COMMISSIONER OF INCOME TAX Vs. ALAPATI VENKATARAMIAH

JUDGEMENT

(1.) THE Tribunal has, in pursuance to our orders under S. 66(2) of the Indian IT Act, referred the following question :

(2.) THE assessee also seems to have made an application in I.T.A. No. 5350/1954 -55 and the Tribunal referred the very same question as arising therefrom. Hence the statement of case in R.C. No. 20/1960 is considered sufficient for the other reference (R.C. No. 21/1960) also.

(3.) THE assessee who was the proprietor of Mohan Tile Works, Tenali, was engaged in the manufacture of tiles and bricks. He had for that purpose plant and machinery and factory buildings and he was one of the promoters of a limited company known as the Mohan Industries Ltd., Tenali (hereinafter called the company), and in bringing into existence that company the assessee entered into an agreement dt. 17th March, 1948, with one Manthena Venkatraju agreeing to sell to the company, after it was duly incorporated, the aforesaid factory, plant and machinery, furniture, stocks and goodwill for a sum of rupees two lakhs. This pre -incorporation agreement contemplates the formation of the company and is subject to the approval of the company after its incorporation. This agreement was subsequently approved on 16th March, 1949, by a resolution of the board of directors and in and by the said resolution the company agreed to pay the purchase price in instalments commencing from 31st March, 1949. This agreement was also approved by the general body of shareholders of the company at a meeting held on 10th April, 1949. Under one of the terms of the agreement, Manthena Venkatraju was to be discharged from all liability in respect thereof only on the company ratifying the agreement. It may also be stated that in the agreement the building and sites were valued at Rs. 1,26,470 and the machinery and electrical fittings which were permanently embedded in the earth were respectively valued at Rs. 15,989 and Rs. 1,298 - 10 -0. Stocks were valued at Rs. 30,050 and goodwill at Rs. 7,395 -6 -0. Immoveable property comprised in the agreement was duly conveyed by the assessee under a registered sale deed dt. 22nd Nov., 1948, in favour of the company for Rs. 4,500. The first instalment of the sale price was paid only on 25th March, 1949. There were further part payments and the full price was not paid. The ITO held that the assessee made a profit of Rs. 79,494 and included this amount in the assessee's taxable income under the head "capital gains". An appeal to the AAC was of no avail. The Tribunal, however, held that there was no sale, much less a legal transfer, of the lands, buildings, machinery, etc., to the limited liability company which was promoted to take over the tiles business and that the assessee did not receive a single pie during the year of account or even during the period when the capital gains tax was in force. The CIT filed an application for reference and during the hearing of that application, a petition was filed by the Department under S. 35 of the IT Act bringing to the notice of the Tribunal certain further materials which were already on record to sustain the Departmental action in taxing the amount of Rs. 79,494. On a consideration of this material the Tribunal came to the conclusion that the Department was justified in bringing to tax the capital gains of Rs. 79,494 and passed fresh orders correcting its earlier orders dt. 24th Nov.,1955. The application for reference was consequently rejected as having become infructuous. The assessee then filed an application for reference against the revised order which was rejected on the ground that it became time -barred, after which he moved this Court under S. 66(2) and the Tribunal was directed to state a case.