Commissioner of Income Tax vs Manasuba and Co. (P.) Ltd.

Sethuraman, J.—u/s 256(1) of the Income Tax Act, 1961, the Income Tax Appellate Tribunal, Madras Bench, has referred the following

question to this court :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sums of Rs. 4,357 and Rs. 10,856

cannot be treated as the taxable income of the assessee-company for the assessment years 1965-66 and 1966-67, respectively ?

The facts which give rise to this question are as follows : The assessee was a company engaged in taking up contracts for construction of

buildings and for supply of building materials. During the course of its business, it had obtained large amounts of loans and other credit facilities

from banks and other financiers. It had acquired 21 lorries and 2 cars for the purpose of its business. These cars and lorries were acquired under

hire-purchase agreements entered into with the respective financiers. The company had acquired wooden logs over which also the financiers and

the bankers had control and rights. The company was directed to be wound up by orders of this court dated 11th August, 1961, in Company

Petition No. 21 of 1961. The official liquidator was appointed the liquidator of this company. On the company going into liquidation, several

financiers and bankers tried to exercise their rights over the assets and seized the lorries. There was actually a scramble to get at the assets. The

lorries were not the properties of the company, but belonged to the financiers. Pending settlement of this dispute, the condition of the lorries was

deteriorating as they were seized by the police and kept exposed to sun and rain. The official liquidator, pending the settlement of rights between

the various parties, applied u/s 361 of the Companies Act for directions. The High Court, by its order dated 22nd February, 1963, directed the

official liquidator to sell these lorries by public auction and to keep the sale proceeds in non-distributable deposit account. After meeting the

charges incurred for certain essential repairs and for conducting the auction, the net sale proceeds were invested in treasury bills and fixed deposits

in the State Bank of India.

After the sale of the lorries were effected, the High Court went into the dispute between the creditors, and, by its order dated November 10,

1967, gave certain directions and as a result of the directions given by the High Court, the claims relating to the 21 lorries were upheld in favour of

the respective persons in whose favour hire-purchase agreements had been entered into. The High Court also allowed the claim of the banks and

the companies who had rights over the respective assets. The official liquidator was directed to pay the amounts due to the claimants out of the net

sale proceeds after deducting the expenses, other charges and costs, as the company at the material time had not become the owner of the lorries,

the lorries being the property of the financiers or the bankers. The position regarding the logs which were also directed to be sold was considered

to be the same as that relating to the lorries as the hypothecates had rights over the same. The net sale proceeds of the wooden logs had also been

invested in treasury bills and other deposits with the State Bank of India. The High Court directed the payment of the respective amounts to the

persons who were entitled to the same. Such amounts included the interest referable to the sale proceeds invested in the manner mentioned above.

The respective amounts were accordingly paid by the official liquidator to the respective parties.

The Income Tax Officer brought to charge a sum of Rs. 8,794 and Rs. 13,810 for the assessment years 1965-66 and 1966-67, respectively,

holding that the said amounts represented interest earned by the assessee on which the assessee was assessable. The assessee appealed against

this order of the Income Tax Officer to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner accepted the contention of

the assessee and held that these amounts were not assessable at the hands of the company as the sale proceeds did not form part of the assets of

the company and were really distributable to the persons entitled to them and that the interest did not also form part of the income of the company.

The department being aggrieved preferred appeals to the Tribunal. Before the Tribunal, the official liquidator filed a report dated October 28,

1969. In the said report, the official liquidator accepted liability to assessment of interest to the extent of Rs. 4,412.50 for the assessment year

1965-66 and Rs. 4,489.25 for the assessment year 1966-67. The balance of Rs. 4,357 in the assessment year 1966-67 and Rs. 10,855.75 in the

assessment year 1966-67 was considered by the official liquidator not to belong to the assessee-company and, therefore, according to him, it

should not be assessed in the hands of the company. The Tribunal accepted the claim of the official liquidator with reference to these amounts,

namely, Rs. 4,357 and Rs. 10,855.75, and deleted the said amounts from the assessments of the assessee-company. It is this conclusion which has

given rise to the question set out above.

Before proceeding further, we may point out that there is a statement annexed to the statement of the case as annexure "" A "" in which it is found

that out of the sale proceeds of Rs. 4,32,304.09 which was kept in the deposit in non-distributable deposit account in accordance with the

directions of this court, a sum of Rs. 3,59,608.16 represents the net sale proceeds of the lorries and the balance represents the sale proceeds of

timber auctioned. There is also another statement which is annexure "" C "" to the statement of the case in which the figures of interest earned on the

timber auctioned is set out. The question being a composite question referring to both the lorries as well as the timber, the total interest arising from

the deposit would have to be split up, because the consideration with reference to the lorries would not necessarily apply to the sale proceeds of

the timber. In the case of lorries, as found by the Tribunal itself, the lorries did not belong to the assesses at all and, therefore, the sale proceeds

would belong to the respective persons with whom the hire purchase agreement had been entered into. As far as the logs are concerned, they had

only been pledged as security for the loan taken from the bankers. The logs themselves belonged to the company and, therefore, would be the

property of the company so that the sale proceeds would also belong to the company. In view of the above, it would normally follow that the

interest attributable to sale proceeds of the lorries will not belong to the company and the interest attributable to the sale proceeds of the logs of

timber will belong to the company. However, the learned counsel for the Commissioner of Income Tax submitted that even the interest referable to

the sale proceeds of the lorries would belong to the company because in the. order dated 10th November, 1967, passed by this court, it had been

stated as follows :

In the case of financing hire purchase agreement the financier being the owner is entitled to be treated as preferential creditor by the official

liquidator and no question of conflict of his interests with the other creditors will arise.

leasing himself on the words "" preferential creditor "" occurring in the above passage, the submission of the learned counsel was that even the

persons in whose favour hire purchase agreements were executed by the company in respect of the lorries would stand only in the position of the

creditors and, therefore, the interest must be deemed to belong only to the company. We are unable to accept this submission. The finding of fact

by the Tribunal as well as the agreed statement of the case go to show that the lorries did not belong to the company and they belonged to the

respective financiers, As a matter of fact, the very order of this court on which reliance is placed itself shows that the financiers were the owners of

the Lorries. So, in these, circumstances, the contention that the sale proceeds of the lorries would stand on the same footing as the sale proceeds

of the timber has absolutely no force.

As regards the sale proceeds of the lorries, on the finding of the Tribunal and also on the basis of the directions of this court, the lorries them

selves being the property of the respective owners, the sale proceeds would belong to them and the interest amount out of the- sale proceeds''

would not be assessable in the hands of the company.

As far as the sale proceeds of the timber is concerned, the creditors had only certain rights over the logs as pledges .In such circumstances, the

amounts realised by the sale of the logs would be the property of the company and the interest earned therefrom would, therefore, be assessable in

the hands of the company.

Subject to this distinction which we have pointed out with reference to the interest referable to the sale proceeds of the lorries and the interest

referable to the sale proceeds of the logs of wood, we answer the question in the affirmative and in favour of the assessee. The Tribunal will go into

the figures which would have to be assessed in the hands of the company as interest referable to the sale proceeds of logs of wood as a result of

the above distinction between the interest referable to the sale proceeds of the lorries and that referable to the sale proceeds of logs of wood.

There will be no order as to costs.