K.N. Narayanan vs Income Tax Officer, C-Ward and Another

T. Kochu Thommen, J.—These writ appeals arise from the common judgment in O.P. Nos. 3444 and 3445 of 1979 ( K.N. Narayanan and Another Vs. Income Tax Officer, C-Ward and Another, ). The learned judge dismissing the petitions challenging the order made by the Commissioner of Income Tax u/s 264 of the Income Tax Act, 1961, held that, in respect of the shares in question, there was a sale and a resale, and consequently income arose under the head "Capital gains", and the returns filed by them for the assessment year 1977-78 including such income had been correctly filed, and the Commissioner was right in rejecting the subsequent contention of the petitioners that the returns were wrongly filed and no such income arose.

The petitioners held 1,700 shares each in a company called Haileburia Tea Estates Ltd. K. N. Narayana Iyer, who is the petitioner in O. P. No. 3444 of 1979, entered into a contract on behalf of himself and his relatives and nominees, including the petitioner in O. P. No. 3445 of 1979, being his brother, with M/s. Tea Sales & Allied Industries (India) Private Ltd., as evidenced by exhibit P-1. The shares in question were agreed to be sold not later than March 31, 1979. They were admittedly sold before that date. The last paragraph in exhibit P-1 reads :

"The vendor hereby assures the purchaser that the other shareholders referred to in the schedule hereunder have agreed with and have authorised the vendor to sell their shares also to the purchaser or its nominees and that the vendor will obtain their letters of consent and authority or such other documents for the purpose and furnish the same to the purchaser if required.

It is further agreed between the parties that this agreement is conditional upon obtaining necessary permission, approval or sanction from the Government of India, Reserve Bank or any other authorities and also of the consent of the other authorities and also of the consent of the other shareholders mentioned in the schedule hereunder and if in the event the aforementioned 1,19,760 shares are not transferred to the purchaser and/or its nominees or duly registered in the registers of the said company in the names of the purchaser and/or its nominees, the vendor shall repay all moneys paid by the purchaser and the purchaser shall return or retransfer all shares which have been transferred or delivered to the purchaser or its nominees ".

This shows that the sale of the shares was conditional upon the vendor obtaining the necessary sanction of the Government of India and other authorities. It is not in dispute that such sanction had been duly obtained in respect of the shares in question and they were accordingly sold before March 31, 1979. The final part of the paragraph set out above, however, provided that in the event of failure to sell the totality of shares, being 1,19,760 in number, agreed to be sold by K. N. Narayana Iyer on behalf of himself and his relatives and nominees, the shares already sold had to be resold to the original vendor and the money had to be returned to the original vendee.

Counsel for the appellants, however, submits that it was the intention of the parties, as can be gathered from the agreement as a whole, that the property in the goods, namely, the shares which are 1,19,760 in number, should not pass until every one of those shares had been sold as agreed. In the present case, 40,000 shares could not be sold for want of sanction of the concerned authorities. In the circumstances, even the shares which were purportedly sold had in fact not been sold and they continued to be the property of the vendor. The returns filed by the assessees showing capital gains was a genuine mistake. The assessees have not understood that the sale, being conditional, had not, and could not have, taken place until the last of the shares had been sold on obtaining the necessary sanction of the authorities. This argument was not accepted either by the Commissioner or by the learned judge, and, in our view, rightly.

On a careful examination of the paragraph which we have set out above, it would be clear, as we have already indicated, that what the parties had provided, for whatever reason, is that in the event of the totality of 1,19,760 shares not being transferred by reason of the failure to get the necessary sanction of the authorities, even the shares transferred should be retransferred and the amounts paid should be repaid. In other words, what had been sold had to be resold and the money paid had to be repaid in the event of any one share out of the totality of shares covered by the agreement remaining unsold. This is exactly what the parties intended by the agreement and what they accomplished. This is how the parties understood the transaction at all material times, as is clear from exhibit P-1, and also from their subsequent conduct in filing the returns showing capital gains arising from the sale of the shares in question here. In the circumstances, the Commissioner rightly found that the assessees who are the appellants here made no mistake in filing the returns and the concerned officer made no mistake in assessing them in respect of the amounts returned. The learned judge has also so found and we are in complete agreement with that conclusion. The appeals are accordingly dismissed. The parties shall bear their respective costs.