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PETITIONER: MESSRS.  ASSOCIATED CLOTHIERS LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, CALCUTTA

DATE OF JUDGMENT: 23/09/1966

BENCH: SHAH, J.C. BENCH: SHAH, J.C. RAMASWAMI, V. BHARGAVA, VISHISHTHA

CITATION:  1967 AIR  788            1967 SCR  (1) 512

ACT: Indian Income-tax Act, 1922 (11 of 1922), s. 10(2)(vii)-Sale of assets by one company to another-Circumstances in,  which sale can be treated as "in substance  to self"-Applicability of s. 10(2)(vii) to such transaction.

HEADNOTE: The  appellant  a private limited  company,  was  originally registered  as /s. Phelps & Company Ltd." but on  March  21, 1952 by an order under S. 11(4) of the Indian Companies Act, 1913,  its name was changed to "Messrs Associated  Clothiers Ltd."  On the same day a company styled "Messrs.   Phelps  & Co. Ltd." was incorporated.  By a written agreement, also of the same date, the appellant company agreed to transfer  its assets  to Messrs Phelps & Co. Ltd.  Consideration  for  the transfer consisted, apart from cash, of allotment of certain shares of Messrs Phelps & Co. Ltd. to the appellant and  the taking  over  of  the latter’s liabilities  by  the  former. Among  the  assets  transferred under the  agreement  was  a building described in the second schedule to the  agreement. The original cost of this building was Rs. 97,252/- and  its written value was Rs. 57,011/-, but in the balance sheet far the  account  year ending March 31, 1953 as well as  in  the aforesaid agreement its value was shown as Its. 2,  4,573/-. In Income-tax proceedings relating to the account year 1952- 53 the Incometax Officer brought to tax under s.  10(2)(vii) of  the Indian Income-tax Act, 1922, the difference  between the original cost and the written down value of the building on  the date of transfer.  Before the  Income-tax  Appellate Tribunal it was contended by the appellant that the sale  of the  assets  of the appellant company was ’in  substance  to self’  and  therefore S. 10(2)(vii) was  inapplicable.   The Tribunal  decided,  in favour of the company  but  the  High Court held against. it.  The company thereupon came to  this Court in appeal by certificate. HELD:The  sale was by one company to another, it was  not  a case  in  which persons carrying on business had  floated  a private limited company and had attempted to readjust  their business positions.  The sale was for a stated consideration which  had  not  been shown to be  notional  and  since  the consideration  was  in excess of the original  cost  of  the

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building  the difference between the original cost  and  the written  down  value  was profit within the  meaning  of  s. 10(2)(vii) second proviso. [517 G-H; 519 F] Sir Homi Mehta’s Executors’ case, 28 I.T.R. 928 and Rogers & Co. v. Commissioner of Income-tax, Bombay City II 34  I.T.R. 336, distinguished. Chirtoor Motor Transport Co. (P) Ltd. v. Income-tax Officer, Chittoor, 59 I.T.R. 238, relied on. Bank  of  Chettinad  Ltd.  v.  Commissioner  of  Income-tax, Madras, 8 I.T.R. 522., Maharajadhiraj Sir Kameshwar Singh v. Commissioner of Income-tax , Bihar and Orissa, 48 I.T.R. 483 and  Doughty  v.  Commissioner of Taxes,  [1927]  A.C.  327, referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 969 of 1965. 513 Appeal from the judgment and order dated February 5 1963  of the  Calcutta  High Court in Income-tax Reference No.  3  of 1958. S. S. Shukla, for the appellant. S. T. Desai, A. N. Kripal and R. N. Sachthey, for the res- pondent. The Judgment of the Court was delivered by Shah,  J.  M/s.  Phelps & Company Ltd. was registered  as  a private  limited company on September 30, 1939 to  carry  on the business of "Clothiers and Tailors".  On March 21,  1952 under  an order made under s. 11(4) of the Indian  Companies Act,  1913,  the name of the Company was altered  to  Messrs Associated Clothiers Ltd.  On the same day a company  styled "Messrs.  Phelps & Co. Ltd." was incorporated.  By a written agreement also of the same date the appellant Company agreed to transfer its assets and liabilities to Messrs.  Phelps  & Co.  Ltd.  in consideration of allotment of  shares  of  the value of Rs. 12,30,000/of Messrs.  Phelps & Co. Ltd. and Rs’ 23,291/10/5 payable in cash, and Messrs.  Phelps & Co.  Ltd. taking  over  liabilities of the appellant  Company  of  the aggregate  amount of Rs. 6,05,601/-/6.  Under the  terms  of the  agreement the appellant Company purported  to  transfer seven  items of property described in the Schedules  annexed to  the  deed  :  one of the  properties  so  agreed  to  be transferred  was described in the second scheduled  building at Connaught Place, New Delhi, valued at Rs. 2,24,673/-.  No deed  of  conveyance  was  executed  in  pursuance  of   the agreement.   It is, however, common ground that on  July  1, 1952, Messrs.  Phelps & Co. Ltd. took over possession of the properties agreed to be sold. The  original cost of the building described in  the  second schedule was Rs. 97,258/- and the written down value of  the building  after deducting depreciation allowed from time  to time  in  the  records of the  Income-tax  Officer  was  Rs. 57,011/-.   In  the balance sheet of the  appellant  Company dated  March  31,  1953  the  building  was  valued  at  Rs. 2,24,673/- the price for which it was agreed to be sold.  In proceedings for assessment for the account year 1952-53  the Income-tax   Officer,  Companies,  District  IV,   Calcutta, brought to tax the difference between the original cost  and the  written down value of the building on the date  of  the transfer as deemed profit of the appellant Company under the second  proviso  to s. 10(2)(vii) of the  Indian  Income-tax Act,  1922.  Before the Appellate Tribunal it was  contended that  the  sale of assets to the appellant Company  was  "in substance  to  self"  and  on that  account  no  profit  had

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resulted to the Company and the amount sought to be  brought to  tax  was  not liable to be  included  in  the  Company’s profit.  The Tribunal 514 relying  upon  the  decision of the  Bombay  High  Court  in Commissioner of Income-tax, Bombay City v. Sir Homi  Mehta’s Executors(1) upheld that contention. At the instance of the Commissioner of Income-tax,  Calcutta the  following  question was referred to the High  Court  of Calcutta               "Whether on the facts and in the circumstances               of the case the Tribunal was right in  holding               that  the  sum of rupees  forty  thousand  two               hundred and forty seven could not be deemed to               be  profits  of  the  assessee  company  under               second proviso to, s. 10(2)(vii) of the Indian               Income-tax Act ?" The  High  Court  answered the  question  in  the  negative. Against the order passed by the High Court, with certificate under s. 66A(2) of the Indian Income-tax Act, this appeal is preferred. The  High  Court was of the view that the principle  of  the decisions  in  Sir  Homi Mehta’s Executor’s  case()  and  in Rogers  &  Co.  v. Commissoner of  Income-tax,  Bombay  City 11(2), did not apply to the facts of the present case, since at   all  material  times  there  were  in   existence   two corporations  which  were distinct and the transfer  by  one corporation of its assets to another cannot be deemed to  be a  transfer  to  self; that the  transaction  by  which  the appellant Company transferred its assets to Messrs.   Phelps &  Co. Ltd. was a transaction of sale, and the  doctrine  of "lifting the veil of corporate personality" had  application only  to  a  limited class of cases, and  the  case  of  the appellants could not be brought within that class; and since the two companies "continued to exist side by side" for many years after the appellant Company had transferred its assets to  Messrs Phelps & Co. Ltd., two different Companies  which carried on business simultaneously could not be regarded  as one entity.  In this appeal with certificate, the  appellant Company  contends  that  the High  Court  gravely  erred  in recording its opinion on the question submitted, relying  on evidence  which  was  never  placed  before  the  Income-tax Officer   or   the  Tribunal.   Counsel   urged   that   the observations  made by the High Court that Messrs.  Phelps  & Co. Ltd. and the appellant Company "continued to exist  side by  side as two separate limited Companies" and  carried  on business  simultaneously for, more than ten years  is  borne out by no evidence on the record.  This criticism has force. The High Court in a reference under s. 66(1) or (2) is bound to  proceed  on  the findings  recorded  by  the  Income-tax Appellate  Tribunal:  it  has no power to  admit  on  record additional evidence, as the High Court did, and to  consider that  additional  evidence which was not placed  before  the Tribunal.  We must therefore proceed on the view (1) 28 I.T.R. 928. (2) 34 I.T.R. 336. 515 that there is no evidence before the Tribunal and no finding of  the  Tribunal  that after transferring  its  assets  the appellant Company carried on business. Counsel for the Company also submitted that the Tribunal was in  error  in  ’observing that  the  appellant  Company  had transferred  all  its  assets and  liabilities  to  the  new Company.   But in the statement of the case which  is  based upon the judgment of the Tribunal, there is a clear  recital

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-that  all  the  assets and  liabilities  of  the  appellant Company  were  transferred  to Messrs.  Phelps  &  Co.  Ltd. Counsel  asked  us to ignore that statement in view  of  the recital  made in the preamble clause of the agreement  dated March  29,  "  1 952 in which it was  recited  that  Messrs. Phelps  &  Co.  were "desirous of acquiring a  part  of  the undertaking  and property of the Vendor Company." But  there is  nothing in the recitals which indicates that any  assets were  retained  by the appellant Company.  The  Tribunal  in deciding the appeal before it observed               "Associated  Clothiers Ltd. were owners  of  a               business  having assets and  liabilities.   By               sale to Phelps & Co. Ltd. they got the  entire               ownership  by  way  of ’shares  and  the  same               assets  and liabilities remained in the  hands               of Phelps & Co. Ltd." This Court must accept the statement made by the Tribunal in the statement of the case, especially when no objection  was raised thereto before the Tribunal or before the High  Court on behalf of the appellant Company at any time. On  the  question  whether in determining  liability  of  an assessee to pay income-tax it is open to the court to ignore the  corporate personality of a Company and to fix upon  the ownership  of the business as decisive, there has been  some difference  of  opinion.   In Sir  Homi  Mehta’s  Executors’ case()  the  assessee  and his sons  had  formed  a  private limited  company and transferred to that company  shares  in several  joint  stock  companies  which  the  assessee  held jointly  with his sons at the market value of the shares  at that  time.  The departmental authorities levied  income-tax on  the  difference between the market price  and  the  cost price of the shares.  The High Court of Bombay held that the so-called  sale  of  the shares to the  Company  was  not  a business  activity entered into with the object  of  earning profit;  that  it  was not really a  sale  but  a  procedure adopted for readjustment of their position as holders of the shares;  and  that the assessee did not make any  profit  or gain in a commercial sense by transferring the shares to the Company  and  therefore the difference  between  the  market price  and cost price of the shares was not exigible to  tax as profit of the business. (1) 28 I.T.R. 928. 516     In  Rogers  &  Co.’s  case(1) the  partners  of  a  firm carrying  on  the business of manufacturing  aerated  waters formed themselves into a private limited company, the shares allotted  to each of them in the company being in  the  same proportions as the shares they held in the firm. The  assets of  the  firm were transferred to the company  for  a  price exceeding the written down value, and the difference between the  original cost of the assets and the written down  value was brought to tax under s.10(2)(vii) of the Income-tax Act. The  High Court held that the transfer of the assets of  the firm  to the Company was merely a readjustment made  by  the members  to  enable  them to carry on their  business  as  a Company rather than as a firm and no profit in a  commercial sense  was made thereby, and therefore the transfer  of  the assets  of  the firm to the Company was not a sale  and  the provisions  of the second proviso to s.10 (2) (vii) did  not apply.     Chagla,  C.J.,  in delivering the judgment in  Sir  Homi Mehta’s Executors’ case(2) observed at p. 932;     "Whatever  legal  or technical form  a  transaction  may take,  the  Court  must try and  determine  what,  the  real transaction  was  and  not the form  which  the  transaction

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took." Again  .the  learned  Chief Justice in  Rogers  &  Company’s case(t) observed that in all transactions which come up  for consideration in a taxing statute the Court has to look  not at the legal form which the transaction has, but to the real nature of the transaction, Counsel for the Revenue  contends that  in  ignoring  the legal form  and  relying  upon  "the substance  of the transaction" the High Court of Bombay  has erred.  He  relies  in support of his  submission  upon  the following  observations  in  the judgment  of  the  Judicial Committee  in  Bank  of Chettinad Ltd.  v.  Commissioner  of Income-tax, Madras(3) at p. 526 :--     "The Commissioner of Income-tax in his reference  stated that  "in substance these loans represent money lent by  the Pudukottai   Bank   to  the  Kanadukathan   Bank   but   the transactions   have   been  unnecessarily   complicated   by resorting to a series of entries which are as superfluous as they are confusing."     Their Lordships think it necessary once more to  protest against the suggestion that in revenue cases "the  substance of  the  matter" may be regarded as distinguished  from  the strict legal position."     But  the  decision  of the Court  in  Sir  Homi  Mehta’s Executors’ case(2) was not rounded only upon the ground that the  real transaction" was different from what it  purported to be.  The Court  (1)  34 I.T.R. 336.                         (2)  28  I.T.R. 928.                        (3) 8 I.T.R. 522. 517 in  the  two  cases opined that  in  determining  whether  a certain  transaction  resulted in profit, it must  be  found that  the transaction resulted in real profit,-profit  which from the commercial point of view meant a gain to the person who  entered into the transaction, and that by  transferring the  assets  with  the  intention  merely  to  readjust  the business  relation of the owners of a business or assets  no real profit was earned. Counsel  for  the Revenue relied upon the  decision  of  the Patna  High Court in Maharajadhiraj Sir Kameshwar  Singh  v. Commissioner of Income-tax, Bihar & Orissa(1).  It was  held in that case that the doctrine that no man can make a profit out  of himself is not applicable to transactions between  a person and a limited company, even though all the shares  in the company are owned by that person, because from "a  legal point of view a company is an entity entirely distinct  from its shareholders." The Court observed at p. 495               "............it   is  not  possible   in   the               circumstances  of  this  case,  to  ignore  or               disregard  the mask of corporate entity or  to               analyse  the  economic  realities  behind  the               transaction of sale." Therefore  the assessee though he was the owner of  all  the shares in the company could not claim to be treated as if he were identical with the Company in order to promote his  own benefit  or advantage.  But in Maharajadhiraj Sir  Kameshwar Singh’s  case(’)  it seems to have been  admitted  that  the price  for  which the buildings, machinery  and  plant  were transferred  to the Company was not a notional  figure,  and the  price  being in excess of the cost  of  buildings,  ma- chinery and plant, s. 10(2)(vii) proviso was attracted,  and the  difference between the written down value and  original cost was held taxable. It  is unnecessary for the purpose of this case  to  express any  final opinion on the question, whether in taxing  cases

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it  is  open  to  the  assessing  authority  to  ignore  the corporate  personality  of a company and to  hold  that  the interest of the shareholders in the shares of a company  and on the business of the Company is identical, and transfer by the  owners of a business to a Company in ’which the  shares are owned by the former owners of the business does not give rise to a sale in a commercial sense.  The present is not  a case  in which persons carrying on business have  floated  a private limited company and have attempted to readjust their business  position.  Here is a case in which the  assets  of one  company  have been sold to another.   The  question  to which attention must be directed is whether there was by the agreement, a transaction of sale in a commercial sense. (1) 48 I.T.R. 483. 518 In  a  recent  judgment  of this  Court  in  Chittoor  Motor Transport  Co. (P) Ltd. v. Income-tax Officer,  Chittoor,(1) it  was  held  by this Court that where  a  private  limited company  transferred  some of its assets  to  a  partnership consisting  of three shareholders who held the entire  issue of shares of the company for a consideration, but the  whole business  was  not transferred, there was in  truth  a  sale within  the  meaning  of  Sale of Goods  Act  and  under  s. 10(2)(vii)  the  rebate  received  by  the  private  limited company  would  be  liable  to  be  forfeited.   This  Court declined  to  accept  the argument  that  when  the  company transferred the vehicles belonging to it to the partnership, there was no commercial transaction.  The Court observed at p. 242 :               "If  we look at the resolution dated June  30,               1959, it is quite clear that, it is a sale for               consideration  of  a number of  buses  by  the               limited company to the partnership.  It  would               be  a sale under the Sale of Goods Act and  it               would  be a sale in any other  proper  meaning               which  might be given to the word ’sale’.   We               are not concerned whether any profit  resulted               to the assessee but what we are concerned with               is   whether   the  assessee   had   sold   or               transferred  these buses to  the  partnership.               To  us  the  answer seems  to  be  plain  that               whether the transaction resulted in profit  to               the  company  or not,  the  transaction  comes               within  the  purview  of the  latter  part  of               section 10(2)(vii)." Counsel for the Company also submitted that the  transaction was  merely  a nominal transaction and the property  in  the shares renamed with the same Company in which it was vested. This  contention was never raised before or decided  by  the Tribunal,  and  it does not arise out of the  order  of  the Tribunal. It  was then urged that there was no profit to  the  Company since  there was no evidence about the market value  of  the property  transferred and in the absence of any evidence  to show  that the property was sold for a price  exceeding  the written  down  value, liability under s.  10(2)(vii)  second proviso will not arise.  But in the agreement the properties sold  were allotted specific values and no attempt was  made at any time before the Tribunal to prove that the values  so allotted   to   the  various  properties  were   not   true. Substantially the whole of the consideration paid by Messrs. Phelps & Co. Ltd. is in the form of shares to the  appellant Company, but unless there is evidence that the market  value of the shares was less than their face value, the claim made by  the appellant Company must fail.  The burden of  proving

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that  the  consideration for sale of the property  was  less than what it purports to be under the agreement of sale  lay upon the Company and since no attempt was made to prove that fact,  the question cannot be raised for the first  time  in this Court. (1) 59 I.T.R. 238. 519 It  was also said that the transfer was a slump sale of  the assets  and  there being no separate sale  of  the  property described in the second schedule, the difference between the written  down value and the cost price was not liable to  be included  as income in the process of assessment.   Reliance in  this  behalf  was placed upon the  observations  of  the Judicial  Committee  of  the Privy  Council  in  Doughty  v. Commissioner  of  Taxes(1).   In  that  case  two   partners carrying  on business as general merchants and drapers  sold the  entire assets and goodwill of the partnership  business to  a  limited  company  in  which  they  became  the   only shareholders.   The nominal value of the shares  being  more than  the  sum to the credit of the capital account  of  the partnership  in its last balance sheet, a new balance  sheet was prepared showing a larger value for the stock in  trade. The  Commissioner of Taxes treated the increase in value  so shown  as  a profit on the sale of the stock in  trade,  and assessed the appellant upon it for income-tax.  The Judicial Committee held that the assessment was wrongly made since if the  transaction  was to be treated as a sale there  was  no separate  sale  of the stock, and no valuation of it  as  an item  forming  part of the aggregate sold.  This  Court  has affirmed  the  principle  in  Doughty’s  case  in  a  recent judgment : Commissioner of Income-tax v. Mugneeram Bangur  & Company (2). That  principle  has however no application  here.   In  the present  case  it  is true that the  entire  assets  of  the appellant  Company were sold to Messrs.  Phelps &  Co.  Ltd. There  was  no  separate sale of different  items,  but  the consideration  of each item of property sold  was  expressly mentioned in the agreement of sale.  The contention that the transaction  of  sale  was a mere attempt  to  readjust  the business position of the transferor was never raised  before the  Tribunal  and does not arise out of the  order  of  the Tribunal. We  decide  this  appeal  on  the  narrow  ground  that  the appellant  Company sold the property in the second  schedule for  a  stated  consideration  which was  not  shown  to  be notional,  and since the consideration was in excess of  the original  cost  of the building, the difference  was  profit within the meaning of s. 10(2)(vii) second proviso. The appeal therefore fails and is dismissed with costs. G.C.                       Appeal dismissed. (1)  [1927] A.C. 327. (2)  57 I.T.R. 299. 16Sup.  C. I./66-5 520