COMMISSIONER OF INCOME TAX Vs. BHURANGIYA COAL COMPANY

JUDGEMENT

(1.) LEGISLATION dealing with capital gain was first introduced in India by S. 6 of the Indian Income -tax (Amendment) Act of 1947 (Act XXII of 1947). Sec. 12B(1) which was newly enacted provided that "in respect of any profits or gains arising from the sale, exchange or transfer of a capital asset effected after 31st March, 1946," income -tax was payable by the assessee and "such profits and gains shall be deemed to be income of the previous year in which the sale, exchange or transfer took place." The section was amended by virtue of S. 8 of the Indian Finance Act of 1949 and the phrase "and before 1st April, 1948" was added after the phrase "after the 31st March, 1946." The result therefore is that the assessee is liable to pay income -tax on capital gain in respect of the transfer of capital assets effected after the 31st March, 1946, and before the 31st April, 1948.

(2.) THE assessee in this case is a partnership called Bhurangiya Coal Company. By an agreement dt. the 16th March, 1946, the assessee agreed to transfer to a limited company, Bhurangiya Coal Co. Ltd., the properties described in Schedules 1 and 2 of the agreement consisting of all the movable and immovable properties appertaining to the colliery. The agreement was that the limited company would purchase from the assessee all the properties in Schedules 1 and 2 for a sum of Rs. 6,10,000. Out of this amount a sum of Rs. 2,00,600 was the price fixed for the immovable properties like coal land, buildings and structures included in sch. 1 and a sum of Rs. 4,09,400 was the price of the movable properties like machinery, plants, tram lines and cables included in sch. 2. The payment of the price was to be made by allotment of 50,000 shares of the value of Rs. 5,00,000 to the nominees of the vendors and the balance was to be paid in cash in equal shares to the two partnership firms Ramsarandas Brothers and D. R. Rathor. The case of the assessee is that in pursuance of the agreement the limited company took possession of the colliery and of the properties mentioned in the two schedules on the 30th March, 1946. On the next day entries were made in the books of the limited company to show that the amount of Rs. 5 lacs was paid by adjusting 50,000 shares in the name of the vendors. The balance of the purchase price was actually paid by two cheques on the 9th May, 1946. It appears that a sale deed was registered on the 17th May, 1946, with respect to the immovable properties included in sch. 1. In this state of facts the ITO held that the sale of both movable and immovable properties took place after 1st April, 1946, and a sum of Rs. 4,71,757 was computed to be the capital gain of the assessee liable to be taxed under S. 12B(1) of the Indian IT Act. The decision of the ITO was affirmed by the AAC in appeal. The assessee took a further appeal to the Tribunal who formed the opinion that so far as the movable properties were concerned the assessee gave possession to the limited company on the 30th March, 1946, and the transfer of title took place on that date. As regards immovables the Tribunal considered that the transfer took place on the 17th May, 1946, when the registration of the sale deed was effected and that the assessee was liable to pay income -tax on the profit made by sale of the immovables under S. 12B(1) of the Indian IT Act. At the instance of the assessee (Commissioner ?) the following question has been submitted by the Tribunal for the opinion of the High Court :

(3.) I next turn to the argument of the Standing Counsel that the contract of sale dt. the 16th March, 1946, is an invalid contract since the limited company was not in existence at that time and Mr. Jayantilal Ojha and Mr. B. K. Maitra had no authority to enter into the contract on the company's behalf. To put it differently, the contention is that the contract of 16th March, 1946, was null and void since the limited company was incorporated only on the 18th March,and the company could not by subsequent ratification affirm or give legal validity to the contract entered into by Mr. B.K. Maitra and Mr. Jayantilal Ojha ostensibly on its behalf. In my opinion this argument proceeds on a misconception. A decisive answer to such an argument is furnished by ss. 23 and 27 of the Specific Relief Act. Sec. 23 states that specific performance of a contract may be obtained by a company when the promoters have before its incorporation entered into a contract for the purposes of the company, and such a contract is warranted by the terms of incorporation. Sec. 27 similarly enacts that specific performance of a contract may be enforced against the company when the promoters had entered into the contract before its incorporation. But there are two conditions for the enforcement, viz., the company should have ratified and adopted the contract and the contract should be warranted by the terms of the incorporation. Secs. 23 and 27 are based upon the principle developed in the English Court of Equity that the company stands in place of the promoters or to use the language of Lord Jeffery in a Scottish case the fact that "a party having passed from the chrysalis to butterfly state" creates no difficulty in the enforcement of such a contract. The doctrine is not based on the principle of contract through the agency of promoters but on the principle that the Court of Equity will not allow a corporate body to exercise powers acquired by means of a previous contract and arrangement without carrying that contract and arrangement into full effect. The principle is that the company is bound not by a contractual obligation, but on a ground independent of contract and analogous to estoppel. The doctrine is also placed on the alternative principle that the company is bound on the ground of a distinct obligation imposed by the article of its constitution. The Standing Counsel referred to In re Empress Engineering Company (1880) 16 Ch D 125 in which specific performance of a contract to pay a sum of sixty guineas to its solicitors was refused on the ground that the company was not in existence at the time of the contract and that the company could not by mere ratification make the contract binding. But that case must be distinguished on the ground that the equitable question of estoppel was not considered. It was argued in that case that if there was no contractual obligation the claimants could still make out a case on the principle that there was a good equitable claim for services rendered before the formation of the company of which the company had the benefit. Lord Justice James remarked that the question had never been tried whether the company has had the benefit of the claimant's services. The decision has been explained and distinguished in a later case, Howard vs. Patent Ivory Manufacturing Co. (1888) 38 Ch D 156, the facts of which are closely parallel to the present case. In that case the company ratified the agreement entered into by the promoter and took possession of the leasehold property which was the subject matter of the agreement and carried on business thereon. It was held by Mr. Justice Kay on these facts that the company was bound by the contract. At p. 163, Kay, J., quoted with approval the judgment of Lord Justice Turner in the case of Wilson vs. West Hartlepool Railway Co.(1865) 2 DJ & S 475 : -