1. This proceeding under section 66(1) of the Income-tax Act, 1922, arises out of the decision of the Income-tax Appellate Tribunal, Bombay (herein-after called the Tribunal), in Income-tax Appeal No. 190 of 1950-51. The Tribunal has submitted to this Court for judgment the following questions of la :
(1) Whether the assessee in effecting the transfer of the management of the coal mines to the company made a capital gain and, if so, the extent thereo
(2) If the answer to question (1) is in the affirmative, whether the law imposing a tax on capital gains is intra vire
(3) If the answer to question (1) be in the negative, whether in effecting the transfer of the management of the coal mines to the company the assessee made an income liable to tax and, if so, the extent thereo
2. The dispute relates to the assessment for the financial year 1st April, 1947, to 31st March, 1948. The assessee was Rai Saheb P.S. Sial, who died during the pendency of the proceedings and is now represented by his widow, sons and daughters. He had acquired coal mines at Majri, Ghogri and Ambara, but it appears that the Ambara coal mine was not being worked. A private limited company known as 'Rai Saheb P. S. Sial and Sons Ltd.' (hereinafter referred to as the company), was incorporated in 1944, the shareholders of which were the assessee, his wife and his sons and daughters. By an agreement, dated 31st March, 1947, called 'the agency agreement', the assessee transferred with effect from 1st April, 1947, the management of the entire business of working his collieries and mines to the company. Clause 6 of this agreement is to the following effec :
'That in consideration of the mining proprietor having allowed the use and occupation of the running collieries to the agency company, the company shall give to the mining proprietor royalty at the rate of Re. 0-6-0 (Rs. nil and annas six only) per ton of coal raised and despatched out of the colliery premises. The mining proprietor shall have nothing to do with any items of expenses that will be incurred for raising coal or for running the business at all these three places.'
By clause 19 the following was provide :
'That the company has agreed to take over all the business outstanding debits either due by or to the proprietor at the face value as per books of the proprietor for the year ending 31st March, 1947, and in lieu thereof the company has agreed to allot shares of the equivalent net value in the name of the proprietor or his nominees.'
It is not disputed that the assets transferred to the company amounted to Rs. 2,54,908, which included Rs. 1,10,000 for what is called the goodwill of the Majri and Ghogri mines. The company was indebted to the assessee in the sum of Rs. 23,450 on 31st March, 1947. Thus it had to pay to the assessee a sum of Rs. 2,78,358 for which it allotted to him shares of the face value a sum of Rs. 2,75,000, the balance of Rs. 3,358 being left with the company to the assessee's account.
3. The Income-tax Officer was of the opinion that by the transfer of the management of the mines to the company the assessee made a capital gain amounting to Rs. 95,000. The Appellate Assistant Commissioner reduced this amount to Rs. 85,000. In appeal the Tribunal held as belo :
'It appears to us that in this case there is no question whatsoever of capital gain. Under section 12B a capital gain arises on the sale, exchange or transfer of a capital asset. In the present case there has been no transfer of a capital asset. What has been transferred to the private limited company is the management of the mines in question. The private limited company was required to pay to the assessee on account of the transfer of the management of the mines at the rate of 6 annas per ton of coal raised and despatched out of the colliery premises. The private limited company would have been required to pay more then 6 annas per ton if it had not paid Rs. 1,10,000 on account of what is called goodwill. The price of one ton of coal was Rs. 16 or so. This by charging only 6 annas, the assessee earns a net income of 2.5 per cent. on the sale of one ton of coal by the company. Formerly his income was much more than this. He has thus capitalized a part of his income. This payment of Rs. 1,10,000 is nothing else but a premium (advance payment) made by the private limited company to the assessee. The whole amount of Rs. 1,10,000 is thus the assessee's income and as such liable to be taxed at the rates appropriate to 'income' and not at the rates appropriate to 'capital gain'. We cannot enhance the assessment. The tax on account of the transfer is less than the tax payable on the premium of Rs. 1,10,000. All that we can do, therefore, is to dismiss this particular ground of appeal.'
4. In his statement before the Income-tax Officer, the assessee has given a history of the amount of Rs. 1,10,000. According to him, the Majri mine was purchased by him for a sum of Rs. 1,35,000 by a registered deed, dated 26th June, 1936. The value of the machinery and plants etc. was fixed at Rs. 80,000 and the building were valued at Rs. 2,000, vide depreciation record of the year 1937-38. An extra consideration which really amounts to Rs. 53,000 and not Rs. 55,000 as stated by the assessee, was, according to him, the value of the goodwill and right to work the mine. The leasehold rights in the Ghogri mine were purchased in the year 1934 for Rs. 55,000, which represented exclusively the consideration for the goodwill and right to work the mine. His case was that these values rose to Rs. 75,000 for each mine in the year 1939 and accordingly he actually suffered a loss of Rs. 40,000 and consequently there was no capital gain.
5. The Income-tax Officer found in respect of the Ghogri colliery that the assessee paid nothing for goodwill and that its fair market price on 1st January, 1939, would depend on the average profit of the colliery which he estimated as Rs. 3,489. As regards Majri colliery, he found as belo :
'........ out of Rs. 1,35,000, Rs. 80,000 were allocated as the price of all machinery, plants, tools and all other articles and property of moveable nature leaving a balance of Rs. 55,000 which was allocated as the price of the said mine, veins and all the other premises covered by the indenture of lease dated 7th April, 1913, (not available) and all buildings, offices and all other fixed machinery and goodwill.'
He worked out the fair market price of the goodwill on 1st January, 1939, on the basis of the average profit of the mine at Rs. 564. He thus fixed the fair market price of the goodwill of both the mine on 1st January, 1939, at Rs. 15,000 and treated the balance of Rs. 95,000 as capital gain. The Appellate Assistant Commissioner estimated the fair market value of the goodwill at Rs. 25,000, and accordingly he reduced the amount of capital gain by Rs. 10,000.
6. It will thus appear that the basis of assessment which was adopted by the Income-tax Officer and the Appellate Assistant Commissioner was that the amount of Rs. 1,10,000 represented a capital asset on which a gain of Rs. 85,000 was made. This finding was negatively by the Tribunal on the ground that the case was not one of transfer of a capital asset. On the other hand, it held the view that the amount of Rs. 1,10,000 was capitalized value of a part of the income, and accordingly it was assessable as income. This finding is based on the assumption that the assessee by charging 6 annas was only earning a net income of 2.5 per cent. on the sale of one ton of coal by the company. In this connection, the Tribunal has found the price of one ton of coal as Rs. 16 or so. There is, however, no material on record on this point, and the agreement itself does not provide any basis for holding that the amount of Rs. 1,10,000 was a premium paid by the company by way of capitalized value of the part of the income.
7. It was contended before us that the Tribunal was not competent to make assessment on a basis which was not the subject of the appeal or objection. This question was raised by the assessee before the Tribunal but was not referred to this Court. The question, however, is one of la : Motor Union Insurance Co. Ltd. v. Commissioner of Income-tax, Bombay, and, as it arises out of the facts of the case, it also needs decision.
8. On the statement of case as submitted by the Tribunal, question No. (3) cannot be answered. The case is accordingly referred back to the Tribunal to submit an additional statement of case on the following questions of la :
(1) Whether there is material for the finding of the Tribunal that the amount of Rs. 1,10,000 was nothing else but a premium (advance payment) paid by the company to the assessee and that it forms wholly as his incom
(2) Whether the Tribunal was competent to make the assessment on the basis of income when that point did not form the subject of the appeal or objectio
ADDITIONAL STATEMENT OF CASE
1. In compliance with the order of the High Court of Judicature at Nagpur, in Miscellaneous Civil Case No. 190 of 1951, we submit an additional statement of the case. Parties agree that all the facts are correctly stated and that there is no omission of any material fact. The assessee desires that paragraph 4 below may be deleted. We are unable to delete that paragraph.
2. The Tribunal is required to submit an additional statement of the case on the following question of la :
'(1) Whether there is material for the finding of the Tribunal that the amount of Rs. 1,10,000 was nothing else but a premium (advance payment) paid by the company to the assessee and that it forms wholly as his incom
(2) Whether the Tribunal was competent to make the assessment on the basis of income when that point did not form the subject of the appeal or objectio ?'
3. The case that was referred to the High Court was agreed to by both the parties.
4. By his application under section 66(1) of the Indian income-tax Act the assessee desired that the following questions of law should be referred to the High Cour :
'(i) Was there any material on record to find that the cash credits of Rs. 14,600 were the assessee's income from some undisclosed sourc
(ii) Following the principle laid down in 1947 Income-tax Reports page 61 and 1949 Income-tax Reports page 269 could it be held that the sum of Rs. 14,600 was the assessee's income from some undisclosed sourc
(iii) Having once found that section 12B of the Income-tax Act did not apply to the so-called transfer of goodwill for Rs. 1,10,000 and that there was no capital gain of Rs. 85,000 as held by the Appellate Assistant Commissioner of Income-tax could the Tribunal proceed to decide that the amount of Rs. 1,10,000 paid by the company to the assessee in lieu of goodwill amounted to payment of capitalised compensation in lieu of the assessee's future income for a period of 10 year
(iv) Was the amount of Rs. 1,10,000 paid by issue of shares to the assessee by the private limited company, Sial and Sons Ltd., an income within the meaning of the Income-tax Act and was it liable to be taxe
Question No. (iii) above is similar to question No. (2) referred to in paragraph 2 supra. We understand that no application was made by the assessee to the High Court under section 66(2) of the Act within the time specified in section 66(2) requiring the Tribunal to state the case on that question. It is submitted with respect, that that question cannot now be agitated. If, however, the High Court is of opinion that the question can be agitated, we have to add no additional facts to the facts as already stated in the dated 3rd August, 1951.
5. As for question No. (1) in paragraph 2 supra, no additional facts are required to be stated. What the Tribunal did was to interpret the agreement dated 31st March, 1947, between the assessee and the newly formed company Rai Sahib P. S. Sial and Sons Ltd., in the context of the facts stated in the case dated 3rd August, 1951. The Tribunal was of opinion that no capital asset as defined in sub-section (4A) of section 2 of the Act was sold or transferred by the assessee to the company. What was transferred to the company was only management of the business carried on by the assessee. If the High Court is of opinion that in substance the assessee transferred his mining leases to the company, the question of computing the capital gain would arise. If, on the other hand, the High Court is of opinion that no capital asset was transferred by the assessee to the company, the question will arise what is the nature of the sum of Rs. 1,10,000 received by the assessee in the shape of shares of the company. Is it a capital not within the mischief of capital gain or income liable to ta
R. J. Kolah with J. M. Thakar, for the assessee.
M. P. Amin with G. N. Joshi, for the Commissioner.