1. By these applications, which are consolidated, the Commissioner of Income-tax Excess Profits Tax, Bombay City I, requires the Appellate Tribunal to refer to the High Court a question of law which is said to arise out of the Tribunal's order in I. T. A. No. 7032 and E. P. T. A. No. 547 of 1951-52. Inasmuch as, in our opinion, a question of law does arise out of the aforesaid order, we hereby draw up a statement of the case agreed to by the parties and refer it to the High Court of Judicature at Bombay under section 66(1) of the Indian Income-tax Act.
2. The late Sir Homi Mehta, hereinafter referred to at times, as the assessee, was assessed by the Income-tax Officer for the year 1942-43, the year of account being the calendar year 1941 on a total income of Rs. 14,16,274 after deduction of excess profits tax of Rs. 2,37,665. The total income before deduction of E. P. T was Rs. 16,53,939 which included a sum of Rs. 11,00,000 taken by the Income-tax Officer as surplus realised by the assessee on the transfer of certain shares to a private limited company called Homi Mehta & Sons Ltd. The shares were transferred to Homi Mehta & Sons Ltd. for Rs. 40,97,000 which was their market value. According to the assessee, the excess of the transfer price over the cost price was Rs. 10,51,983, but the Income-tax Officer taxed Rs. 11,00,000 inasmuch as in his opinion, the cost price of these shares, which according to the assessee was Rs. 30,45,017 was not properly proved. We shall presently state the circumstances in which the shares were transferred to Homi Mehta & Sons Ltd.
3. The assessee was the promoter, chairman and founder of several joint stock companies, both public and private. He was, one may say, one of the financial magnates of Bombay. He dealt in shares, both ready and forward.
4. The assessee floated a private limited company called Homi Mehta & Sons Ltd. with a capital of Rs. 60 lacs. The memorandum of association of the company forms part of the case. It is not printed but the assessee is directed to produce copies thereof before the High Court at the time of the hearing of this reference. In pursuance of an agreement dated 18th August, 1941 (a copy of which is annexure 'A' and forms part of the case) with that company, the assessee transferred to Homi Mehta & Sons Ltd. several businesses and shares of 26 joint stock companies. The assets were valued at Rs. 69,05.281-II-0. This included, the sum of Rs. 40,97,000 referred to in paragraph 2 above. Along with the transfer an over-draft bank account of Rs. 9,05,281-II-0 was also transferred to Homi Mehta & Sons Ltd. In short, property worth Rs. 60 lacs was transferred to Homi Mehta & Co. Ltd. In return thereof the assessee got 6,000 shares of Rs. 1000 each. 5600 shares were allotted to the assessee by the company and 400 shares were allotted by the company, at the instance of the assessee to his four sons. All this happened in 1941. In 1942 the assessee created a trust of trusts in respect of 5,400 shares.
5. In the grounds of appeal before the Tribunal it was stated that the idea of the assessee to consolidate a major portion of his holdings and interests in businesses by informing a private limited company, namely, Homi Mehta & Sons Ltd. was an entirely bona fide one. The idea of creating a trust of trusts must be at the back of his mind. In order to facilitate the creation of trusts it appeared to the Tribunal that the assessee transferred a major portion of his holdings and his business to Homi Mehta & Sons Ltd.
6. The Tribunal held that out of the shares which were transferred by the assessee to Homi Mehta & Sons Ltd. the shares of the following companies were not the assessee's stock-in-trade.
(1) H. M. Mehta & Co. Ltd. (The managing agents of the Gaekwar Mill Ltd.)
(2) H. M. Mehta & Sons Ltd. (The managing agents of the Navsari Cotton .)
(3) Govan Brothers (Rampur) Ltd.
(4) Dharangadhar Chemical Works Ltd., and
(5) Mills stores Trading Co. (India) Ltd. (There are two companies of that name).
Thus the total these six companies is arrived at. The Tribunal further held that the shares of the remaining twenty companies were the assessee's stock-in-trade.
7. The appeal of the assessee (by the time the appeal came before the Appellate Tribunal Sir Homi Mehta had dies and his legal representatives were brought on record) was heard by a Bench consisting of the President (Mr. A. N. Shah) and Mr. Malhotra. These members differed on the following point :-
'Whether on the facts and in the circumstances of the case any profit accrued to the assessee on the transfer of his stock-in-trade of shares to Homi Mehta & Sons.'
The case was then referred to the President under section 5A (7) of the Indian Income-tax Act. The President referred the case to Mr. Aggarwal. The President held that profit accrued to the assessee on the transfer of his stock-in-trade to Homi Mehta & Sons Ltd. whereas the other two members held that no profit accrued to the assessee on the transfer to his stock-in-trade to Homi Mehta & Sons Ltd. A copy of the Tribunal order giving the reason for the view taken by each of the members is annexure 'B' and forms part of the case.
8. The question of law that, therefore, arises out of the facts stated above is :-
'Whether any income liable to tax accrued to the assessee on the transfer of the shares of the remaining 20 joint stock companies to Homi Mehta & Sons Ltd'.
The Advocate-General with G. N. Joshi, for the Commissioner.
R.J. Kolah with Sir Jamshdji B. Kanga and Dwarkadas, for the assessee.