JAGADISAN J. - The following questions have been referred to this court under section 66 of the Indian Income-tax Act :
'1. Whether the assessment on the assessee computing the profit under rule 2(a) in respect of the Indian branch of the Winterthur Life Assurance Company Ltd. and adopting the surplus under rule 2(b) in respect of its own business in the single assessment raised for that year is valid ?
2. Whether the assessee is entitled to exemption of Rs. 43,588 under section 4(3) (xii) of the Income-tax Act in each of the aforesaid assessment ?'
The assessee, the United Life Assurance Company Ltd., was formerly carrying on life insurance business. The Life Insurance Corporation of India has taken over that business and the assessee is now represented by the Corporation. A Swiss company called Winterthur Swiss Life Insurance Company was carrying on life business in India through its agents, Messrs. Volkart Brothers. The assessee entered into an agreement with the Swiss company on October 1, 1952, and this agreement was superseded and substituted by another agreement between them dated December 29, 1952. We shall refer to the terms of the agreement in detail a little later. The substance of the agreement was that the Swiss company should transfer all its assets and liabilities in regard to its life insurance business in India to the assessee company in consideration of the assessee paying the Swiss company the sum of Rs. 1,60,451.07, which was the excess value of assets over liabilities as per the balance-sheet of the Swiss company for the calendar year 1951. Under the provisions of the Indian Companies Act this arrangement had to be approved by the court. In O.P. No. 144 of 1954 on the file of the Original Side of this court Ramaswami Gounder J. accorded sanction to the agreement by order dated July 10, 1954. It appears that by order of court in Application No. 164 of 1954 dated January 18, 1954, a meeting of the creditors of the company (Swiss company) was directed to be held. A meeting was held and a resolution approving the agreement was passed on March 27, 1954. It is only thereafter that this court sanctioned the scheme or agreement.
In respect of the calendar years 1952 and 1953, the previous years for the relevant assessment years 1953-54 and 1954-55, the computation of the assessable income of the Swiss company in relation to its business in India resulted in the sums of Rs. 1,00,605 and Rs. 1,26,167 as per calculation under rule 2(a) and Rs. 35,228 (deficit) as per rule 2(b) respectively. On August 25, 1953, the assessee filed a return of income showing its taxable income as Rs. 5,74,708 which was the surplus computed under rule 2(b) of the Schedule to the Income-tax Act, and which amount was higher than the profits computed under 2(a) of the Schedule. On behalf of the Swiss company another return was filed on September 7, 1953, by the manager of the assessee company showing a taxable income of Rs. 1,00,605 computed under rule 2(a) being higher than the surplus computed under rule 2(b). A revised return was filed by the assessee on October 9, 1954, showing a taxable income of Rs. 4,94,735 under rule 2(b) as per details given below :
United India loss ...
Winterthur Life profit ...
The assessee claimed before the Income-tax Officer that the Swiss companys Indian business stood transferred to it on and from January 1, 1952, in pursuance of the terms of agreement dated December 29, 1952, and in view of the order of the court sanctioning that agreement. The assessee contended that the two life businesses, that of the Swiss company and that of the assessee company, became merged into one business on and from January 1, 1952, and that the computation of profits should be under the same rule, either rule 2(a) or rule 2(b) or both, and that it would not be open to the department to treat the business as those of two companies and apply the rules on that basis. The Income-tax Officer rejected this contention in respect of both the years 1953-54 and 1954-55. The assessee claimed further that a sum of Rs. 4,35,588 should be exempted under section 4(3) (xii) of the Act as that amount represented rents from properties which had been erected and completed during the period mentioned in that provision. The Income-tax Officer disallowed the claim for exemption on the ground that section 10(7) of the Act excludes the operation of other provisions of the Act in regard to computation of income of insurance business which had to be done under rule 2(a) or (b) of the Schedule to the Act.
The assessee preferred an appeal to the Appellate Assistant Commissioner and a further appeal to the Income-tax Appellate Tribunal urging amongst others the contentions referred to above, but failed. It is not necessary to refer to other heads of claim made by the assessee before the department or the Tribunal. On an application by the assessee to the Tribunal under section 66(i) of the Act the question cited above stand referred to us.
Question No. 2 need not be discussed. It is plain that the language of the statute, section 10(7), prevents the assessee from obtaining the relief prayed for by way of exemption. The question is also covered by authorities which are against the assessee. Following our decision in Vanguard Fire & General Insurance Co. v. Commissioner of Income-tax and Commissioner of Income-tax v. Asian Assurance Co. Ltd., we answer this question against the assessee.
In order to appreciate the contention of the assessee that there was a de facto and de jure merger of the two life business of the Swiss company and that of the assessee on and from January 1, 1952, it is necessary to refer to the terms of the agreement. As stated already the first agreement dated October 1, 1952, was cancelled by consent of parties and what was effective between them was only the second agreement dated December 29, 1952. We shall, therefore, refer only to the terms of the later agreement. The Swiss company is described as the transferor and the assessee as the transferee. It is stipulated that the transferor should hand over to the transferee assets shown in the balance-sheet of the transferor as on December 31, 1951. The liabilities of the transferor as on that date were also to be taken over by the transferee. The excess value of assets over liabilities was Rs. 1,60,421.07 and this amount the transferee agreed to pay to the transferor. But this was subject to the following terms and conditions :
'1. Any income-tax to be paid up to 31st December, 1951, or any refund of income-tax to be received in respect of the period ending 31st December, 1951, shall be the liability or receivable by the transferor.
2. The transferor company shall open a separate account and shall carry to such account all premiums and other moneys received after 31st December, 1951, in respect of the Life Assurance contracts taken over or agreed to be taken over and shall be entitled to withdraw amounts therefrom to make any payments which the transferor company is liable to make in respect of the said life assurance contracts and other expenses of management thereto (excluding head office expenses referred to below).
3. A sum equivalent to 3 per cent. of the premiums received subsequent to 31st December, 1951, and during the year 1952, only shall be paid to the head office of the transferor by the transferee.
4. A sum equivalent to Rs. 41,441.4-0, which is included in the amount of estimated liability in respect of outstanding claims, whether due or intimated as at 31st December, 1951, but which the transferor has either repudiated or feels that it is not obliged to pay, in respect of the policies mentioned below, shall be retained with the transferor :
Provided, however, that the transferee shall be entitled to receive from the transferor such sums in respect of each of the above policies as it may pay to the policyholders or other persons claiming the policies, if any claim in respect thereof should be established in a court of law or otherwise.
5. The balance arising out of the receipts and payments referred to under 5, 6, 7 (2, 3 and 4 above) shall be paid to the transferee by the transferor or by the transferee to transferor as the case may be in the shape of cash and (or) investments made subsequent to 31st December, 1951. All investments made by the transferor subsequent to 31st December, 1951, shall be considered for the purposes of this agreement at their actual purchase price.
6. When and so soon as the agreement is approved and sanctioned by the Bombay High Court, the transferee shall either by issuing fresh contracts or by endorsements on the existing contracts, directly take over the liabilities of the transferor to its policyholders on the terms and conditions hereinbefore provided and the assets shall be made over by the transferor to the transferee.
7. It is understood that notwithstanding the consent of the Bombay High Court to this transfer, the transfer will be effective only on the transferor obtaining permission of the Controller of Foreign Exchange to convert into Swiss Franks and to transfer the amount to Switzerland and the transferee likewise being put in possession of the Indian rupees in India to the extent that is due in terms of this agreement. If this is not fulfilled the parties to the agreement shall be restored to the position as if the transfer did not take place.'
The outstanding feature of this agreement was that the Swiss company should continue to carry on business as before even after the date of the agreement through its agents. The assessee company itself functioned as the agents of the Swiss company after the agreement in the place of Messrs. Volkart Brothers. Though the assets and liabilities of the Swiss company were valued as on December 31, 1951, there is nothing in the agreement to indicate that the ownership of the Swiss company should cease as and from January 1, 1952, after the necessary sanction of the court is obtained. The very fact that business was done by the Swiss company through the agency of the assessee would indicate that the Swiss company did not divest itself of its ownership after the concluding of the agreement. On the other hand the Swiss company protected its interests by inserting the clause that the transfer would be effective only if and when permission of the Controller of Foreign Exchange is obtained to convert the Indian rupees payable by the assessee company into Swiss franks. The following clause in the agreement is fairly destructive of any possible interpretation of the termination of ownership of the Swiss company on the date of the agreement. The clause is in these terms :
'That subject to the approval and sanction by the Bombay High Court of the transfer, the transferee shall take over the liabilities of the transferor as at 1st January, 1952, in respect of the life assurance business in India and coming under the following heads.....'
This clause has no doubt been relied on by learned counsel for the assessee to show that the intention of the parties was that the transfer should take effect from January 1, 1952, in the event of sanction by court. In our opinion, the terms of the agreement read as a whole are not capable of being interpreted as a transfer of ownership of the business by the Swiss company as and from January 1, 1952, despite the fact that the actual sanction by court followed subsequently long afterwards.
The provisions of the Indian Companies Act have also to be borne in mind, and it is only in the light of those provisions that the validity and effectiveness of the agreement between the parties have to be adjudged. The relevant provisions of the Act in force on the date of sanction were sections 153 and 153A. They are as follows :
'153. (1) Where a compromise or arrangement is proposed between a company and its creditors or any class of them, or between the company and its members or any class of them, the court may, on the application in a summary way of the company or of any creditor or member of the company or, in the case of a company being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members of the company or class of members, as the case may be, to be called, held and conducted in such manner as the court directs.
(2) If a majority in number representing three-fourths in value of the creditors or class of creditors, or members or class of members, as the case may be, present either in person or by proxy at the meeting. agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the court, be binding on all the creditors or the class of the creditors, or on all the members or class of members, as the case may be, and also on the company, or, in the case of a company in the course of being wound up on the liquidator and contributories of the company.
(3) An order made under sub-section (2) shall have no effect until a certified copy of the order has been filed with the Registrar, and a copy of every such order shall be annexed to every copy of the memorandum of the company issued after the order has been made, or in the case of a company not having a memorandum, of every copy so issued of the instrument constituting or defining the constitution of the company.
(4) If a company makes default in complying with sub-section (3) the company and every officer of the company who is knowingly and wilfully in default shall be liable to a fine not exceeding ten rupees for each copy in respect of which default is made.
(5) The court may, at any time after an application has been made to it under this section, stay the commencement or continuation of any suit or proceeding against a company on such terms as it thinks fit and proper until the application is finally disposed of.
(6) In this section the expression company means any company liable to be wound up under this Act and the expression arrangement includes a reorganisation of the share capital of the company by the consolidation of shares of different classes or by the division of shares into shares of different classes or by both those methods, and for the purposes of this section unsecured creditors who may have filed suits or obtained decrees shall be deemed to be of the same class as other unsecured creditors....
(7) An appeal shall lie from any order made by the court exercising original jurisdiction under this section to the authority authorised to hear appeals from the decisions of the court.
153A. (1) Where an application is made to the court under section 153 for the sanctioning of a compromise or arrangement proposed between a company and any such persons as are mentioned in that section, and it is shown to the court that the compromise or arrangement has been proposed for the purposes of or in connection with a scheme for the reconstruction of any company or companies or the amalgamation of any two or more companies, and that under the scheme the whole or any part of the undertaking or the property of any company concerned in the scheme (in this section referred to as a transferor company) is to be transferred to another company (in this section, referred to as the transferee company) the court may, either by the order sanctioning the compromise or arrangement or by any subsequent order, make provision for all or any of the following matters;
(a) the transfer to the transferee company of the whole or any part of the undertaking and of the property or liabilities of any transferor company;
(b) the allotting or appropriation by the transferee company of any shares, debentures, policies, or other like interests in that company which under the compromise or arrangement are to be allotted or appropriated by that company to or for any person;
(c) the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company;
(d) the dissolution, without winding up, of any transferor company;
(e) the provision to be made for any persons who, within such time and in such manner as the court directs, dissent from the compromise or arrangement;
(f) such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out.
(2) Where an order under this section provides for the transfer of property or liabilities, that property shall, by virtue of the order, be transferred to and vest in, and those liabilities shall, by virtue of the order, be transferred to and become the liabilities of, the transferee company, and in the case of any property, if the order so directs, freed from any charge which is by virtue of the compromise or arrangement to cease to have effect.
(3) Where an order is made under this section, every company in relation to which the order is made shall cause a certified copy thereof to be delivered to the registrar for registration within fourteen days after the completion of the order, and if default is made in complying with this subsection, the company and every officer of the company who is knowingly and wilfully in default shall be liable to a fine not exceeding fifty rupees.
(4) In this section the expression property includes property, rights and powers of every description, and the expression liabilities includes duties.
(5) Notwithstanding the provisions of sub-section (6) of section 153 the expression company in this section does not include any company other than a company within the meaning of this Act.'
The corresponding provisions under the 1956 Act are sections 391 and 394. It may be mentioned that the provisions under the English Act are also practically similar. While section 153 deals with compromise and arrangement with creditors and members of the company, section 153A is a specific provision governing reconstruction and amalgamation of companies. The word 'amalgamation' has not been statutorily defined, but there cannot be any doubt that it means fusion of two companies into one. It is not necessary that a new company should be formed to take over the assets and liabilities of an existing company to constitute an amalgamation. As Lindley M. R. observed in Wall v. London and Northern Assets Corporation :
'Amalgamation does not involve the formation of a new company to carry on the business of an old company. It includes that, but is not confined to that.'
When one company is absorbed into and blended with another company the result is amalgamation. As section 153A deals with amalgamation, and as the present case is really one in which the taking over, by the assessee company, of the Swiss companys business in India and absorption of that business into its business brought about an amalgamation, we must have regard only to this special provision.
The point of time when the Swiss company became merged into the assessee company losing all rights of ownership in its assets is the only question to be determined in this case. The language of the section, section 153A, indicates, quite plainly, that the arrangement becomes effective or valid only on the sanction of the court. The words used are 'Where an order under this section provides for the transfer of property or liabilities, that property shall, by virtue of the order, be transferred to and vest in, and those liabilities shall, by virtue of the order, be transferred to, and become the liabilities of, the transferee company....' Now the words 'by virtue of the order the property shall be transferred to and vest in..... or the liabilities shall be transferred' have to be marked and due and proper weight should be attached to these words. Surely, the arrangement would fall to the ground if the court refuses to set its seal. It is the courts sanction which gives life to it. So much is clear, and is beyond controversy. But once the sanction is given by the court does it have a retrospective operation, so as to claim that the scheme had been in operation from an anterior date, anterior to the date of sanction. It seems to us that the order of the court cannot have any such retrospective effect or operation. The requisite order of court which alone can sustain the validity of the arrangement is not a mere formality and is of course not one which the court would make automatically, merely because the requisite majority passed the resolution approving the scheme. The dissentient minority, if any, must have a say in the matter and the court should consider whether the scheme is reasonable and practicable.
'The court must look at the scheme, and see whether the Act has been complied with, whether the majority are acting bona fide, and whether they are coercing the minority in order to promote interests adverse to those of the class whom they purport to represent; and then see whether the scheme is a reasonable one or whether there is any reasonable objection to it, or such an objection to it as that any reasonable man might say that he could not approve of it' : Lindley L. J. in English, Scottish, and Australian Chartered Bank Ltd., In re. If this is the true position, as we conceive it to be, it would be very difficult to contend that an ex post facto sanction by a court of an agreement would achieve the legal result of making the agreement effective either from its date or from a date long anterior to it by imagining a fiction that the court gave the sanction on the date from which the operation is claimed. A decree or order of a court adjudicating on the rights of parties cannot be deemed to have come into force earlier than the date of its pronouncement, but it may relate to rights obtaining on the date of the commencement of the proceedings. It is true that the arrangement would bind the creditors and shareholders including the dissentient group, if any, even during the interval between the date of resolution and the date of sanction, if ultimately sanction is granted. It may even be conceded that the binding character of the scheme. This is the view expressed by the Judicial Committee in dealing with a case under section 153 of the Companies Act. That case is reported in Raghubar Dayal v. Bank of Upper India Ltd.
Learned counsel for the assessee has based his entire argument only on this decision of the Judicial Committee and contended that the agreement must be given effect to on and from January 1, 1952, and that it must be held that from that date the Swiss company lost its existence in regard to its Indian business. In the Privy Council case, a bank called the Bank of Upper India, closed its doors. The appellant before the Privy Council was a customer of the bank, who had a fixed deposit with it. The deposit was payable on November 4, 1914, but the bank had suspended payment even on October 8, 1914. The appellant filed a suit on December 19, 1914, against the bank and obtained a money decree on April 19, 1915, for recovery of a sum of about Rs. 25,000. In the meanwhile on December 15, 1914, an extraordinary meeting of the shareholders formulated a scheme of arrangement. An application to the High Court under section 153 was moved on 21st December. Two days thereafter, an order was made directing the creditors to meet and consider the scheme. A meeting was held on March 4, 1915, and the court gave its sanction on June 2, 1915. The appellants decree was on April 19, 1915, before the court passed the order confirming the resolution but after the meeting at which the resolution of the scheme to which it related had been agreed upon. The question raised was whether the creditor was bound by the scheme. The Judicial Committee held that he was bound. The Judicial Committee observed that if the contrary view was taken, it would result in uncertainty and the door would be open for a race between creditors and persons concerned in administering the affairs of the bank. Learned counsel for the assessee relied upon the following observations at page 139 :
'The agreement becomes binding from the date when it is arrived at, subject to subsequent sanction by the court. It that sanction be refused, the agreement is without effect. But it is not the case that the agreement is to take effect from the date of sanction. It takes effect from the date when it is made. Such is our interpretation of the words of the section.'
That was a decision under section 153 and not under section 153A. Section 153 relates to a compromise or arrangement which need not necessarily involve a transfer of assets and liabilities. Section 153A deals with a scheme of transfer of rights. The absence of any provision in section 153 for the vesting point of time is natural and intelligible as there is no occasion for it in that section. It is, however, quite essential that a point of time should be fixed for vesting in cases of transfer of rights and section 153A has indicated it quite clearly and precisely as being the date of the order of court.
The real question that arises in this case is whether there was an effective divestment of ownership by the Swiss company as and from January 1, 1952. In the face of the statutory language which states that the property shall be transferred by virtue of the order it seems to us that the instrumentality of the transfer is not the agreement but the order of court. We would, therefore, prefer to rest our conclusion on the specific language of the statute rather than upon general principles of convenience and certainty.
Learned counsel for the department referred to the decision in Sailendra Kumar Ray v. Bank of Calcutta Ltd. There the question was whether transfer of assets of one company to another under a scheme of amalgamation sanctioned by the court under section 153A of the Indian Companies Act of 1913 was not a transfer by assignment within the meaning of Order XXI, rule 16, of the Civil Procedure Code. The Jessore Loan Company obtained two final decrees in mortgage actions against the appellant in the case before the Calcutta High Court. On February 4, 1946, the High Court, on its original side, made an order under section 153A sanctioning a scheme of amalgamation of the Jessore Loan Company with the Bank of Calcutta Ltd. and by the same order provided for the transfer to the latter company of all the assets and liabilities of the former in accordance with the scheme of amalgamation. On July 16, 1946, the Bank of Calcutta Ltd. applied for execution of the two decrees in place of the Jessore Loan Co., Ltd. Judgment debtors in both the cases took the plea that as no notice under Order XXI, rule 16, Civil Procedure Code, had been served, the execution proceedings were not maintainable. It was conceded that no notice under Order XXI, rule 16, was taken out but the bank contended that there had been no transfer by assignment and that, therefore, no notice was necessary. It was held that there was no transfer by assignment but that there was only a transfer by operation of law and no notice under Order XXI, rule 16, was called for. At page 5 Chakravartti J., as he then was, observed as follows :
'The respondents advocate overlooked the fact that by calling the High Courts order an instrument of transfer, he went perilously near conceding that the transfer was by assignment. We are by no means satisfied that the order can be regarded as an instrument of transfer but assuming it can be so regarded it appears from the record that in fact no copy of the order was filed along with the application.'
We do not think that this case can be of any assistance to us in deciding the issue in question.
We would like to refer to the Full Bench decision of this court in Sahayanidhi Virudhunagar Ltd. v. A. R. S. Subrahmanya Nadar That was a reference under the Stamp Act regarding the stamp duty chargeable on two documents executed in pursuance of court orders under section 153A, Companies Act. It is not necessary to refer to the facts of the case. The following observations of Viswanatha Sastri J., with which we are in respectful agreement, define the scope and effect of section 153A :
'Where an order of court made under the section provides for the transfer of the assets and liabilities of a company in liquidation to another company, the assets are, by virtue of that order, without more, transferred to and vest in the transferee company and the liabilities of the former company are also cast upon the transferee company............... There is not only a vesting of assets and property but also the imposition of a liability to discharge the debts of the transferor company as a result of the order of court passed under section 153A.'
The statute, the Companies Act, required that there should be an order of court before a transfer can be effected. This really means that it is only the court that can bring about the transfer by an appropriate order. Parties to a transfer cannot come to the court and say that there is already an instrument of transfer governing them as and from a particular point of time, and that the court should not merely sanction it but also effectuate it from the operational point of time agreed to by the parties. If the court were to accord any such sanction it would be in contravention of the provisions of section 153A, which clearly provides that the transfer can only be by an order of court and not by agreement of parties, and that the transfer and vesting should only follow the order. A statutory order under the section cannot be passed to clothe parties with rights which they cannot acquire merely by the terms of a contract or agreement. In our opinion, there was no transfer on and from January 1, 1952, and that the Swiss company was an independent entity during the relevant assessment years.
The department and the Tribunal have reached the correct conclusion in the matter. Question No. 1 is also answered against the assessee.
The assessee will pay the costs of the department. Counsels fee Rs. 250.