "12B. Capital gains (1) The tax shall be payable by an assessee under the head "Capital gains" in respect of any profits or gains arising from the sale, exchange or transfer of a capital asset effected after the 31st day of March 1946 and before the 1st day of April 1948, and such profits and gains shall be deemed to be income of the previous year in which the sale, exchange or transfer took place.
. " 573 The word "capital asset" was defined to mean "property of any kind held by the assessee whether or not connected with his business, profession or vocation but does not include (i) any stock in trade, consumable stores or raw materials held for the purpose of his business, profession or vocation.
" The question which arises is whether any sale or transfer took place before the first day of April, 1948.
Upto that date, apart from the agreement to sell, three events had taken place.
First, the assessee as managing agents had written on March 11, 1948, i.e., before the agreement was signed, to the Government regarding loan.
Secondly, on March 17, 1948, the possession of the land and the buildings and machinery had ' been given to the company.
Thirdly, on March 20, 1948, the assessee had been credited with the price of Rs. 2,00,000/ in the books of the company and he had also made appropriate entries in his own account books Turning now to the agreement dated March 17, 1948, it is urged that this is an agreement to sell and not a sale deed '.
This is evident from clause 1 of the agreement.
Further it is contended that it is a conditional agreement to sell.
Reliance is placed on clauses 8 and 9 of the agreement.
Clause 8 expressly contemplates adoption of the agreement by the company in such manner as to render the same binding on the company, and clause 9 contemplates that it is only after the adoption of the agreement that the company shall stand in the place of the said Mantuna Venkata Raju.
It seems to us that it was a conditional agreement to sell and before it could ripen into a contract between the company and the assessee, it had to be adopted by the company.
We may mention that Mr. Rajagopala Sastri urged that we should discard clauses 8 and 9 because they were meant to operate if the agreement had been executed before the incorporation of the company.
But we are unable to rewrite the agreement.
Clauses 8 and 9 are appropriate in an agreement which is made by an agent subject to confirmation by a principal and must be given effect to.
When was the agreement adopted by the company '? We are relieved from addressing ourselves to this question because in the statement of the case, which was agreed to by the assessee and the Revenue, it is stated that "the said agreement was approved and accepted by a resolution of the Board of Directors of the Company on 26.3.1949 and in and by the said resolution the company agreed to pay purchase price in instalments commencing from 31.3.1949.
The agreement was subsequently approved by the general body of share holders at a meeting held on 10 4 1949 and on such approval, acceptance and adoption, the agreement became binding on the assessee and the company.
" Even if the agreement was accepted by the company in 1949, the question still remains whether any sale or transfer of assets took place before April 1948.
Sale or transfer of an asset could take place, as it did in respect of the site, even before the agreement was L/P(N)4SCI 10 574 accepted.
The assets comprised of two items of immovable property, viz., Plant and machinery valued at Rs. 15,989/ and site and buildings valued at Rs. 1,26,470/ .
It is clear that title to these assets could not pass to the company till the conveyance was executed and registered.
(See Commissioner of Income Tax vs Bhurangva Coal Co.(1) No such conveyance was executed before April 1, 1948.
It is only on November 22, 1948, that a sale deed was executed and registered in respect of the site.
Therefore, it is clear that the title to these assets did not pass to the company till after April 1, 1948, and consequently nO sale took place of these assets before April 1, 1948.
Mr. Rajagopala Sastri however urges in the alternative that even if no sale took place before April 1, 1948, the assets had been transferred to the company before that date.
He says that 'transfer ' is a wide word ' and had been used in section 12B to cover those cases where rights in assets have been transferred in such a manner as to give rise to capital gains.
He further urges that in this case possession of the assets was transferred ' to the company on March 17, 1948, and the assessee could never get back possession of the immovable assets in view of section 53A of the Transfer of Property Act.
In none of the cases cited before us has this point been considered.
We are unable to sustain this contention.
Before section 12B can be attracted, title must pass to the company by any of the modes mentioned in section 12B, i.e. sale, exchange or transfer.
It is true that the word 'transfer ' is used in addition to the word 'sale ' but even so, in the context transfer must mean effective conveyance of the capital asset to the transferee.
Delivery of possession of immovable property cannot by itself be treated as equivalent to conveyance of the immovable property.
The High Court has relied on the entries made in the account books of the assessee and the company on March 20, 1948, but the date of sale or transfer according to section 12B is the date when the sale or transfer takes place, and it seems to us that the entries in the account books are irrelevant for the purpose of determining such a date.
Mr. Rajagopala Sastri contends that the assessee should not be allowed at this stage to draw a distinction between movable and immovable assets, but in the statement of the case, which was agreed to by the assessee and ' the Revenue, a distinction is drawn thus: "The building and site was valued at Rs. 1,26,470/ .The machinery and electrical fitting which were permanently embedded in the earth were respectively valued at Rs. 15,989/ and Rs. 1,298 10 0.
The stocks were valued at Rs. 30,050/ and goodwill at Rs. 7396 6 0.
" We are, therefore, unable to prevent the assessee from relying upon the distinction between movable and immovable assets.
In the (1) 575 result, we hold that the following assets were not sold ' or transferred before April 1, 1948.
(i) Machinery valued at Rs. 15,989 0 0.
(ii) Electrical fittings valued at Rs. 1,289 10 0.
(iii) Buildings and site valued at Rs. 1,26,470 0 0.
Therefore, no capital gains in respect of these items arose in the previous year ending March 31, 1948.
This brings us to the movable assets.
Stocks valued at Rs. 30,050/ are expressly exempt from the definition of capital asset, and therefore we hold that no capital gain accrued in respect of their sale or transfer.
This leaves furniture valued at Rs. 18,805/ , and goodwill valued at Rs. 7,396/6/ .
There is no doubt that possession of furniture was delivered on March 17, 1948, and as title to furniture can pass by delivery, capital gains, if any, accrued on that date.
In the circumstances of the case, delivery must have been made with the intention of passing title.
The position regarding goodwill is however different.
It is an intangible asset and it ordinarily passes alongwith the transference of the whole business.
It cannot be said in the circumstances of this case that the goodwill was transferred before April 1, 1948.
Accordingly, we hold that only one asset, namely, furniture was transferred before April 1, 1948.
In the result, we answer the question referred to the High Court as follows: "In the facts and circumstances of the case the sum of Rs. 79,494/ is not assessable as capital gains in the assessment year 1948 49, but only such part of it, if any, as is attributable to the capital gain made by the transfer of furniture valued at Rs. 18,805/ is assessable.
" The appeal is accordingly accepted and as the assessee has succeeded substantially he will have his costs here and in the High Court.
Appeal allowed.

summary/full:
On 17th March 1948, the assessee entered into an agreement to sell his factory to a company, and on the very same day possession of all the assets of the factory was handed over to the company.
A few days later an entry was made in the company 's account showing that a sum of Rs. 2,00,000/ had been paid to the assessee and there were corresponding entries in the assessee 's accounts also.
In fact only a lakh and odd was paid to the assessee and even that amount was paid only in March 1949.
In November 1948 a sale deed was executed and registered and in March 1949 the Board of Directors of the Company ratified the sale.
For the assessment year 1948 49, the assessee had included in his return the sum of Rs. 2 lakhs as capital gains.
The Income tax Officer held that the assessee realised an excess of Rs. 79,494/ over and above the original cost, as capital gains assessable under section 12B of the Income tax Act.
The Appellate Assistant Commissioner, and the Tribunal confirmed the order.
In reference, the High Court held that it was immaterial as to when the money was actually paid because the transfer had already been made to the company by possession, that for the purpose of the section the assessee should have the right to receive the profits and not that he should have in fact received it, that entire property was transferred by giving possession to the company in the year of account, and that the income had arisen to the assessee in the year of account.
In appeal to this Court, it was contended that as the sale took place only in March 1949, when the Directors ratified the agreement of sale, no sale or transfer took place before 1st April 1948, as required by section 12B, and hence the amount was not liable to tax.
HELD: Title to the assets could not pass to the company till the conveyance was executed and registered and consequently no sale, in the instant case, took place of the assets before 1st April 1948 as required by section 12B. [574B] Commissioner of Income tax vs Bhurangya Coal Co. 34 I.T.R. 802, referred to.
Before section 12B can be attracted, title must pass to the company by any of the modes mentioned in section 12B i.e., sales exchange or transfer It is true that the word 'transfer ' is used in addition to the word 'sale ' but even so, in the context, transfer must mean effective conveyance.
of the capital asset to the transferee.
Delivery of possession of immovable property cannot by itself be treated as equivalent to conveyance of the immovable property.
[574E] The date of sale or transfer according to section 12B is the date when the sale or transfer takes place, and the entries in the account books are irrelevant for the purpose of determining such a date.
[574F G] In the present case, machinery, electrical fittings, buildings and site were not sold or transferred in the relevant year of account; only 568 one asset, namely, furniture was transferred on 17th March 1948 as title to furniture can pass by delivery.
Capital gains, if any, made by the transfer of furniture accrued on that date.
The position of goodwill is however different.
It is an intangible asset and it ordinarily passes along with the transference of the whole business and so it was not transferred before 1st April 1948.
[575A E]