Holding

The auction sale is a sale within the meaning of clause (vii) of s.10(2) and is deemed to have taken place on the date the sale certificate was issued, so s.12B applies.

Summary

Jagdish Sugar Mills, a liquidated public company, was ordered to pay arrears of cane‑cess and its mills were attached and auctioned on 10 November 1955. The sale certificate under Rule 285‑M of the U.P. Zamindari Abolition and Land Reforms Rules was issued on 4 July 1956, after objections were resolved. The Income‑Tax Officer assessed the excess proceeds as profit under clause (vii) of s.10(2) and as capital gains under s.12B of the Indian Income‑Tax Act, 1922. The assessee contended that the auction was a compulsory transfer, not a voluntary sale, and that the sale date should be the auction date, thus falling before the commencement of s.12B on 1 April 1956. The Supreme Court held that the transaction constituted a sale within the meaning of clause (vii) because the assessee voluntarily engaged in an activity subject to statutory provisions that included the possibility of auction, and that the date of sale is the date the sale certificate was issued, making s.12B applicable. Consequently, the appeal was dismissed.

Issues considered

Whether clause (vii) of sub‑section (2) of s.10 of the Indian Income‑Tax Act, 1922 applies to a compulsory auction sale for recovery of arrears of land revenue.
Whether the date of sale is the auction date or the date of issuance of the sale certificate, and consequently whether s.12B of the Act, which became effective on 1 April 1956, is attracted.

Legislation cited

Code of Civil Procedures. 65
Income Tax Act, 1922s. 10(2)(vii), s. 12B, s. 23(3), s. 34(1A)
U.P. Zamindari Abolition and Land Reforms Act, 1952s. 279, s. 282, s. 286, s. 341
U.P. Zamindari Abolition and Land Reforms Rules, 1952s. 281, s. 285‑M

Subjects

Income taxCapital gainsAuction saleCompulsory saleSection 10(2)(vii)Section 12BDate of transferU.P. Zamindari Abolition and Land Reforms ActDouble taxationCane‑cess

Judgment

lAGDISH SUGAR MILLS v. C.J.T. [PATHAK,J.] 199

Income-tax Officer called upon the assessee to explain why the excess A
amount which he had received on sale of the buildings, machinery and
plant over the difference between the original and the written down
value should not he subjected to tax under cl. (vii) of sub-s. (2) of s. 10
and under -s. 12B of the Indian Income-tax Act, 1922. The assessee
contended (i) that an aucµon sale being a compulsory sale was not a sale B
within the meaning of cl. (vii) of sub-s. (2) of s. 10; and (ii) that the sale

I~
having been completed prior to March 31, 1956, it did not attract the
provisions of s. 12B relating to capital gains, which became effective
from April 1, 1956 only. The Income-tax Officer rejected the aforsaid
contentions and computed the profits under s. 10 (2) (vii) at
\ Rs.10,07 ,000 and the capital gains under s. J2B at Rs. 10, 23, 210. The
matter ultimately went before the High Court which decided in favour c
of the Revenue.

In the assessee's appeal to this Court it was contended (i) that cl.
(vii) of sub-s. (2) of s. 10 of the Income-tax Act, 1922 had no application
because an auction sale was not a voluntary sale; and (ii) that the sale D
must be regarded as having taken place on November 10, 1985 when the
auction was held and not on July 4, 1956 when tbe sate certificate was
issued, for the property should be deemed to have vested in the purch-
aser from the time when it was sold and not from the time when the sale
became absolute and that being so, s. 12B did not exten;J to the sale.
E
Dismissing the appeal, the Court

HELD: 1. The sale of the properties of the assessee falls within
the scope of cl. (vii) of sub-s. (2) of s. 10 of the Indian Income-tax Act,
I 1922. it cannot be said that the element of consent essential to the
character of a sale was absent altogether from the transaction. The levy F
of cane cess was imposed under a statute in respect of an activity carried
on voluntarily by the assessee. When entering upon and carrying out
that activity the assessee was fully conscious that he did so subject to the
provisions of the statute, and that in the event of default of payment of
cane-cess it was exposing itself to recovery proceedings as arrears of
land revenue. The assessee was also aware that recovery could be af- G
fected by an auction sale of its property. The assessee thereby agreed to
be bound by the structural framework imposed by the statute around
the activity, and, therefore, agreed to an auction sale of its properties in
the event of its failure to pay the cane-cess. [205C-; 204G-H; 205A-C]

Calcutta Electric Supply Corporation Ltd. v. Commissioner o: H
200 SUPREME COURT REPORTS l!986J 3 S.C.R.

A Income-tax, West Bengal, I1951] 19 ITR 406; Indian Steel & Wire Pro-
ducts Ltd. v. State of Madras, 11968] 1 SCR 479; and R.E. Lachman
Das Mohan/al & Sons v. Commissioner of Income-tax, U.P., 11964] 54
ITR 315 referred to.

B 2. The date on which the sale certificate was issued should be ·the
date on which the sale must be regardejl as having taken place. It is only
when the property is transferred that it can be deemed to have vested in
the purchaser. Rule 285-M of the U.P. Zamindari Abolition and Land
Reforms Act, is explicit in its terms. When the sale certificate itself
operates as effecting the transfer of the property, no question arises of )
relating the transfer hack to the date of auction. (205E; 260A-B I
c
The procedure incorporated in the U.P. Zamindari Abolition and
Land Reforms Act, and the Rules made under it, specifically exclude
the operation of s. 65 of the Code of Civil Procedure. Section 341 of that
Act applies the Code only so far it is consistent with the· provisions of the
D Act and not in derogation of it. [206B-Cl

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1348
(NT) of 1974

From the Judgment and Order dated 7.1.1974 of the Allanabad --,.
E High Court in l.T.R. No. 364of1971.

S.C. Manchanda, V.J. Francis, N.M. Popli and Ujjal Singh for
the Appellant.

V. Gouri Shankar and Miss A. Subhas!tini for the Respondent. \
F
The Judgment of the Court was delivered by

PATHAK, J. This appeal is directed against the judgment of the
Allahabad High Court answering the following question in the nega-
tive:
G
"l. Whether on the facts and in the circumstances of the
case, the Tribunal was justified in holding that the pro-
visions of sections 10(2) (vii) of the Income-tax Act,
1922 were not attracted?

H 2. Whether on the facts and in the circumstances of the
JAGDISHSUGARMILLSv. C.l.T. [PATHAK,J.J 201

case, the Tribunal was justified in holding that the sale A
had taken place before 1.4.1956 and, therefore, the
provisions of section 12B of the Income-tax Act 1922
were not attracted?"

The assessee, a public limited company, was put into liquidation under B
the orders of the Allahabad High Court. An amount of,Rs. 8,58,893/5/
6 was payable by the assessee to the State of Uttar Pradesh on account

[
\
of arrears of cane-cess. In proceedings for recovery of that amount as
arrears of land revenue, the Collector of Deoria attached the assessees
mills and put them to auction sale on November 10, 1955. The land,
building, machinery and parking grounds were sold for Rs. 24,00,000
while the moveable properties including mill stores, spare parts, tools c
and equipment were sold for Rs. 1,80,000. All the properties_were
purchased by the Kanpur Sugar Works (P) Ltd., Although the sale was
- held on November 10, 1955, the sale certificate under rule 285 M of the
U.P. Zamindari Abolition and Land Reforms Rules, 1952 could not
be issued till July 4, 1956 on account of objections _raised by the asses- D
see, in spite of the fact that the entire amount of purchase money of
Rs.25,80,000 had been paid by the purchasers on December 8, 1955.
During the period in which the objections were pending, i.e.,
November 10, 1955 to July 2, 1956, the Government of India appoin-
ted an Authorised Controller to run the sugar mills by a notification
t-- dated November 25, 1955.
E
After possession of the mills was given to the purchasers, a suit
was filed by them against the assessee claiming damages for loss of
profits on account of the possession of the mills not having been de-
J livered to them immediately after the auction sale. In the suit the
purchasers claimed, in the alternative, compensation for loss of in- F
+ terest on Rs.25,80,000 from the date of deposit of the sale price to the
da~e of delivery of the mills. The claim of the purchasers was ulti-
mately settled by compromise for a sum of Rs. l,25,000.

In assessment proceedings for the assessment year 1957-58, the
relevant accounting period being the year ended October 31, 1956, the G
Income-tax Officer called upon the assessee to explain why the excess
amount which the assessee had received on sale of the building,
~ machinery and plant over the difference between the original and the
written down value should not be subjected to tax under cl. (vii) of
sub-s. (2) of s. 10 and under·s. 12B of the Indian Income Tax Act,
1922. The assessee replied stating that ( 1) simultaneous computation H
202 SUPREME COURT REPORTS !1986] 3 S.C.R.
A of income under cl. (vii) of sub-s. (2) of s. 10 and of capital gains under
s. 12B amounted to double taxation and was against the principles of
natural justice and the legislative intention; (2) the sale being a com-
;mlsory sale was not a sale within the meaning of cl. (vii) of sub-s. (2)
of s. 10; (3) moveable property was exempt from capital gains tax; and
B \4) as the sale was complete before April 1, 1956 it did not attract the
provisions relating to capital gains which became effective from April
1, 1956 only. Alternatively, it was claimed that the value of the mills as
on January 1, 1954 was much higher than that determined and the
assessee was not liable to tax on capital gains. The Income-tax Officer
rejected the contentions raised by the assessee, and completed the J
assessment under sub-s. (3) of s. 23 read with sub-s. (lA) of s. 34 of the
c Indian Income-tax Act, 1922 on March 29, 1965, computing the profits
under cl. (vii) of sub-s. (2) of s. 10 at Rs.10,07,000 and the capital gains
at Rs.10,23,210. The Income-tax Officer did not find any substance in
the assessee's contention that the value of the fixed assets of the mills
was Rs.18,50,000 as on January 1, 1954 and that there was no justifica-
D tion for initiating the assessment proceedings under sub-s. (!A) of s.
34 of the Indian Income-tax Act, 1922.

On appeal by the assessee the Appellate Assistant Commis-
sioner, by his order dated May 1, 1968, agreed with the Income-tax
Officer that the sale attracted cl. (vii) of sub-s. (2) of s. 10, that it took
E place on July 4, 1956 and that the assessee was, therefore, liable to
capital gains under s. 12B. But contrary to the view taken by the
Income-tax Officer, the Appellate Assistant Commissioner held that
' the ai·,essee was entitled to substitute the market value of the machin-
ery as on January 1, 1954 in olace of its cost price under cl. (iii) of s.
12B, and accordingly reduced the capital gains from Rs.10,23,210 to \
F Rs.4,89,343.

Both the Revenue and the assessee filed appeals before the
Income-tax Appellate Tribunal. Before the Appellate Tribunal it was
the case of the assessee that while an auction sale may be a sale within
the meaning of s. 12B it was not a sale as contemplated under cl. (vii)
G of sub-s. (2) of s. 10. It was urged that a compulsory sale was not a sale
for the purposes of cl. (vii) of sub-s. (2) of s. 10. It was also urged that
as the auction sale had taken place prior to March 31, 1956 the assessee
was not liable to tax on capital gains at all. The Appellate Tnbunal by
its order dated January 31, 1970 allowed the assessee's appeal and
di.s'missed the Revenue appeal. It accepted both the contentions of the
H assessee and did not find it necessary to go into the question whether
JAG DISH SUGAR MILLS'· C.l.T. [PATHAK,J.I 203

the Appellate Assistant Commissioner was right in substituting the A
market value of the machinery as on January 1, 1954 in place of its cost
price under cl. (iii) ofs. 12B.

At the instance of the Commissioner of Income-tax, Lucknow
the Appellate Tribunal referred the two questions of law set out earlier B
to the High Court for its opinion. On January 7, 1974, the High Court
pronounced judgment in the reference in favour of the Revenue. And

I
\
now this appeal.

Shri S. C. Manchanda, appearing for the assessee, has raised two
points before us. The first contention is that cl. (vii) of sub-s. (2) of s.
10 of the Indian Income-tax Act 1922 has no application because a sale c
effected for recovering arrears of cane-cess as an arrear of land re-
venue is not a vofuntary sale and does not fall within the terms of the
relevant statutory provisions. The second contention is that the sale
must be regarded as having taken place on November 10, 1955 when
the auction was held and not on July 4, 1956 when the sale certificate D
was issued, and that being so s. 12B which took effect from April 1,
1956 does not extend to the sale. These are the only two contentions
before us, and in our opinion, they can be disposed of shortly.

Clause (vii) of sub-s. (2) of s. IO of the Indian Income-tax Act,
1922 provides for the computation of profits and gains chargeable to
E
tax under the head 'business' after making the following allowances:

"(vii) in respe.::t of any such building, machinery or plant
which has been sold or discarded or demolished or des-
/ troyed, the amount by which the written down value
thereof exceeds the amount for which the building, F
machinery or plant, as the case may be, is actually sold or
its scrap value·:

Provided that such amount is actually written off in
the books of the assessee:
G
Provided further that where the amount for which
any such building, machinery or plant is sold, whether dur-
ing the continuance of the business or after the cessation
thereof, exceeds the written down value, so much of the
excess as does not exceed the difference between the origi-
nal cost and the written down value shall be deemed to be H
204 SUPREME COURT REPORTS [1986] 3 S.C.R.
A
profits of the previous year in which the sale took place:

xxx xxxx xxxxx''

The argument for the assessee is that the word "sold" in the clause
B refers to a sale transaction affected on the free volition of the seller
and not where it is in the nature of a compulsory transfer for recover-
ing an arrear of land revenue. Reliance is placed on Calcutta Electric
Supply Corporation Ltd. v. Commissioner of Income-tax, West Bengal,
[1951] 19 ITR 406, where the Calcutta High Court laid down that the
word ."sale" in its ordinary meaning, was a transaction entered into
I
/
voluntarily between two persons, the buyer and the seller, and that,
c therefore, the requisition of an electricity generating plant by the Gov-
ernment under sub-rule (1) of rule 83 of the Defence of!ndia Rules,
not being a voluntary sale, did not fall within the mischief of cl. (vii) of
sub-s. (2) of s. 10. Our attention has also been drawn to Indian Steel &
Wire Products Ltd v. State of Madras, 119.68] I S.C.R. 479. In that case
D- this Court was called upon to consider whether the supplies by the
appellant of certain steel products to various persons in the State of
Madras under the Iron and Steel (Control of Production and Distribu-
tion) Order, 1941 could be regarded as sales for the purposes of the
Madras General Sales Tax Act. The Court observed that the transac-
tions must be treated as sales because the element of mutual assent was
E not excluded altogether from the transactions. Learned counsel seeks
support from that case in support of his submission that the element of
consent is essential to the character of a sale. A third case, R. B.
Lachman Das Mohan/al & Sons v. Commissioner of Income-tax, U. P.,
[1964] 54 ITR 315 has been placed before us but nothing said therein
is truly apposite to the limited question before us. We have given the \
F matter careful consideration and we think, for the reasons which fol-
low, that there is no escape from the conclusion that the transaction in
this case constitutes a sale for the purposes of cl. (vii) of sub-s. (2) of s.
10.

The levy of cane-cess was imposed under a statute in respect of
G an activity carried on voluntarily by the assessee. When entering upon
and carrying out that activity the assessee was fully conscious that he
did so subject to the provisions of the statute. The statute provided for
the levy of cane-cess and its recovery, in the event of default of pay-
ment, as arrears of land revenue. What was done in the present case

H
JAG DISH SUGAR MILLS v. C.I.T. [PATHAK,!.] 205

was to recover the arrears of cane-cess as arrears of land revenue. All A
along, therefore, the assessee was aware that when it entered upon and
carried out an activity attracting cane-cess it was exposing itself to
recovery proceedings as arrears of land revenue. The assessee was
aware that recovery could be affected by an auction sale of its proper-
ties. It can be inferred from the circumstance that by embarking upon B
the activity which attracted cane-cess the assessee agreed to be bound
by the structural framework imposed by the statute around that activ-

( ity, and, therefore, agreed to an auction sale of its properties as arrears
of land revenue in the event of its failure to pay the cane-cess. We are
not satisfied that the element of consent is absent altogether from the
\ transactions considered in this case. We are clearly of opinion that the
sale of the properties of the assessee fall within the scope of cl. (vii) of c
sub-s. (2) of s. 10 of the Indian Income-tax Act, 1922 and therefore,
the first contention must be rejected.

Turning to the second contention, the question is whether the
sale can be said to have taken place when the properties were D
auctioned or on the date when the sale certificate was issued. The
recovery of an arrear of land revenue in Uttar Pradesh is governed by
the provisions of the U .P. Zamindari Abolition and Land Reforms Act
and the Rules made thereunder. We have been taken through the
pertinent provisions, of that Act and its Rules. The High Court, in the
+-- judgment under appeal, has made detailed refefence to them and, in
E
an admirable exposition of the law, has demonstrated that the date on
which the sale certificate was issued is the date on which the sale must
be regarded as having taken place. We have no hesitation in endorsing
that view. Section 279 of the U .P. 7.~mmclan Abolition and Land
) Reforms Act specifies the modes for the recovery of an arrear of Land
revenue, ands. 282 prescribes the procedure for the attachment and F
sale of moveable property. Section 286 empowers the Collector to
proceed against other immoveable property belonging to the defaul-
ter. Rule 281 authorises the Collecter to sell immovable property and
upon the property being auctioned under the Rules, and the objec-
tions, if any, thereto having been considered and disposed of, provides
for confirmation of the sale by an order of the Commissioner. Rule
G
285-M provides that the Collector shall thereupon put the person de-
clared to be the purchaser into possession of the property, and shall
grant him a certificate to the effect that he has purchased the property
to which the certificate refers, and that such certificate shall be
deemed to be a valid transfer of such property. It is apparent that it is
only after the sale is confirmed and a certificate is granted that the H
206 SUPREME COURT REPORTS 11986) 3 S.C.R.

A property stands transferred and the purchaser becomes the owner of
the property. Rule 285-M is explicit. The certificate operates as a
1
transfer of the property. As before the High Court, learned counsel
for the assessee relies on s. 65 of the Code of Civil Procedure in
support of his submission that the property shall be deemed to have
B vested in the purchaser from the time when the property is sold and
not from the time when the sale becomes absolute. The application of
s. 65 turns upon the scope of s. 341 of the U.P. Zamindari Abolition
and Land Reforms Act, which applies the provisions of the Code of
Cilli! Procedure to the proceedings taken under that Act. S. 341, how-
ever, applies the Code only so far as it can be applied consistently with
I j
the Act and not in derogation of it. As is clear, the procedure in- '
c corporated in the U.P. Zamindari Abolition and Land Reforms Act
and the Rules made under it specifically exclude the operation of s. 65.
When the sale certificate itself operates as effecting the transfer of the
property, no question arises of relating the transfer back to the date of
auction. It is true that the order of the Commissioner confirming the
sale refers back to the auction which has already taken place, but that
D
is hardly of any moment in view of the terms of Rule 285M. We see no
force in the second contention.

In the result the appeal fails and is dismissed with costs.

E
P.S.S. Appeal dismissed.

\