Balakrishna Ayyar, J.
(1) In both these cases the facts are similar and the question for determination is the same. We shall therefore deal with both the cases together.
(2) T.V. Sundaram Ayyangar and Sons Ltd., the assessee in R. C. No. 91 of 1953, is a private limited company carrying on business among other things in the purchase and sale of motor ears, spares and accessories. It also acts as the managing agent of several allied transport companies. In November 1945, the assessee had on hand 15 lorries, six taxis and four delivery vans. At that time there was before the business world a scheme sponsored by the Central and State Governments to co-ordinate road and rail transport.
In furtherance of this scheme a company called the Southern Roadways Ltd., was floated. It was incorporated on 13-9-1946 and it obtained the certificate of commencement of business on 15-9-1946. The assessee was the Managing Agent of the Southern Roadways Ltd. In November 1946 the assessee sold its entire fleet of 15 lorries, six taxis and four vans to the Southern Roadways Ltd., for a sum of Rs. 2,20,250. Subsequently, that is to say, on 18-12-1946, the Southern Roadways Ltd., wrote to the assessee asking it to reduce the price to Rs. 1,92,834.
This was done in view of the fact that the State Government at that stage proposed to nationalise road transport. By a letter dated 17-1-1947 the assessee agreed to this reduction. Subsequently the Government again changed their policy and as a consequence T.V. Sundaram Ayyangar and Sons Ltd., agreed to accept Rs. 48,800 being the written down value of the vehicles, and, to accept this sum of Rs. 48,000 in the form of paid up shares in Southern Roadways Ltd. All this was in 1947, that is to say, after the close of the account year of the assessee company which ended on 31-12-1946.
(3) In computing the total income of the assessee for the account year ended 31-12-1946 the Income-tax Officer included a sum of Rs. 1,16,598 as capital gains under S. 12-B of the Income-tax Act. How this figure was arrived at is explained in the assessment order made by the Income-tax the assessment order made by the Income-tax Officer on 31-1-1948. The assessee appealed to the Appellate Assistant Commissioner and contended that the Income-tax Officer was wrong in holding that the sum of Rs. 1,16,598 represented profits assessable to capital gains tax. The appeal failed. A further appeal to the Appellate Tribunal also failed. The assessee then came to this Court in C. M. P. No. 2884 of 1950 and obtained an order directing the Tribunal to state a case on the following points of law:
(1) Whether the provisions of Sec. 12-B of the Indian Income-tax Act levying a tax on capital gains are beyond the competence of the Central Legislature under the Government of India Act, 1935, and
2. Whether on the facts and circumstances of the case, there is material to support the assessment made on the petitioner on a sum of Rs. 1,16,598--as capital gains and whether such assessment is valid.
(4) The assessee in R. C. No. 92 of 1953 is the P. S. S. Motor Service, Ltd, Madurai, a private limited company now under liquidation. It carried on the business of road transport in passengers and goods in the districts of Madurai and Ramanathapuram. This company had 22 buses with rout rights which it conveyed to the Southern Roadways Ltd. in October 1946 for a sum of Rs. 3,06,500. Subsequently, on 18-12-1946 P. S. S. Motor Service Ltd, agreed to accept Rs. 2,22,085, as the price of its buses and route rights. In 1947 this company agreed to accept Rs. 78,000 in full satisfaction of the purchase price due to it in form of fully paid up shares in the Southern Roadways Ltd.
(5) The account year of the company ended on 31-12-1946. The Income-tax Officer included a sum of Rs. 1,44,109 as capital gains under Sec. 12-B of the Income-tax Act in respect of the buses. How he obtained this figure is explained in the order he made on 31-1-1948. This assessee also appealed against the levy of tax on this amount to the Appellate Assistant Commissioner and failed. The further appeal to the Income-tax Appellate Tribunal was also unsuccessful. The assessee then came to this court in C. M. P. No. 2863 of 1952 and obtained an order directing the Tribunal to state the following questions of law for the decision of this Court:
(1) Whether the provisions of Sec. 12-B of the Indian Income-tax Act levying a tax on capital gains are beyond the competence of the Central Legislature under the Government of India Act, 1935.
(2) Whether, on the facts and circumstances of the case, there is material to support the assessment made on the petitioner on a sum of Rs. 1,44,109 as capital gains and whether such assessment is valid.
(6) By an order made on 25-2-1957 this court held on the first question thus:
'The first of these questions is concluded by the decision of the Supreme Court in Navinchandra Mafatlal v. Commissioner of Income-tax Bombay City : [1954]26ITR758(SC) . That question is answered in the negative and in favour of the department.'
In view of certain other contentions which had been raised, this court directed the Tribunal to submit a further statement of the case and give its findings as to the market value of the motor vehicles which had been transferred by T.V. Sundaram Ayyangar and Sons Ltd. and P. S. S. Motor Service Ltd. to the Southern Roadways Ltd. The Tribunal has accordingly submitted its findings and further statement.
(7) The Tribunal found that the value of the assets transferred by T.V. Sundaram Ayyangar and Sons Ltd. and P. S. S. Motor Services Ltd, to the Southern Roadways Ltd, was respectively Rs. 1,84,750, and Rs. 2,32,050.
(8) It will be noticed that these figures are higher than the corresponding figures adopted by the Income-tax Officer.
(9) Under Sec. 12-B of the Income-tax Act, an assessee is liable to pay tax under the head 'capital gains' in respect of any profits or gains, arising from the sale, exchange or transfer of a capital asset effected after 31-3-1946.
(10) Mr. Subbaraya Aiyar, the learned advocate for the assessee, first contended that there had been no sale at all in these two cases and that in consequence Sec. 12-B did not apply. In respect of this contention, the very first observation we would make is that this point was not taken at any prior stage of these somewhat protracted proceedings. Besides, all the available evidence is against the contention. The vehicles and the route rights in the case of the buses admittedly belonged in one case to T.V. Sundaram Aiyangar and Sons Ltd. and in the other to P. S. S. Motor Service Ltd. All these have been transferred to the Southern Roadways Ltd, which is an entirely different legal entity. The transfer was not gratuitous but for a price agreed on. It is difficult to see what more is required to make the transaction a sale. This argument, therefore, fails.
(11) We have already stated that in 1947 the assessees agreed to accept in lieu of cash fully paid up shares in the Southern Roadways Ltd, for amounts very much smaller than the price at which the assets had been sold. Basing himself on this fact Mr. Subbaraya Aiyar contended that it was open to the parties to a contract to vary it or substitute a fresh contract in its place. That is no doubt so, but we find it difficult to see how that argument would help the assessees now before us. In order that Sec. 12-B of the Income-tax Act may apply, it is sufficient if in the relevant accounting year profits arise out of the sale of capital assets. What the parties did subsequent to the year will not have any bearing on their liability to tax in respect of that year.
(12) Mr. Subbaraya Aiyar next argued that 'capital gains' can be subject to tax only after the gains have been received, and that in the present case no profits were received because in 1947 the assessees agreed to accept paid up shares in the Southern Roadways Ltd, equivalent only to the written down or book value of the assets transferred. We are unable to find any support for this argument in the language of the Act. Section 12-B does not require that profits should have been actually received. It is sufficient if they have arisen. Throughout the Income-tax Act the words 'accrue' and 'arise' are used in contradistinction to the word 'receive' and indicate a right to receive. This was explained by Fry LJ in Colquhoun v. Brooks, (1888) 21 Q. B. D. 52. The learned Judge observed:
'I think, therefore, that the words 'arising or accruing' are general words descriptive of a right to receive profits.'
See also Commissioner of Income-tax v. Anamallais Timber Trust Ltd : [1950]18ITR333(Mad) . To attract the operation of S. 12-B it is therefore sufficient if the profits arose. They need not have been actually received.
(13) In support of his argument Mr. Subbaraya Aiyar referred to Lalbhai v. Commissioner of Income-tax, Bombay North, Kutch and Saurashtra, Baroda : AIR1952Bom457 and Karumuthu Thiagaraja Chettiar v. Commissioner of Income-tax Madras, : [1953]24ITR593(Mad) . Neither of these cases is in point because they deal with the meaning of the word 'receivable' in Sec. 8 of the Indian Income-tax Act. In the former case it was held that there can be no mercantile method of accounting as far as Sec. 8 is concerned. Interest on securities only becomes 'income' when it is actually received and not when it is due or capable of being received by the assessee. Similarly it was held in the latter case:
'On the interest which accrues due in respect of securities, debentures etc., referred to in S. 8 of the Indian Income-tax Act, 1922, the liability to pay arises only when the interest is received.'
Section 12-B, however, does not speak of any receipt at all. The crucial word used there is 'arising'. Neither of these decisions, therefore, applies.
(14) Section 12-B renders liable to tax the profits that have arisen to an assessee by the sale of his capital assets. There is no controversy here that the assets transferred by the assessees to the Southern Roadways Ltd, constituted capital assets of the assessees. It is also not controverted that depreciation was allowed in respect of the vehicles in computing tax in the earlier years. One of the provisos to Sec. 12-B indicates that where in respect of a capital asset the assessee has obtained depreciation allowance in any year, the actual cost of the asset to the assessee shall be its written down value subject to certain adjustments which are not of present interest.
There is no allegation that the sale of the assets to the Southern Roadways Ltd., was effected with the object of avoiding or reducing the liability of the assessees to tax under Sec. 12-B. Therefore, the proviso which directs that in such cases the profits arising to the assessees shall be determined with reference to the fair market value of the assets sold does not apply. The profits that have arisen have, therefore, to be ascertained by deducting the book value from the price at which the assets were sold.
That price was first fixed in the case of T.V. Sundaram Aiyangar and Sons Ltd., at Rs. 2,20,250. but, in the same year it was reduced to Rs. 1,92,834. Similarly in the case of P. S. S. Motor Service Ltd., the price was first fixed at Rs. 3,06,500, but subsequently reduced in the same year to Rs. 2,22,085. There is no allegation that the price was to be paid at any future time, which means, that the price became payable forthwith, that is to say, in the relevant accounting year. The assessees, therefore, obtained the right to receive the price in that year. Their profits, therefore, arouse in that year. As we tried to explain before, the section does not require that the profits should have been received. It is sufficient if they have arisen.
(15) In this connection we would mention that the assessees maintained their books on a mercantile basis and showed the sale price of their assets as receipts. In this context the observations of the Privy Council in Commissioner of Income-tax v. Kameshwar Singh are of interest. At p. 101 (of ITR): (at p. 111 of AIR) their Lordship say:
'What the Officer is directed to compute is not the assessee's receipts but the assessee's income and in dubio what the assessee himself chooses to treat as income may well be taken to be income and to arise when he so chooses to treat it (See per Lord Dunedin in delivering the judgment of the Board in Commissioner of Taxes v. Melbourne Trust Ltd; (1914 A.C. 1001)). The sums which the officer has brought into account from the interest register in so far as consisting of allocations from sum received in previous years have never borne tax and in their Lordships' opinion the assessee cannot complain if the officer agrees with the assessee in treating them as income of the year in which the assessee himself first thought fit so to regard them.'
(16) If it subsequently happens that the money is not actually received, that would be a capital loss arising in the year when the money became irrecoverable. Even if we suppose that the assessees found it difficult to receive in full price for which they transferred their assets to the Southern Roadways Ltd., and, that in consequence they decided to accept paid up shares in the transferee company, that would be a capital loss which arose outside the accounting year, and, therefore cannot be taken notice of for the relevant accounting year. As we said before, to attract liability to tax under Sec. 12-B it is sufficient if profits have arisen, that is to say, if the assessee has a right to receive the profits. It is not necessary that the assessee should have actually received them. And undoubtedly the assessees had the right to receive the price and therefore the profits during the relevant accounting year.
(17) The second of the questions referred to us, therefore, must be answered in the affirmative and against the assessee. The department will be entitled to its costs in both cases. Counsel's fee Rs. 250 only in R. C. No. 91 of 1953.