DALMIA CEMENT LTD., RAJASTHAN vs. COMMISSIONER OF INCOME TAX, NEW DELHI

CIVIL APPEAL No. 4632/1992Supreme Court[1999] 2 S.C.R. 73516 April 1999Bench: 2 JudgesAuthor: M. SRINIVASAN, U.C. BANERJEE CEMENT LTD., RAJASTHAN A15 pages
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What were the facts?

The assessee, Dalmia Cement Ltd., agreed to sell two cement factories on July 24, 1962, with a supplemental agreement on November 2, 1962, stipulating that profits and losses arising from these factories after September 30, 1962, would be for the account of the transferee. The actual sale deed was executed on September 30, 1964. The assessee excluded profits from these factories for assessment years 1963-64 and 1964-65 (corresponding to accounting periods 1.10.1962 to 30.9.1963 and 1.10.1963 to 30.9.1964). The Income-Tax Officer included these profits, which was upheld by the Appellate Assistant Commissioner and the Tribunal. The High Court answered the reference in favour of the Revenue, leading to the present appeal.

What did the Supreme Court hold?

The Supreme Court allowed the appeal, holding that the assessee could not be taxed for the profits arising from the two cement factories for the assessment periods 1.10.1962 to 30.9.1963 and 1.10.1963 to 30.9.1964. The Court found that there was a diversion of income by an overriding title in favour of the transferee even before the actual accrual of profits. The Court reasoned that profits do not accrue from day to day but at the end of the accounting year, and in this case, the agreement dated July 24, 1962, read with the supplemental agreement dated November 2, 1962, effectively transferred the right to profits from September 30, 1962. The Court also held that Section 60 of the Income-tax Act, 1961, was not applicable because it applies only when the income-earning asset remains with the transferor, which was not the case here, especially given the definition of 'transfer' in Section 63 which includes an 'agreement'. The Court noted an inconsistency in the Revenue's approach, as the assessment of capital gains treated the gross consideration as the sale price, implying acceptance of profits belonging to the transferee. The High Court's judgment was set aside.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the profit arising from the working of the two cement factories situated in Pakistan for the period 1.10.1962 to 30.9.1963 was taxable in the hands of the applicant company (assessee)? (Question of law and fact, concerning Section 28 of the Income Tax Act, 1961). 2. Whether, on the facts and in the circumstances of the case, the profit arising from the working of the two cement factories situated in Pakistan for the period 1.10.1963 to 30.9.1964 was taxable in the hands of the applicant company (assessee)? (Question of law and fact, concerning Section 28 of the Income Tax Act, 1961). Assessee's Contentions: The High Court erred by focusing on physical control rather than ownership or title to profits, which was governed by the agreement. The High Court misapplied the law regarding accrual of profits and misread the supplemental agreement. The High Court's finding on the applicability of Section 60 was unwarranted given the language of Sections 60 and 63. Revenue's Contentions: Not recorded in the judgment.

Which sections of the Income-tax Act were involved?

Section 28,Section 60,Section 63

AI-generated summary — verify with the full judgment below

- DALMIA CEMENT LTD., RAJASTHAN A v. COMMISSIONER OF INCOME TAX, NEW DELHI APRIL 16, 1999 [M. SRINIVASAN AND UMESH C. BANERJEE, JJ.] B Income Tax Act, 1961 S. 28-Income Tax-Assessee-Agreement dated 24. 7.1962, to sell and transfer two cement factories-Supplemental agreement dated 2.11.1962 C stipulating in clause 3 that profits and loss arising from the said factories after 30.9.1962 to go to the account of.transferee-Actual transfer of assets by sale deed dated 30.9.1964 Profits arising out from the two factories after agreement to sale hut prior to actual transfer-Liability to pay tax- Determination of-R~ld, there was diversion of income by overriding title in D favour of transferee even before actual accrual-Assessee not able to retain the profits after sale agreement-Thus, profits not taxable in the hands of aSsessee.

Ss. 60 and 63--Applicability of.

Income Tax-Profits of business-Accrual of-Held, profits do not accrue E from day to day but at the end of the accounting year.

Words & Phrases "Transfer "-Meaning and scope of in the context of s. 63 of the Income F Tax Act, 1961. Appellant-ass.essee, by an agreement dated 24.7.1962 agreed to sell and transf

The order continues below.

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