JAGDISAN J. - This is a reference under section 66(1) of the Indian Income-tax Act. The following question stands referred to us :
'Whether, on the facts and in the circumstances of the case, the compulsory acquisition of the land by the Government would amount to sale or transfer within the meaning of section 12B(1) of the Indian Income-tax Act'.
The assessee is a limited company incorporated under the Indian Companies Act, 1913., It is carrying on business as chemists and druggists. On December 2,1950, it purchased 1.77 acres of vacant land from one Ettiappa Pillai for Rs. 2,178 in the village of Mullam, near Aiyanavaram. It is stated that the object was to grow herbs and plants for medicinal purposes and to construct a warehouse for stocking its goods. The land was, however, compulsorily acquired by the State Government for purposes of the Integral Coach Factory on 7th September, 1957, and the assessee obtained a sum of Rs. 14,580 as compensation. The assessee, therefore, made a profit out of the purchase of this land in a sum of Rs. 12,402. In respect of the accounting year ended 31st January, 1959. the excess receipt of Rs. 12,402 was shown in section D of the return with the following description :
'Profit in acquisition of land in Mullam village (being agricultural land) by the Government.'
The assessee claimed exemption from tax on this amount on the ground that section 12B (1) of the Act was not applicable. The Income-tax officer held that the land was a 'Capital Asset' within the meaning of section 2(4A) of the Act, and that, therefore section 12B was attracted. The assessees appeal to the Appellate commissioner of Income-tax failed. There was a further appeal to the Income-tax Appellate Tribunal, but the Tribunal affirmed the decision of the department.
In this reference, two questions arise. The first is, whether the land is a 'capital asset' within the meaning of section 2(4A); the second is, whether there has been a 'transfer' of the asset, as a result of the compulsory acquisition proceedings, so as to fall within the ambit of section 12B(1) of the Act.
Learned counsel for the assessee contends that the land was 'punja lands' fit for being put to agricultural purposes, that the object of the purchase by the assessee was only to grow plants and herbs, which are essentially agricultural operations, and that, therefore, the land would not be a 'capital' as defined under the Act. It is, however, not disputed, and indeed there is no evidence the matter, that at any point of time was this land ever used as agricultural land. The assessee concedes that, after purchase of this property it did not grow any medicinal plant or herb. It is not pretended that the land was put to any other agricultural purpose. Apparently, the land was lying fallow, both before and after the purchase by the assessee. On these material, can it be said that the land is not a 'capital asset' The expression is defined under section 2(4A) of the Act. That reads (omitting portions not necessary for the present case),
'Capital asset means property of any kind held by an assessee, whether or not connected with his business, profession or vocation, but does not include -(sub-clauses (i) & (ii) omitted)
(iii) any land from which the income derived is agricultural income'.
It may be conceded that agricultural land would not cease to possess that character it no income is derived from it in any particular year. Continuous and uninterrupted derivation of agricultural income is not an essential sine qua non to determine the character of the land; even if the land had been used for agricultural purposes by fits and starts, the land could yet be called the land from which the income derived is agricultural income. But all the same, it should be remembered that it would not be enough for the assessee to claim the exemption, on the ground that the land is not a capital asset, by merely showing that the land was once an agricultural land. It might be that the land became converted into a housesite, or devoted to the location of a brick-kiln. If at the time of the sale or transfer, which leads to the receipt of money liable to be taxed under section 12B(1) the land is not strictly agricultural in character, then the levy would be proper. In other words, the assessee must show that the land was agricultural even at the time of the sale or transfer. In Mohammed Othuman Sahib v. Commissioner of Income-tax, it was held that, even though the land was once agricultural land, as the assessee did not
hold the land of agricultural purposes, and did not derive any agricultural income therefrom, the land was not excluded from the definition of 'capital asset' by clause (iii) of section 2(4A), and the profit made in respect of the land was assessable to tax as capital gains under section 12B of the Income-tax Act. On the facts of that case, the Division Bench held that the land was not a land from which agricultural income was derived on the crucial date. We are unable to say that the Division Bench took the view that, unless the assessee were to show actual perception of profits in the byear in question, the land could not be treated as agricultural land. we are however, clear that, on the facts of the present case, the land was purely a vacant site, on which no agricultural operations were ever conducted. In this view of the matter, the land is certainly a 'capital asset' as defined under the Act.
The next questions is whether section 12B (1) would apply to a case, where the assessee makes a capital gain, as a result of compulsory acquisition of his capital asset. Now section 12B (1) is as follows :
'The tax shall be payable by an assessee under the head 'capital gains' in respect of any profits or gains arising from the sale, exchange, relinquishment or transfer of a capital asset effected after the 31st day of March 1956 and such profits and gains shall be deemed to be income of the previous year in which the sale, exchange, relinquishment or transfer took place'. (other portions omitted.)
It is urged by the learned counsel for the assessee that, where a subject is deprived of his property at the instance of the state by exercising powers under a statute there is neither a sale nor a transfer of the property, as a sale or transfer cannot be effected without the concurrence of the transferor and the transferee; and that it would be a misnomer to call the compulsory divestiture of title against the will of the owner of the property as sale or transfer however lawful the act may be. This in short, is the contention of the learned counsel for the assessee. In support of this position, reliance is placed upon a decision of the Calcutta High Court in Calcutta Electric supply Corporation v. Commissioner of Income-tax. In that case, the assessee were an electric supply company. The Government requisitioned an electricity generating plant of the assessees under the Defence of India Rules. The assessees were not willing to sell the plant, but the government insisted and took it over. The amount which the assessees eventually received as compensation for the plant exceeded the written down value of the plant by Rs. 3,27,840. The taxing authorities treated the excess as the assessees profits under section 10(2)(vii) of the Indian Income-tax Act, and assessed the amount of tax. The Calcutta High Court held that the transaction by which the Government acquired the plant could not be regarded as a sale within the meaning of the section 10(2)(vii) and that therefore the sum of Rs. 3,27,840 was not taxable as profit. The learned judges observed that 'sale' was a transaction entered into voluntarily between two persons known as the buyer and the seller by which the buyer acquired the property of the seller for an agreed price. The important point to be noted is that section 10(2)(vii) uses only the word 'sale'. The second proviso to that provision as it then was reads :
'Provided further that where the amount for which any such machinery or plant is sold exceeds the written down value, the excess shall be deemed to be profits of the previous year in which the sale took place.'
The word 'transfer' does not occur in that section. The question is whether the word 'transfer' should also be understood and interpreted in the same manner as the calcutta High Court construed the word 'sale'.
Capital gains were brought to income-tax by the Income-tax and Excess Profits tax (Amendment) Act, 1947, which enacted section 12B. The section in its present form came upon the statute book, as a result of the Finance Act of 1956. The old section 12B, prior to 1956, contained a proviso in these terms :
'Provided further that any transfer of capital assets by reason of the compulsory acquisition thereof under any law for the time being in force relating to the compulsory acquisition of property for public purposes.... shall not, for the purposes of this section, be treated as sale, exchange or transfer of the capital assets'.
In the Act, as at present constituted, this proviso has been omitted. We may observe that this commissioner is not without significance. It would tend to show that the legislature intended to bring in compulsory acquisition also within the scope of the 'sale' or 'transfer'.
'Transfer' is a word of the widest import and includes every means by which the property may be passed from one person to another. It includes transfer by operation of law in invited. Roland Burrows in his book on Words and Phrases, volume v. states thus at page 331, under the caption 'Transfer on sale'.
'.. . . a transfer of land under compulsory powers is a transfer on sale; and that, if the notice to acquire was sent after the date of the Act, the sale takes place in pursuance of a contract within the meaning of section 1(a).'
Reference is there made to scotch case, Tweedie v. Inland Revenue commissioners, per Lord Salvesen, at page 508. In ordinary parlance, compulsory acquisition of property by the State under its overriding statutory powers may no strictly fall within the meaning of 'sale'. The house of Lords too that view in John Hudson & co. Ltd. v. Kirkness. The appellant company carried on business as coal merchants, and owned a number of railway wagons, which were requisitioned in 1939 by the Minister of Transport. On 1st January , 1948, the wagons were transferred to and vested in the British Transport Commissioner under section 29, Transport Act, 1947, and compensation was subsequently paid under section 30 of that Act. A balancing charge was raised on the footing that the transfer constituted a 'sale' for the purposes of section 17(1)(a), Income Tax Act, 1945. The House of Lords held that the transfer, vesting and compensation did not constitute a sale for the purposes of section 17(1)(a) of the Income Tax Act 1945, At page 59, Viscount Simonds observed as follows :
'My Lords, in my opinion the companys wagons were not sold, and it would be a grave misuse of language to say that they were sold. To say of a man who had had his property taken from him against his will and been awarded compensation in the settlement of which he has had no voice, to say of such a man that he had sold his property appears to me to be as far from the truth as to say of a man who has been deprived of his property without compensation that he has given it away. Alike in the ordinary use of language and in its legal concept a sale connotes the mutual assent of the two parties.'
If section, 12B(1) had only used the expression 'sale', we would have held that, under the circumstances of the present case, the assessee, having been deprived of the property not of his own volition but because of compulsory proceedings by way of acquisition, would not come within the mischief of section 12B of the Act. This would not militate against the decision of the Supreme Court in James Anderson v. Commissioner of Income-tax. That was a case where an executor of a deceased person, in the course of the administration of his estate, sold certain shares and securities belonging to the deceased, for the purpose of distribution among the legatees. The sale realised more than the cost price and the excess was treated by the department as capital gains under section 12B of the Act The assessees contention was that section 12B was not applicable, as capital assets were not sold by the deceased, and that the sale cam within the purview of the third proviso to section 12B(1). The Supreme Court held that the expression 'distribution of capital assets in specie' in the third proviso to section 12B(1) meant distribution in specie and non distribution of sale proceeds. It is in this context and in construing the third proviso that their Lordship observed as follows.
'The argument was that inasmuch as the administrator sold the shares and securities for the purpose of distributing the sale proceeds to the legatees, the sale was involuntary and was necessitated by reason of the terms of the will; therefore, he was protected under third proviso. The High Court repelled this argument and for good reasons. Firstly, the question whether the sale was voluntary or involuntary is not germane to the scheme of section 12B'.
The question for consideration before the Supreme Court was whether there was any distribution of capital assets under the will. We do not read this decision as laying down the principle that compulsory acquisition would amount to a sale. But we are, however, unable, to restrict the term 'transfer' only to a voluntary transfer.'In the law of property, a transfer is where a right passes from one person to another, either (1) by virtue of an act done by the transferor with that intention, as in the case of conveyance or assignment by way of sale or gift, etc., or (2) by operation of law, as in the case of forfeiture, bankruptcy, descent, or intestacy' (Dictionary of English Law, Earl Jowitt, page 1771). In our opinion, any divestiture of title would amount to a transfer. The transferor may not be a willing party. But nevertheless his title to the property is divested from him and the result is, the title is transferred. There is nothing in the context of section 12B (1) of the Act to indicate that the word 'transfer' should not be interpreted in a comprehensive meaning including both a transfer by act of parties and a transfer by operation of law.
Our attention has been drawn to a decision of the Madhya Pradesh High Court in commissioner Of Income-tax v. Shrikrishan Chandmal, where a Division Bench observed as follows at page 840 :
'Capital gains includes profits or gains arising from a sale, exchange, relinquishment or transfer of a capital asset. A compulsory acquisition by the Government of some property may not constitute a sale; but it would be a transferand the profit obtained by the transferor on such transfer would be capital gains.'
As already stated, we also inclined to take the same view.
In the result, the reference is answered against the assessee, who will pay the costs of the department. Counsels fee Rs. 250.