S.K. Das, J.
1. This is an appeal on a certificate granted by the High Court ofJudicature at Bombay under sub-section (2) of section 66A of the IndianIncome-tax Act (hereinafter referred to as the Act). The appellant is theCommissioner of Income-tax, Bombay, and the respondent is the ProvidentInvestment Co. Ltd., Bombay, hereinafter referred to as the assessee company.
2. The short question which falls for consideration in this appeal iswhether a particular transaction, details whereof we shall presently state,entered into by the assessee company in 1946 resulted in capital gains withinthe meaning of section 12B of the Act. The question which was referred to theHigh Court under section 66(1) of the Act was this : 'Whether the assesseecompany made a capital gain amounting to Rs. 81,81,900 within the meaning ofsection 12B of the Indian Income-tax Ac ?' The High Court answered thequestion in the negative. The appellant being dissatisfied with the judgmentand order of the High Court asked for and obtained a certificate from the saidHigh Court that the case is a fit one for appeal to the Supreme Court.
3. The material facts may be very shortly stated. The assessee company is aprivate limited company, the shares of which were held by the then MaharajaScindia of Gwalior and his nominees. At the material time, the assessee companywas the managing agent of Madhowji Dharamsi ., hereinafterbriefly referred to as the Dharamsi Company, and Sir Shapurji Broacha MillsLtd., briefly referred to as the Shapurji Broacha Company. The assessee companyheld all the 'conversion' shares of the Dharamsi Company and asubstantial majority of the 'conversion' shares of the ShapurjiBroacha Company. The Dalmia Investment Company Limited, which will hereinafterbe briefly referred to as the Dalmia Company, wrote two letters to the assesseecompany on September 14, 1946. In these two letters, the Dalmia Company offeredto purchase 28,328 'conversion' shares of the Dharamsi Company at Rs.500 per share together with the managing agency, and also 75,212'conversion' shares of the Shapurji Broacha Company, together withthe managing agency. We are not concerned with the other details mentioned inthe two letters, except this that the Dalmia Company made it clear that itwould purchase both the mills or neither, and a time limit till September 23,1946, 3 p.m. was imposed during which the offer would remain open. This timelimit was, however, extended later up to September 30, 1946. The letter furtherstated :
'On your accepting theoffer, we will pay to you
Rs. 20 lakhs in the case of theDharamsi Company,
Rs. 30 lakhs in the case of theShapurji Broacha Company
as and by way of earnest money.You shall have to arrange to get the transfer of the managing agency sanctionedby the general body of the shareholders within a period of 40 days from thedate of acceptance. As soon as the transfer is sanctioned, we will pay thebalance of the purchase price.'
4. On September 26, 1946, there was a meeting of the board of directors ofthe assessee company. At that meeting, the board considered the offers made bythe Dalmia Company and resolved to accept the offers. The board further statedin its minutes that out of the total amount received from the sale of theshares, a sum of Rs. 1 crore should be paid to the assessee company ascompensation for the loss of the managing agency of the two mills. On September30, 1946, the assessee company wrote to the Dalmia Company accepting the offersmade, subject to a condition which is not material for our purpose. On the samedate, the Dalmia Company received the acceptance of the offers made by it andsent two drafts, one for Rs. 20 lakhs and the other for Rs. 30 lakhs. OnOctober 7, 1946, the Dalmia Company wrote a very important letter to theassessee company. This letter said inter alia :
'With reference to theinterview our solicitor Mr. Tanubhai had with your Mr. Wadia, we beg to recordthat it is now being agreed upon as follows in modification of the arrangementpreviously made between yourselves and ourselve :
(1) In our letters of offerwhich have been accepted by you, it was arranged that the managing agency willbe transferred either to us or to our nominees. Now, instead of doing so byyou, you as the present managing agents will give their (sic.) resignation, sothat at the time of delivery of the shares and payment of moneys, your managingagency will have come to an end. In view of the above, it is not necessary toobtain any sanction of general meeting.
(2). 1. Mr. Shriyans PrasadJain, 2. Mr. Jaidayal Dalmia, 3. Mr. Shanti Prasad Jain, and 4. Mr. Vishnu HariDalmia
will be appointed directors ofboth the Mills Companies and thereafter all the present directors will tendertheir resignation.
(3) Qualification shares in thenames of the above proposed directors will be transferred by you and thebalance of the shares will be delivered to us along with the transfer deedsduly signed against payment.
(4) You may communicate by acircular to the shareholders that you have resigned the managing agency. Youmay further mention in the circular that in accordance with the offer we areprepared to take up the deferred shares held by the shareholders which may beoffered to us at the rate of Rs. 25 and Rs. 7-8-0 of Madhowji Dharamsi., and Sir Shapurji Broacha Mills Ltd. respectively withintwo months of the date of letter of offer which we would also send.'
5. The assessee company accepted the modified arrangement suggested by theDalmia Company, and on 19th October, 1946, the assessee company wrote to theDharamsi Company and the Shapurji Broacha Company that it had decided to resignthe office of the managing agency and accordingly tendered its resignation onthat date. The balance of the consideration money was then paid to the assesseecompany, and it was not disputed that the value of the managing agency wascomputed at Rs. 1 crore, nor was there any dispute that the managing agency wasa capital asset. Out of the said sum of Rs. 1 crore, the Income-tax Officercomputed the capital gain at Rs. 81,81,900 and asked the assessee company topay tax thereon. The Appellate Assistant Commissioner held that the assesseecompany had sold the managing agency and therefore the profits or gains arisingfrom that sale were capital gains within the meaning of section 12B of the Act.The Income-tax Appellate Tribunal, Bombay Bench 'A', held, however, that therewas no sale of the managing agency, because the original contract of purchasewas varied by the new contract embodied in the letter of October 7, 1946. TheTribunal, however, held as follows:
'The assessee company was the owner of the sharesand the managing agencies. It sold the shares to the Dalmia Company and handedback the managing agencies to the managed companies. This handing back, in ouropinion, constitutes a transfer of the managing agencies.'
6. On that footing the Tribunal held that section 12B of the Act applied. Onan application by the assessee company, the Tribunal on being satisfied that aquestion of law did arise our of its order, referred the question which we havealready set out in an earlier paragraph of this judgment, to the High Court ofBombay. The High Court answered the question in the negative on the ground thatthere was neither a sale nor a transfer of the managing agency within themeaning of section 12B of the Act.
7. The point for our consideration is whether the High Court has correctlyanswered the question. We must first read sub-section (1) of section 12B of theAct as it stood at the material time. The sub- section, so far as it isrelevant for our purpose, was in these term :
'The tax shall be payable by an assessee under thehead 'Capital gains' in respect of any profits or gains arising from the sale,exchange or transfer of a capital asset effected after the 31st day of March,1946; and such profits and gains shall be deemed to be income of the previousyear in which the sale, exchange or transfer took place.'
8. It is worthy of note that 'capital gains' were charged for thefirst time by the Income-tax and Excess Profits Tax (Amendment) Act, 1947,which inserted section 12B in the Act. It taxed 'capital gains'arising after the 31st March, 1946, and the levy was virtually abolished by theIndian Finance Act, 1949, which confined the operation of the section to'capital gains' arising before the 1st April, 1948. The Finance (No.3) Act, 1956 (77 of 1956) re-introduced the section in wider terms so as to bringwithin 'capital gains' 'any profits or gains arising from thesale, exchange, relinquishment or transfer of a capital asset effected after31st March, 1956, etc.' We are not, however, concerned with the questionwhether the transaction under our consideration, which took place in 1946,resulted in capital gains within the meaning of section 12B as it sands afterthe enactment of the Finance (No. 3) Act, 1956 (77 of 1956). The questionbefore us is whether the transaction under consideration resulted in capitalgains within the meaning of S. 12B as it originally stood.
9. Two other points must be stated at the outset in order to clear theground for a consideration of the relevant arguments advanced before us. Thefirst point is that there is no question here of the assessee company trying tocircumvent the provisions of section 12B of the Act by deliberately modifyingthe original agreement (by its letter dated 7th October, 1946) so as to put thetransaction outside the scope of that section. The agreement was modified inOctober, 1946, before even the insertion of section 12B in the Act. Therefore,no question of deliberate or fraudulent evasion arises in this case. The secondpoint is that in construing fiscal statutes and in determining the liability ofa subject to tax, one must have regard to the strict letter of the law and thetrue legal position arising out of the transaction in question. The Bombay HighCourt has referred to a large number of English decisions on this point. Weconsider it unnecessary to examine those decisions in the present case. Thepoint was considered very recently by this Court in A.V. Fernandez v. The Stateof Kerala : 1SCR837 , where the following observations made are verypertinent.
'If the Revenue satisfies the Court that the casefalls strictly within the provisions of the law, the subject can be taxed. If,on the other hand, the case is not covered within the four corners of theprovisions of the taxing statute, no tax can be imposed by inference or byanalogy or by trying to probe into the intentions of the legislature and byconsidering what was the substance of the matter. We must of necessity,therefore, have regard to the actual provisions of the Act and the rules madethereunder before we can come to the conclusion that the appellant was liableto assessment as contended by the Sales Tax authorities.'
10. Those observations were made in a case dealing with sales tax but areequally applicable to the case under our consideration.
11. Two conditions must be fulfilled before the transaction under ourconsideration can come within the purview of section 12B of the Act. The firstcondition is that the profits or gains must arise from the sale, exchange ortransfer of a capital asset; and the second condition is that the sale,exchange or transfer must be effected after 31st March, 1946. There is no doubtthat the transaction before us was effected after 31 March, 1946. There is alsono dispute that the managing agency of the two mills which the assessee companyheld was a capital asset. Therefore, the question boils down to this - did theprofits or gains, namely, the sum of Rs. 1 crore which was computed as thevalue of the managing agency, arise from the sale or transfer of the managingagenc The Income-tax authorities held that there was a sale of the managingagency; but the Appellate Tribunal held that there was no sale in the strictsense but only a transfer of the managing agency to the managed companies, thatis, the Dharamsi Company and the Shapurji Broacha Company. The High Court heldthat there was neither a sale nor a transfer, because the letter of October 7,1946, substituted a different contract for the original contract entered intoby the parties, and the true legal position with regard to the substitutedcontract was that the assessee company resigned the managing agency, or, inother words, the managing agency was relinquished by the assessee company.
12. The learned Solicitor-General, who has appeared for the appellant, hascontested the correctness of the view of the Bombay High Court and hassubmitted a two-fold argument before us. His first argument is that there was aconcluded contract of sale as a result of the letters, dated 14th September,1946, and 30th September, 1946, exchanged between the parties, and the salehaving taken place, the letter of 7th October, 1946, which merely changed themode of performance of the contract, did not affect the true legal character ofthe transaction which was a sale of the managing agency. We are unable toaccept this argument. The true legal effect of the letter dated 14th September,1946, and 30th September, 1946, which contained an offer and an acceptance, wasmerely this : the Dalmia Company offered to purchase (1) certain shares in thetwo mills and (2) the managing agency, on payment of a certain consideration,and the assessee company accepted that offer. In law, this was merely anagreement to sell and purchase the shares together with the managing agency onpayment of the consideration, etc. The two letters did not by themselves amountto a sale of the shares or the managing agency, in the sense of a transfer ofthe property in them. Before any such sale could take place, the agreement wasmodified by the letter of October 7, 1946, and instead of 'selling'the managing agency the assessee company agreed to resign or relinquish themanaging agency. We are unable to agree with the learned Solicitor-General thatthe letter of October 7, 1946, merely changed the mode of performance, and didnot constitute a new contract. In our opinion, the Bombay High Court correctlyheld that whereas under the original contract the Dalmia -Company wanted themanaging agency to be transferred, which meant that it wanted the benefit ofthat contract to be vested in it and was also prepared to accept the burden ofthe obligations that went with that contract, under the substituted contract,the Dalmia Company did not want the managing agency to be assigned to it; onthe contrary, it wanted the assessee company to relinquish its rights in themanaging agency of the two mills by resigning. On a true interpretation, theletter of October 7, 1946, substituted a new contract, a contract ofrelinquish-ment rather than a1 contract of sale, so far as the managing agencywas concerned.
13. The second argument of the learned Solicitor-General is that there wasone indivisible consideration for the whole transaction, including the sale ofthe shares and of the managing agency. So far as the shares were concerned, thesale did take place and the entire consideration was paid; there was thereforea sale within the meaning of section 12B of the Act, and the considerationbeing one and indivisible, the transaction did result in capital gains withinthe meaning of that section. At the first blush, the argument has an apparentmerit of plausibility, though it was not urged before the Bombay High Court inthe manner in which it has been urged buffered us. On a closer scrutiny,however, it appears to us that this argument is not really available to thelearned Solicitor-General. The parties and the Income-tax authorities,including the Appellate Tribunal, proceeded on the footing that part of theconsideration, namely, the sum of Rs. 1 crore, was the consideration for thesale or relinquishment of the managing agency, the Department contending thatthe transaction was a sale or transfer and the assessee company contending thatit was neither a sale nor a transfer but a mere relinquishment. In the agreedstatement of the case, it was stated :
'The value of the managing agencies was computed bythe assessee company at Rs. 1 crore and there is no dispute on this point. TheIncome-tax Officer thereupon computed capital gain at Rs. 81,81,900 and againthere is no dispute on this point. The question which the Tribunal had todetermine was whether the transactions between the Dalmia Company and theassessee company resulted in a capital gain of Rs. 81,81,900.'
14. It is obvious that the entire assessment proceedings proceeded on thebasis that the sum of Rs. 1 crore was the consideration for the sale orrelinquishment of the managing agencies, and the dispute between the partieswas whether the transaction with regard to the managing agencies, in its truelegal character, was a sale or transfer or relinquishment. That being theposition, it is not now open to the learned Solicitor-General appearing for theRevenue to go behind the agreed statement of the case and to ask us to give ananswer to the question of law raised in the case on different assumptions or ina different set of circumstances. The answer must be given on the basis of thefacts and circumstances as stated in the agreed statement of the case.
15. We are of opinion that the answer was correctly given by the HighCourt of Bombay. The transaction in its true legal character was arelinquishment of the managing agency and was neither a sale nor a transferthereof. Therefore, the High Court correctly answered the question in thenegative.
16. In the result, the appeal fails and is dismissed with costs.
17. Appeal dismissed.