COMMISSIONER OF INCOME TAX Vs. MATHURADAS MULJI

JUDGEMENT

(1.) THE following questions have been referred to this Court at the instance of the CIT Bombay, under s. 256(1) of the IT Act, 1961 :

(2.) THE assessee is an individual, and the relevant assessment year is 1970 -71. The crux of the matter is whether the property in shares held by James Finlay and Co. Ltd. passed to the purchasers. The assessee and his brother Ratansinh Mulji ('purchasers') jointly agreed with James Finlay and Co. Ltd., Glasgow ('vendor') to purchase the shares in three textile mills, viz., Swan Mills Ltd., Finlay Mills Ltd., and Gold Mohur Mills Ltd. at a total price of Rs. 94,82,181 by an agreement dt. 20th February, 1968. Under the terms of the agreement the payment was to be made in 10 six -monthly instalments, and upon the payment of each instalment, 1/10th of the shareholdings was transferred in the names of the purchasers. The purchasers had to furnish, within 31st March, 1968, or within the mutually agreed time, the irrevocable guarantee to ensure the payment of consideration in terms of the agreement either from a bank or an insurance company, approved by the vendors. The New India Assurance Co. Ltd. ('Insurance Company') gave an irrevocable guarantee dt. 24th September, 1968 in favour of the purchasers which was furnished. The vendors handed over all the share scrips along with the blank transfer forms to the guarantor who were in charge of the transferring of the shares when the payment was received from the purchasers. The guarantor, in return, took counter -guarantee from the two brothers and their relatives. If any instalment was not paid by the purchasers, the guarantor had to pay the same, and the shares acquired by such payment could be transferred in the name of any other person by the guarantor. The dividend received on shares, still not transferred, was payable to the vendor.

(3.) THE ITO held that it was a case of an absolute conditional sale, whereby the entire shareholdings at the price of Rs. 94.82 lakhs became the property of the purchases during the year under reference and, consequently, the entire dividend in respect of shares was taxable in the hands of the purchasers in moiety. The assessee preferred an appeal before the AAC who allowed the same by upholding the stand taken by the assessee. The Department approached the Tribunal. There was difference of opinion between two members. As a result, there was a reference to the third member. The third member agreed with the view that there was no completed sale of all the shares of the property, the property in the goods did not pass to the purchasers and, hence, entire dividend could not be taxed as income of the purchasers during the relevant period. Thus, by majority judgment, the Tribunal dismissed the appeal.