Factory transfer agreement and who must pay tax on factory profits-s 60 vs s 63, Revenue appeal dismissed

Section 60 applies only where income is diverted to a transferee but the income-producing asset remains with the transferor; where there is a "transfer" as specially defined in s 63, including an agreement, s 60 is excluded. Since an agreement to transfer the factories existed, the HC erred in affirming the Tribunal's view that profits from the two factories were taxable in the hands of the transferor-company. The assessment of capital gains on the basis of gross consideration as sale price also implied acceptance that profits belonged to the transferee, rendering the contrary accrual finding inconsistent. The question was answered against the Revenue; the appeals were allowed and the orders of the HC, Tribunal, and tax authorities were set aside.

---

---

Issues Involved:
1. Taxability of profits from two cement factories situated in Pakistan for assessment years 1964-65 and 1965-66.
2. Applicability of Section 60 of the Income-tax Act.
3. Concept of diversion of income by overriding title.

Detailed Analysis:

1. Taxability of Profits from Two Cement Factories Situated in Pakistan:
The primary issue was whether the profits arising from the operation of two cement factories situated in Pakistan for the years October 1, 1962, to September 30, 1963, and October 1, 1963, to September 30, 1964, were taxable in the hands of the applicant-company. The High Court had affirmed that these profits were taxable in the hands of the applicant-company for both assessment years 1964-65 and 1965-66.

The facts revealed that the applicant-company had entered into an agreement on July 24, 1962, to sell its properties and assets in Pakistan to Mr. Maneckji. A supplemental agreement on November 2, 1962, extended the completion date of the sale to September 30, 1964. The Income-tax Officer included the profits from these factories in the total income of the applicant-company, which was upheld by the Appellate Assistant Commissioner and the Tribunal.

The Supreme Court, however, found that the High Court erred in its judgment. The Court noted that the sale transaction was completed on September 30, 1964, and profits were ascertained on that date. Therefore, the question of accrual of profit to the applicant-company did not arise as the profits were diverted to the purchaser in accordance with the agreement. The Court emphasized that profits of a business do not accrue from day-to-day but at the end of the accounting year, and since the property was transferred on September 30, 1964, the profits for the year 1965-66 did not accrue to the applicant-company.

2. Applicability of Section 60 of the Income-tax Act:
The High Court had held that Section 60 of the Income-tax Act applied, which contemplates that income arising to any person by virtue of a transfer, where there is no transfer of the assets from which the income arises, shall be chargeable to income-tax as the income of the transferor.

The Supreme Court disagreed with this finding, noting that Section 60 applies only where the income-earning asset remains with the transferor. In this case, the agreement dated July 24, 1962, and the supplemental agreement dated November 2, 1962, indicated that the transfer of assets was to occur, and the income was diverted to the purchaser. Therefore, Section 60 did not apply as the income did not accrue to the transferor but to the transferee.

3. Concept of Diversion of Income by Overriding Title:
The Supreme Court extensively discussed the concept of diversion of income by overriding title. It referred to the case of CIT v. Sitaldas Tirathdas, which established that income diverted by an overriding title before it reaches the assessee is not taxable in the hands of the assessee. The Court also cited other cases, including CIT v. Jhanzie Tea Association and CIT v. Tea Producing Co. of India Ltd., which supported the principle that income diverted by an overriding title could not be assessed in the hands of the transferor.

The Court concluded that in the present case, the income was diverted to the purchaser by an overriding title as per the agreements, and thus, the income did not accrue to the applicant-company. The High Court's finding that the issue of overriding title was not available due to the event being yet to take place was incorrect, as the event (completion of the sale) had already occurred by the date of assessment.

Conclusion:
The Supreme Court set aside the judgment and order of the High Court and the Tribunal, holding that the profits from the two cement factories for the relevant assessment years were not taxable in the hands of the applicant-company. The Court directed the respondent-tax authorities to take steps in accordance with the judgment, emphasizing that the income stood diverted by an overriding title before accrual. The appeals were allowed with no order as to costs.

---