Income-tax---

----Capital gains---Long-term capital gains---Time of sale---Intention of parties is crucial---Agreement for sale of machinery after obtaining sanction of Authority as required---Machinery handed over to vendee before obtaining sanction---Consideration fixed after obtaining sanction---Vendor making entries-in accounts only after sanction was obtained---Sale took place after sanction of Authority was obtained---Long-term capital gains accrued---Indian Income Tax Act, 1961, S.45---Sale of Goods Act, 1930, S.19.

Section 19 of the Sale of Goods Act, 1930, states that, where there is a contract for the sale of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. Therefore, it is quite clear that the crucial test is the intention of the parties regarding passing of the title. If the intention of the parties could be gathered from the circumstances of a case such an intention will have to be given effect to in order to decide as to when the title to the goods passed.

The assessee had a printing press used for the publication of a newspaper. The printing press was imported from U.S.S.R. after obtaining appropriate licence from the Controller of Imports and Exports. The bill of lading was dated April 6,1975, and the machine was installed in May, 1975. On April 4, 1978, the assessee entered into an agreement with D to sell some of the machinery and the, said machines were handed over to the buyer on April 6, 1978. However, since these machines were imported, it was necessary to obtain the permission of the Registrar of Newspapers for the sale of the machines, in terms of the Import Control Policy. In the agreement, it was stated that the sale agreement would be subject to the approval of transfer by the Chief Controller of Imports through the sanctioning authority, the Registrar of Newspapers in India. The agreement also stated that the consideration for the transfer would be fixed by mutual agreement which would be settled either by the issue of shares or by payment of cash or cheque or by a mixture of both. The Registrar of Newspapers in India accorded his permission to sell these machines on June 15, 1978. The sale of machinery was entered in the books of accounts of the assessee on July 15, 1978, obviously, because consideration for the sale was agreed upon subsequent to the approval of the Registrar. The Income Tax Officer held that the capital gains, which accrued on the sale were short-term capital gains as the sale was concluded on April 6, 1978, but the Tribunal held that they were long-term capital gains. On a reference:

Held, that the intention of the parties was quite clear. It was only after the Registrar of Newspapers accorded sanction for the sale that the seller passed the title. The conduct of the seller also supported this conclusion. He treated the sale as having been concluded only after the permission was obtained and requisite entries in his books of account were also n1ade accordingly. The essential condition for the sale was the term as to consideration for the sale and, on the date of the agreement, the consideration itself was not arrived at between the parties. The consideration for the sale was fixed only subsequently. Hence the sale of the printing machines had given rise to a long term capital gains.

Alapati Venkataramiah v. CIT (1965) 57 ITR 185 (SC); CIT v. Bhurangya Coal Co. (1958) 34 ITR 802 (SC) and Mahabir Commercial Co. Ltd. v. CIT (197.2) 86 ITR 417 (SC) ref.

H. Raghavendra Rao for the Commissioner.

K.R. Prasad for the Assessee.

JUDGMENT

K. SHIVASHANKAR BHAT, J: --Under section 256(1) of the Income Tax Act, 1961 ("the Act" for short), the following question has been referred for our consideration:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sale of the printing machines had given rise to a long-term capital gain?"

The proceedings pertained to the assessment year 1979-80.

The assessee had a printing press used for the publication of a newspaper. The printing press was imported from U.S.S.R. after obtaining appropriate licence from the Controller of Imports and Exports. The bill of lading was dated April 6, 1975, and the machine was installed in May, 1975. On April 4, 1978, the assessee entered into an agreement with M/s. Deccan News Printers (P.) Ltd. to sell some of the machinery and the said machines were handed over to the buyer on April 6, 1978. However, since these machines were imported, it was necessary to obtain the permission of the Registrar of Newspapers for the sale of the machines in terms of the Import Control Policy.

There is no dispute in the instant case that there was an agreement between the assessee and the purchaser. Under the agreement, it was stated that the sale agreement shall be subject to the approval of transfer by the Chief Controller of Imports, New Delhi, through the sanctioning authority, the Registrar of Newspapers in India. The agreement also stated that the consideration for the transfer shall be fixed by mutual agreement which shall he settled either by the issue of shares or by payment of cash or cheque or by a mixture of both. There is also no dispute that the Registrar of Newspapers of India accorded his permission to sell these machines on June 15, 1978. Further, there is no dispute that the sale of machines was entered in the books of account of the assessee on July 15, 1978, obviously because consideration for the sale was agreed upon subsequent to the approval of the Registrar- The question essentially pertains to the date on which the sale was concluded.

The Revenue contends that the sale was concluded on April 6, 1978, the date on which the machines were delivered to the purchaser, while the assessee contends that the sale was concluded only after the Registrar accorded his sanction on June 15, 1978, because such a sanction was a statutory requirement for the completion of the sale; in fact, it was a condition precedent for the sale.

If, according to the Revenue's contention, the sale was on April 6, 1978, the possession of the machinery with the assessee would not be beyond 36. months and, therefore, the assessee was liable to the levy of capital gains by treating the asset as a short-term capital asset. However, if the date of the sale is June 15, 1978, the asset will be a long-term asset.

The Appellate Tribunal has accepted the case of the assessee and has given a definite finding that the sale could have been completed only after the sanction of the Registrar was obtained and, therefore, there can be no doubt about the intention of the parties that the sale was to be completed only thereafter. Further, the consideration of the sale was also paid later. The Appellate Tribunal also accepted the alternative contention that the assessee had become the owner of the machine on April 6, 1975, and, therefore, the period of 36 months was over by April 6,1978.

Mr. Raghavendra Rao, learned counsel for the Revenue, relied on the decisions of the Supreme Court to contend that in the case of movable properties the sale takes place on delivery of the goods to the buyer. CIT v. Bhurangya Coal Co. (1958) 34 ITR 802 (SC) was relied on for this purpose at the outset. That was a case where immovables as well as movables were sold. The agreement itself stated that the movables were capable of being transferred by delivery (those movables were described in para 2 of the agreement). In respect of immovables the actual conveyance was executed subsequently. It is in this context that the Supreme Court made the following observation (at page 804):

"Now the point that arises for determination in these proceedings is as to the extent to which the profits of the transaction entered into on the 16th March, 1946, and completed by the sale-deed, dated the 17th May, 1946, are assessable to income-tax under the above section. So far as the immovables are concerned, the position is clear. The title to them passed to the transferee only when the sale-deed was executed on the 17th May, 1946, and not when the agreement was concluded on the 16th March, 1946. The transaction therefore falls directly within the operation of section 12-B. So far as the movable Properties are concerned the position is equally clear. Title to the movables passed when they were delivered to the transferee and that was on the 30th -March 1946 and their sale falls outside the section. Therefore, on the terms of the agreement, dated the 16th March, 1946, and the sale?-deed, dated the 17th May, 1946, the position is that while the respondent will be liable for tax in respect of profits made with reference to immovables covered by the sale-deed, dated, the 17th May, 1946, it will not be liable to tax in respect of profits attributable to the sale of movables of which delivery was given to them on the 30th March, 1946. That precisely was the determination made by the Appellate Tribunal." (Underlining is ours).

Mr. Raghavendra Rao relied on the sentence underlined above and contended that title to the movables passed when they were transferred to the transferee in the instant case also. A closer reading of the facts of the said case and the above observation would show that the above observation of the Supreme Court was based on the terms of the agreement. The Supreme Court was not laying down any universal principle that, in every case, the title in the movables passed immediately on the delivery of the movables.

Alapati Venkataramiah v. CIT (1965) 57 ITR 185 is also a decision of the Supreme Court relied upon by learned counsel for the Revenue. It was held in the said decision that title to furniture passed upon delivery, which was on March 17, 1978, and that capital gains accrued on that date. The relevant observations are found (at page 193):

" ....This leaves furniture valued at Rs.18,805 and goodwill valued at Rs.7,396-6-0. There is no doubt that possession of furniture was delivered on March 17, 1948, and as title to furniture can pass by delivery, capital gains, if any, accrued on that date. In the circumstances of the case, delivery must have been made with the intention of passing title." (italic is ours).

Again, the above observation does not lay down an absolute rule of law applicable in the case of movables. The finding was based entirely on the circumstances of the case as could be seen from the sentence quoted above. In fact, the sentence indicates that the passing of title depends upon the, intention of the parties.

Mahabir Commercial Co. Ltd. v. CIT (1972) 86 ITR 417; AIR 1973 SC 430, no doubt arises out of a C.I.F. contract wherein prima facie the property in the goods passes once the documents are tendered by the seller to the buyer, etc. However, the observation at page 438 requires to be noted (at page 430 of 86 ITR):

"The appropriation of the goods to the contract by itself would not be such as to pass the property in the goods if it appears or can be inferred that there was no actual intention to pass the property."

Section 19 of the Sale of Goods Act, 1930, makes the position quite clear. It states that where there is a contract for the sale of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. Therefore, it is quite clear that the crucial test is the intention of the parties regarding passing of title. If the intention of the parties could be gathered from the circumstances of a case, such an intention will have to be given effect to decide as to when title to the goods passed.

In the instant case, the intention of the parties is quite clear as is revealed from the agreement under which the assessee agreed to sell the machines to the purchaser; it was only after the Registrar of Newspapers accorded sanction for the sale that the seller would have passed the title. The conduct of the assessee also supports this conclusion. He treated the sale as having been concluded only after the permission was obtained and requisite entries in his books of account were also made accordingly. The essential condition for the sale is the term as to consideration for the sale and, on the date of the agreement, he consideration itself was not arrived at between the parties. The consideration for the sale was fixed only subsequently. This is another important element, which goes against the contention of the Revenue in the instant case.

In the view we have taken above, it is unnecessary to go into the alternative contention of Mr. Prasad that the period of 36 months will have to be calculated with reference to the actual days by treating every 30 days as a month.

For the reasons stated above, the question is answered in the affirmative and against the Revenue.

Reference is, answered accordingly.

M.B.A./11/T.F???????????????????????????????????????????????????????????????????????? Reference answered.