K N NARAYANAN Vs. INCOME TAX OFFICER

JUDGEMENT

(1.) K N. Narayana Iyer and the members of his family were holding 1,19,760 out of the 3,12,500 fully paid up equity shares of Heileyburia Tea Estate Ltd., Kottayam. By Ext. P1 dated 15-12-76 he agreed to transfer all the aforesaid shares to the Sales & Allied Industries (lndia) Ltd., Calcutta in four different lots, between 15-12-76 and 30-4-78, subject to the obtaining of necessary sanctions and approvals under the Companies Act and the Foreign Exchange Regulation Act. The agreement also provided that in case the whole block of 1,19,760 shares were not so transferred, the vendor was to repay all moneys received from the purchaser and that the latter was to return or re-transfer all the shares delivered or transferred.

(2.) Shares held by the two petitioners herein were also covered by the agreement; and 1700 shares belonging to each were actually transferred on 31-3-77. They filed returns under the. Income Tax Act showing long term capital gains on the sales so effected, and the Income Tax Officer assessed them under S.143(1). It so transpired, however, that permission was not obtained from the Reserve Bank in time, for transferring 40,000 shares held by another member of the family who was a non resident Indian. The vendors were thus obliged to buy back the shares in terms of Ext. P1 agreement. A contention was then raised by the petitioners that the transfers effected on 31-3-77 were only conditional and that no capital gains were actually made. The Commissioner of Income Tax rejected the contention, in proceedings under S.264; and the two writ petitions are directed against such rejection.

(3.) The controversy is about the scope of the transaction covered by Ext. P1. According to the petitioners, the agreement has to be read as a whole to discover its true legal effect, and when so read, it only disclosed an intention that property in all the shares would pass only when the process was completed by 30-4-78. The sales effected on 31-3-77 were thus non est due to non fulfillment of the above basic condition. There were no completed sales in law, and no taxable point giving rise to capital gains bad arisen on 31-3-77. The transferees could have obtained full title only if the whole of the 1,19,760 shares had been transferred by 30-4-78.