1. These two cases have been stated under s. 66(1) of the Indian I.T. Act, 1922, by the Income-tax Appellate Tribunal at the instance of the assessees, Evans Fraser and Co. Ltd. (in liquidation), at different stages of the proceedings relating to the assessment of the assessees' income for the assessment year 1948-49 in respect of the accounting period June 1, 1946, to May 31, 1947. We have heard both these references together and have thought it convenient to dispose of them by a common judgment. In Income-tax Reference No. 146 of 1970 only one question has referred to this court of his determination, while in Income-tax Reference No. 66 of 1979 two questions have been so referred. The question referred to this court in Income-tax Reference No. 146 of 1970 is :
'Whether, on the facts and in the circumstances of the case, the transfer of the business along with it assets and liabilities by the assessee company to Evans Fraser and Company (India) Ltd. had resulted in any capital gain liable to tax under section 12B of the Indian Income-tax Act, 1922 ?'
2. The two questions referred to this court in Income-tax Reference No. 66 of 1979 are as follows :
'(1) Whether, on the facts and in the circumstances of the case, the sale and transfer of the goodwill of the assessee-company can in law be said to have taken place on April 23, 1947, and thus assessable to capital gains under section 12B of the Indian Income-tax Act, 1922 ?
(2) Whether the Tribunal was justified in not allowing the assessee to raise the question as to whether goodwill was property assessable to capital gains under section 12B of the Indian Income-tax Act, 1922 ?'
3. The assessees owned a departmental store situate at Fort House, Hornby Road (now Dr. Dadabhai Nowroji Road), Fort, Bombay. This departmental store had been opened in the last decade of the previous century. In, 1942, the owners of the said departmental store were a partnership firm consisting of certain Englishment. In 1942, the said partnership converted itself into a private limited company. This private limited company, which is now in liquidation, is the applicant before us. The assessee-company was formed for the purpose of acquiring the business of the said partnership, and accordingly an agreement was entered into between the said partners and the assessee-company on September 12, 1942, under which the vendors were to sell and the assessee-company was to purchase from the date of its incorporation the goodwill of the said business of M/s. Evans Fraser with the exclusive right in India to use the name, Evans Fraser and Company Ltd., as the name of the company and to represent the company as carrying on the said business in continuation and in succession thereto and the right in India to use the words indicating that the business was being carried on in continuation of or in succession to the said business. The total consideration paid by the assessee-company to the said partnership firm was a sum of Rs. 3,89,277-15-2. In the first balance-sheet of the assessee-company as on May 31, 1943, a sum of Rs. 47,781-2-0 was shown as being for goodwill. The said sum of Rs. 47,781-2-0 had been arrived at by taking over the liabilities of the said firm in the sum of Rs. 11,469 and the estimated tax liability agreed to be paid by the assessee-company, namely, Rs. 55,505, these two items aggregating to Rs 66,974, and deducting therefrom the debts which had already been collected, namely, Rs. 19,193. By May 31, 1946, the entire sum of Rs. 47,781 was wiped out by being transferred to the reserve fund. The issued capital of the assessee-company consisted of 1,800 5 per cent. Preference shares of the face value of Rs. 100 each and 652 ordinary shares of the face value of Rs. 100 each.
4. By an agreement dated August 19, 1946, all the shares of the assessee-company were purchased by one Dhirajlal N. Shroff and some other persons for a total sum of Rs. 12,40,804, the said preference share being purchased at the rate of Rs. 100 per share while the said ordinary shares being purchased at the rate of Rs. 1,627 per share. The said price of Rs. 12,40,804 was fixed on the basis of a report made by a firm of chartered accountants, M/s. A. F. Ferguson and Company, who had estimated Rs. 7,41,827 as the value of their net stock-in-trade and other assets of the assessee-company as representing the balance of assets over liabilities on the basis of the assessees' accounts as on May 31, 1946, and Rs. 4,98,987 as the value of the name and goodwill of the assessee-company. The said share had been purchased by the said Shroff and other with the intention and for the purpose of transferring all the assets and business of the assessee-company at cost to a public limited company to be promoted by them in the name and style of Evans Fraser and Company (India) Ltd. After the aforesaid purchase of the Shares by them the said Shroff and other made an application dated December 13, 1946, to the Examiner of Capital Issues, Finance Department, New Delhi, for permission to issue capital of Rs. 25,00,000 under rule 94(a) of the Defence of India Rules, 1939, which permission was granted to them.
5. On April 19, 1947, a meeting of the board of directors of the assessee-company was held and the said meeting resolved that a majority of the directors of the assessee-company should make the necessary declaration of solvency as required by s. 207 of the Indian Companies Act, 1913, and that the duly verified declaration together with the report of the auditors be filed with the Registrar of Companies immediately. It was further resolved to convene an extraordinary general meeting of the assessee-company on April 23, 1947, for the purpose of passing special resolution for winding up the assessee-company, for appointment of a liquidate for the sale of the assessees' business to a public company to be registered in the name of Evans Fraser and Company (India) Ltd. and for authorising the liquidator of the assessee-company to give consent on behalf of the assessee-company to the formation and registration of the new company with the said name. On April 23, 1947, the said extraordinary general meeting of the assessee-company was held at 10.30 a.m. a its registered office at Fort House. At the said meeting resolutions were passed to sell and transfer to the new public limited company, to be formed and registered in the name of Evans Fraser and Company (India) Ltd., the business of the assessee-company together with its goodwill and its properties, assets and liabilities in terms of the draft agreement which was submitted to the said meeting. It was further resolved that the assessee-company be wound up voluntarily and the said Shroff, who was also a director of the said company, be appointed liquidator without remuneration for the purpose of such winding-up. The said Shroff was given by another resolution all the powers and authorities conferred upon the liquidator by the said Indian Companies Act, and he was further authorized to consent to the registration of a new public limited company to be named Evans Fraser and Company (India) Ltd., the memorandum and articles of association of which had already been prepared with the privity and approval of the director of the assessee-company. The fifth and the last resolution passed at the said meeting was in the following terms :
'5. That the draft agreement referred to above and submitted to this meeting expressed to be made between this company (that is, Evans Fraser and Company Ltd.) of the 1st part, Dhirajlal N. Shroff and others of the 2nd part and the said Evans Fraser & Co. (India) Ltd. of the 3rd part be and the same is hereby approved and that the said liquidator be and he is hereby authorised to enter into an agreement with such new company when incorporated in terms of the said draft and carry the same into effect with such modification, if any, as he may think expedient.'
6. Thereafter on the same day the proposed new public limited company, namely, Evans Fraser and Company (India) Ltd., was incorporated, and thereafter held a meeting of its board of directors at 3 p.m. at its registered office which was also at the said Fort House. At the said meeting the said Shroff who had been appointed chairman of the board of directors at this meeting informed the board that the company had been registered on that day. Amongst other work that was done at the said board meeting was to approve the draft agreement made between the assessee-company of the first part, the said Shroff others of the other part and the proposed new company of the third part for the acquisition and purchase by the said company of the business, property and assessee company as a going concern, and it was resolved that the said draft agreement be approved and adopted and that the same be executed and the common seal of the company be affixed thereto in the presence of the said Shroff land another director of the company. At the said meeting a draft agreement appointing D. N. Shroff and Company Ltd., as the managing agents of the said public company, was considered and adopted. It was also resolved at the said meeting of the board that a draft statement in lieu of a prospectus which was submitted to the meeting be approved and that it should be signed by all the directors of the public company and be filed with the Registrars of Companies at an early date. By the said resolution the managing agents were requested to obtain the certificate of commencement of business immediately.
7. On the next day, namely, April 24, 1947, a circular resolution was passed by the board of directors to the effect that a sum of Rs. 1,50,000 be paid to the vendors, that is, the assessee-company, towards the purchase price of its business together with its goodwill, assets, liabilities and other properties. On April 5, 1948, an agreement was executed between the assessee-company of the first part, the said Shroff and five others who constituted all the then members of the assessee-company of the second part and the said public company of the third part. This agreement was in consonance with the said draft agreement which had been approved on April 23, 1947, by the assessee-company as also later in the day by the board of directors of the said public company after that company had been incorporated. We will have occasion to refer to the terms of the said agreement later while dealing with question No. 1 referred to us in Income-tax Reference No. 66 of 1979.
8. Before proceeding further with the narrative it will be convenient to refer to the relevant statutory provisions. Capital gains tax, that is, a tax on any profits or gains arising from the sale, exchange, relinquishment or transfer of a capital asset, was for the first time introduced in the fiscal legislation of India by the Income-tax and Excess Profits Tax (Amendment) Act, 1947. This was done by inserting a new clause defining 'capital asset', namely, cl. (4A), in s. 2 of the Indian I.T. Act, 1922, by amending cls. (6A) and 15 in s. 2, sub-s (3) of s. 3 and cl. (c) of s. 4A; and making other consequential amendments in the said Act. Under these amendments capital gains arising after March 31, 1946, were liable to tax. For the assessment year 1947-48, cl. (4A) of the said s. 2 was amended by Act 44 of 1947. We are not concerned with this amendment. Section 12B was amended by the Indian Finance Act, 1949, so as to confine its operation to capital gains arising before April 1, 1948. This levy was again reimposed by the Finance Act, 1956, and when the Indian I.T. Act, 1922, came to be repealed and replace by the I.T. Act, 1961, the levy was continued. So far as the present references are concerned, capital gains tax would be leviable only if the sale of the business undertaking of the assessee-company had taken place after March 31, 1946, and before April 1, 1948. Any capital gains on this transaction made on or after April 1, 1948, would not be chargeable to tax under this head. It will also convenient now to set out such of the provisions of the above amendments as are relevant for our purpose. The relevant part of the said cl. (4A) of s. 2 provided as follows :
'(4A) 'Capital asset' means property of any kind (other than agricultural land) held by an assessee, whether or not connected with his business, profession or vocation, but does not include -
(1) any stock-in-trade, consumable stores or raw materials held for the purposes of his business, profession or vocation; ......'
9. The amendments made in s. 6 of the said Act by insertion of cl. (vi) introduced a new head of income chargeable to income-tax, namely, 'Capital gains'. The only provisions of s. 12B which require to be reproduced are sub-ss. (1) and (2), both without the provisos thereto. These sub-sections provide as follows :
'12B. Capitals gains. - (1) The tax shall be payable by an assessee 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 the 31st day of March, 1946; and such profits and gains shall be deemed to be income of the previous year in which the sale, exchange or transfer took place : ...
(2) The amount of a capital gain shall be computed after making the following deductions from the full value of the consideration for which the sale, exchange or transfer of the capital asset is made, namely :-
(i) expenditure incurred solely in connection with such sale, exchange or transfer;
(ii) the actual cost to the assessee of the capital asset, including any expenditure of a capital incurred and borne by him in making any additions or alternations thereto, but excluding any expenditure in respect of which any allowance is admissible under any provision of section 8, 9, 10 and 12. .....'
10. It will also be convenient at this stage to refer to the corresponding provisions of the 1961 Act. In the I.T. Act, 1961, cl. (14) of s. 2, so far as the provision material for our purpose is concerned, is in identical terms. Section 45 of the 1961 Act is as follows :
'45. Capital gains. - Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53, 54, 54B, 54D and 54E, be chargeable to income-tax under the head 'Capital gains', and shall be deemed to be the income of the previous year in which the transfer took place.'
11. As s. 45 uses only the word 'transfer' instead of the words 'sale, exchange or transfer', clause (47) of s. 2 of the 1961 Act, defines the word 'transfer' as follows :
''Transfer', in relation to a capital asset, includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law.'
12. Section 45 read with the said cl. (47) of the new Act thus corresponds to sub-s. (1) of s. 12B of the old Act. The statutory provision in the new Act which corresponds to sub-s. (2) of s. 12B of the old Act is s. 48 which runs as follows :
'48. Mode of computation and deductions. - The income chargeable under the head 'Capital gains' shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :-
(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the capital asset and the cost of any improvement thereto.'
13. The expression 'cost of any improvement' occurring in cl. (ii) of the said s. 48 is defined in s. 55(1)(b) and is as follows :
'(ii) In any other case, means all expenditure of a capital nature incurred in making any addition or alternations to the capital asset by the assessee after it became his property, and, where the capital asset became the property of the assessee by any of the modes specified in sub-section (1) of section 49, by the previous owner........'
14. To proceed with the narrative, in its assessment proceedings for the assessment year 1948-49, the assessee-company contended that it was not liable to pay any capital gains tax. It was also contended by the assessee-company that there was no sale by the assessee-company to the said public because the members of both the companies were one and the same and that this was not a transaction effected for making any profit but was for reconstituting the assessee-company as a public limited company. This contention of the assessee-company was based upon a decision of the Bombay High Court in CIT v. Sir Homi Mehta's Executors : 28ITR928(Bom) . In the alternative it was also contended by the assessee-company that the sale had taken place in the course of liquidation proceedings and had not taken place during the relevant year. The ITO, by his assessment order, held that the sale of the business undertaking of the assessee-company to the said public company had taken place on April 1, 1947, and had not taken place in the course of liquidation proceedings. He further held that the identity of the vendors and the purchasers was not the same because the original members of the assessee-company had sold their shares to the said Shroff and others who were individuals and that the said Shroff and others had thereafter dissolved the assessee-company and formed the said public company for the purpose of taking over the business undertaking of the assessee-company. He computed the total capital gains made on the transaction at Rs. 3,26,159 after allowing certain deductions. From Rs. 4,98,987, which he took as being the value of goodwill based upon the aforementioned report of the said M/s. A. F. Ferguson and company. It may be mentioned that the abovementioned decision of the Bombay High Court has been overruled by the Supreme Court in CIT v. B. M. Kharwar : 72ITR603(SC) .
15. The assessee-company went in appeal against the said assessment order, the appeal filed by the assessee-company being Appeal No. DAP/57/53-54. By his appellate order passed on October 29, 1958, the AAC held that the sale was concluded on April 23, 1947, and only the execution of the agreement was postponed and had taken place on April 5, 1948. He further held that what had happened was a continuous transaction for the purpose of winding-up and reconstitution of the assessee-company and, therefore, no question of capital gains arose. The Revenue went in appeal to the Income-tax Appellate Tribunal against the said appellate order, being I.T.A. No. 9809 of 1958-59. This appeal was heard by a Bench of two Members of the Tribunal, one of them being an Accountant Member and the other a Judicial Member. The Accountant Member held that the shareholders of the assessee-company received nothing as also lost nothing by reason of the said sale but continued to remain the owners of the business and there was, therefore, no capital gain. He, however, did not accept the assessees' contention that the sale had taken place in the course of liquidation, and held that the sale had taken place in April, 1947. The Judicial Member differed from the Accountant Member. He held that the transaction between the original shareholders and the said Shroff and others was distinct and separate from the transaction between the assessee-company and the said public company and there was, therefore, a transfer of the business of the assessee-company together with its assets, liabilities and goodwill by the assessee-company to the said public company which had resulted in a capital gain and such capital gain was therefore, liable to tax. With respect to the assessees' contention that the transfer, if any, had not taken place during the assessment year, he observed that the finding of the AAC that the sale took place on April 23, 1947, was no longer in dispute when the matter was argued before the Tribunal, but that if necessary and for clarity's sake he recorded his finding that the sale had taken place on April 23, 1947, when the two resolutions mentioned above were passed. We find it difficult to understand the observation of the Judicial Member to the effect that the finding of the AAC with the respect to the date of transfer was not in dispute when the matter was argued before the Tribunal. We are unable to understand why, if the matter was not in dispute, the Accountant Member should have considered in detail and should have given his now finding on rival submissions that the sale had not taken place on April 5, 1948. As the two Members differed, the question whether the transfer of the said business together with its assets and liabilities had resulted in any capital gain liable to tax under the said s. 12B was referred to and heard by the president of the Tribunal as a third Member. The president agreed with the view taken by the Judicial Member, and directed the case to go back to the Bench which had heard it for fixing the quantum of capital gains. On September 3, 1964, the assessee-company made an application to the Tribunal for a rectification of the said order of the President so as to incorporate in it the contention of the assessee-company that the transfer of the goodwill to the said public company could not take place in April, 1947, inasmuch as goodwill could not be transferred except by means of a written document and that since the only writing was the said agreement of sale dated April 5, 1948, capital gains, if any, on the transfer of goodwill arose during the period when the said s. 12B was not in operation. By his order dated June, 25, 1965, the President of the Tribunal dismissed the said application holding that the arguments sought to be incorporated related to the question of quantum of capital gains with which he had not been concerned while deciding the point of difference which had arisen between the Accountant Member and the Judicial Member. Thereafter, on the application of the assessee-company, Income-tax Reference No. 146 of 1970 came to be made. The Bench, which had heard the department's said appeal, remanded the matter to the AAC to determine the quantum of goodwill. On remand, the AAC held that as the business was transferred on April 1, 1947, goodwill was transferred along with it. He took the cost of acquisition of goodwill at Rs. 47,781, being the amount shown in the first balance-sheet of the assessee-company. He computed the capital gains as being Rs. 3,64,414 less the said sum of Rs. 47,781, namely, at Rs. 3,16,633. Against this order the assessee-company went in appeal to the Tribunal, this appeal being numbered as I.T.A. No. 64 (Bom) of 1968-69. Meanwhile, the Madras Hig Court had given a judgment reported as CIT v. K. Rathnam Nadar : 71ITR433(Mad) , in which it held that from the nature of goodwill and the manner in which it is treated, goodwill did not fall within the scope of s. 12B because there could be no cost of acquisition of goodwill in terms of money. At the hearing of its appeal, before the Tribunal, the assessee-company wanted to raise a contention based upon this judgment. The assessee-company was not allowed to do so by the Tribunal. The Tribunal then held that the goodwill of the said business of the assessee-company was transferred along with its business. According to the Tribunal, the business of the assessee-company was in general merchandise and as the stock owned by the assessee-company was transferred on April 23, 1947, the entire business including the goodwill of its business was transferred along with the stock on the same day and the agreement dated April 5, 1948, merely ratified what had already taken place. Out of this order of the Tribunal the two questions which form the subject-matter of Income-tax Reference No. 66 of 1979, and which have been reproduced above have been submitted to this court for its determination.
16. So far as Income-tax Reference No. 146 of 1970 is concerned, Mr. Dastur, learned counsel for the applicants has contended that there could be no question of any capital gain in respect of goodwill where a business along with goodwill is sold, because the charging section, namely, s. 12B, and the computation provisions contained therein are but one integral whole and that unless and until it is possible to determine in terms of money the cost of acquisition of goodwill as also the cost of additions or alternations thereto, the charging section is not attracted. In support of this submission Mr. Dastur relied upon a decision of the Supreme Court in CIT v. B. C. Srinivasa Setty : 128ITR294(SC) and certain other decisions of different High Courts. Mr Dastur submitted that in the present case there was neither any cost of acquisition of goodwill of the assessee-company nor could there be any cost of any addition or alteration thereto. His further submission was that the said sum of Rs. 47,781, which had been taken as the cost of acquisition of goodwill by reason of this figure being shown in the first balance-sheet of the assessee-company, was merely a book entry made, and did not really represent any cost for acquiring the goodwill of the said firm of Evans Fraser and Company. Mr. Joshi, learned counsel for the department, raised a preliminary objection to the assessee-company's counsel being allowed to urge this point. In Mr. Joshi's submission, this point had not been taken any stage of the proceedings and when the assessee-company wanted to raise this contention at the hearing of its appeal before the Tribunal, namely, I.T.A. No. 64 (Bom) of 1968-69, the Tribunal had not allowed this point to be canvassed or not formed the subject-matter of question No. 2 in Income-tax Reference N0. 66 of 1979. Mr. Joshi further submitted that if this court answered the said question in favour of the assessee-company, it would then be open to the Tribunal to hear arguments thereon and decide the point. On the merits Mr. Joshi submitted that the decision of the Supreme Court in CIT v. B. C. Srinivasa Setty : 128ITR294(SC) had no application to the present case because here there was actually a cost of acquisition and that the ratio of the decision of the Supreme Court applied only where there was no cost of acquisition of goodwill, that is is to say, when a business which had a goodwill, sold it thereafter in his own turn.
17. Dealing first with the preliminary objection taken by Mr. Joshi, in our opinion, it is not sustainable either on authority or on principle. All throughout the contention of the assessee-company was that they were not liable to pay any capital gains tax on the sale or transfer of goodwill. The assessees had raised various contentions with respect thereto, and what they are seeking to do now is merely to rely upon an additional argument in support of their main substantial contention that goodwill is not liable to capital gains tax under the said s. 12B. It is not as if the assessee-company had sought before the Tribunal, at the time when its appeal was being argued, to claim a deduction or an exemption which it had not till then done. All that the assessees were doing was merely to support a claim which they had made right from the beginning, with the start of the assessment proceedings. It is undoubtedly true that the question whether it was open to the assessee-company to raise this contention before the Tribunal at the time of the hearing of its appeal is before us in Income-tax Reference No. 66 of 1979. From this, however, it does not follow that if it is open to Mr. Dastur to argue this point before us in Income-tax Reference No. 146 of 1970, he should not be allowed to do so. The course suggested by Mr. Joshi is one calculated merely to lead to multiplicity of proceedings, because it is obvious, or should be to any one, that were we to answer the said question in Income-tax Reference No. 66 of 1979 in favour of the assessee-company and the matter were left to the Tribunal to decide, there would in either event be a third reference to the High Court arising out of the order of the Tribunal. Today when dockets of all courts are choked with pending cases and when there are nearly four thousand tax references awaiting decision by this High Court, a fact which at least the department ought to be aware of, to follow this course would be to make a fetish of purposely technicality. It should also be borne in mind that the question which has been referred to us by the Tribunal is in very wide terms, namely, 'whether, on the facts and in the circumstances of the case, the transfer of the business along with the assets and liabilities by the assessee-company to Evans Fraser and Company (India) Ltd., has resulted in any capital gains liable to tax under s. 12B of the Indian I.T. Act, 1922 ?'. The question whether the transfer of the business together with it assets and liabilities by the assessee-company to the said public company has resulted in any capital gain liable to tax under the said s. 12B would embrace within its scope the question whether any transfer had taken place in law as also the question whether the transfer took place during the assessment year in which the said s. 12B operated as also the question whether some assets which were transferred were such as could be the subject-matter of the charge under the said s. 12B. Objections identical with the one raised before us or very similar thereto have time and again been taken on behalf of the department before various High Courts and have all met with the same fate. Before the Karnataka High Court in CIT v. Sujirkar's Tile Works P. Ltd. : 99ITR482(KAR) , both before the ITO and the AAC, the assessee's contention was that the amount in question was not taxable as capital gains as there was complete identity between the sellers and the purchasers. Before the Tribunal the assessee sought to raise an additional plea that the said amount representative consideration for goodwill. The plea was accepted by the the Tribunal. The High Court held that the Tribunal had acted within its jurisdiction in allowing the assessee to raise this additional plea. In CIT v. Home Industries and Co. : 107ITR609(Bom) , an identical contention based on the case of Sir Homi Mehta's Executors : 28ITR928(Bom) , referred to earlier, was taken before the taxing authorities and was negatived, but found favour with the Tribunal. A case was stated to this High Court at the instance of the department. The question referred to the High Court was 'whether, on the facts and in the circumstances of the case, there is any transfer or sale of goodwill to the private limited company so as to attract s. 12B(1) of the Indian I.T. Act, 1922 ?'. At the hearing of the reference, counsel for the assessee, who by a strange coincidence was also Mr. Dastur, who has appeared for the assessee-company before us, conceded that in view of the decision of the Supreme Court in B. M. Kharawar's case : 72ITR603(SC) , the Tribunal's view that there was no transfer could not be supported. He, however, sought to raise the point that there could be no capital gains within the meaning of s. 12B in the case of goodwill. Mr Joshi, who had also appeared in that case on behalf of the department, raised the same preliminary objection to the assessees' counsel being permitted to argue this point. That objection met with the same fate as met before us. The court held that the question framed, which, it will be noticed, is in almost the same terms as the question before us in Income-tax Reference No. 146 of 1970, not merely touched the aspect as to whether there was any 'transfer or sale' of the goodwill to the company, but it also embraced the aspect as to whether there was capital gains tax liability at all, and this was implicit in the words 'so as to attract section 12B(1) of the Indian Income-tax Act, 1922' occurring in that question. Though the question before us does not in express terms speak of the transfer of the goodwill of the assessee-company, it speaks of the transfer of the business along with its assets and liabilities by the assessee-company. Goodwill being an asset of a business, the question whether goodwill can be subjected to any charge under s. 12B would be implicit in the question. In the case of Home Industries and Co. : 107ITR609(Bom) , the court further held that, the contention was a purely legal contention capable of being disposed of on a consideration of the legal position contained in s. 12B and on the facts on record. The court observed (pp. 616-7) :
'It is well-settled position that when the main question is under issue before the Tribunal there is no further limitation imposed by section 66(1) of the Act (that is, the Indian Income-tax Act, 1922), that the reference should be limited to those aspects of the question which had been argued before the Tribunal and if a different aspect of the same question is sought to be raised for the first time before the High Court, it would be permissible to High Court to allow such aspect being argued before it even if that aspect has not been argued before the Tribunal. If necessary, a reference may be made to two decisions of the Supreme Court, one in Ogale Glass Works Ltd.'s case : 25ITR529(SC) and the other in Scindia Steam Navigation Co. Ltd.'s case : 42ITR589(SC) and in particular the following observations of the Supreme Court in the latter case appearing at page 612 are apposite :
'Now a question of law might be a simple one, having its impact atone point, or it may be a complex one, trenching over an area with approaches leading to different points therein. Such a question might involve more than one aspect, requiring to be tackled from different standpoints. All that section 66(1) requires is that the question of law which is referred to the court for decision and which the court is to decide must be the question which was in issue before the Tribunal. Where the question itself was under issue, there is no further limitation imposed by the section that the reference should be limited to those aspects of the question which had been argued before the Tribunal. It will be an over-refinement of the position to hold that each aspect of a question is itself a distinct question for the purpose of section 66(1) of the Act. That was the view taken by this court in Commissioner of Income-tax v. Ogale Glass works Ltd. : 25ITR529(SC) and in Zoraster & Co. v. Commissioner of Income-tax : 40ITR552(SC) , and we agree with it. As the question on which the parties were at issue, which was referred to the court under section 66(1) and decided by it under section 66(5), is whether the sum of Rs. 9,26,532 is liable to be included in the taxable income of the respondents, the ground on which the respondents contested their liability before the High Court was one which was within the scope of the question, and the High Court rightly entertained it'.'
18. Other decisions where the same or similar objections have met with the same fate are Beharilal Ramcharan Cotton Mills Ltd. v. CIT : 62ITR212(Bom) , CIT v. K. Rathnam Nadar : 71ITR433(Mad) and CED v. John Gregory Apsar : 119ITR192(Cal) .
19. In support of his preliminary objection, Mr. Joshi relied upon two decisions of the Supreme Court, namely, CIT v. Indian Molasses Co. P. Ltd. : 78ITR474(SC) and Addl. CIT v. Gurjargravures P. Ltd. : 111ITR1(SC) . In our opinion, neither of these two decisions have any applicability to the facts of the present case. On the contrary, if they are read carefully, instead of supporting the said preliminary objection they would support the arguments of Mr. Dastur. In the case of Indian Molasses Co. P. Ltd. the question referred was whether certain expenditure had been laid out or expended during the relevant accounting year within the meaning of s. 10(2)(xv) of the Indian I.T. Act, 1922, and if the answer to such question was in the affirmative, then whether the said expenditure represented a revenue expenditure. The High Court had found that it was not an expenditure of the nature of capital expenditure or personal expenditure of the assessees. So far as the second question was concerned, the High Court did not allow the Commissioner to take the point that the requirements of s. 10(2)(xv) were not satisfied. The Supreme Court held that the said question did not exclude an inquiry whether the expenditure was wholly and exclusively laid out for the purpose of the business of the assessees and because before the Tribunal Stress was not pointedly laid upon the ingredients which enable an expenditure to be claimed and allowed, it could not be said that the question did not arise out of the order of the Tribunal. The Supreme Court further held that the matter in dispute before the Tribunal was whether the company was entitled to the allowance under s. 10(2)(xv) of the Indian I.T. Act, 1922, and the High Court was, therefore, in error in refusing to allow an argument to be raised by the Commissioner that the requirements of s. 10(2)(xv) were not satisfied. As, however, the determination of this question involved certain facts to be before it, the Supreme Court was not able to decide that question on the record as it stood. In this context the Supreme Court said that there were two courses open to it, namely, either to call for a supplementary statement of the case from the Tribunal or to decline to answer the question raised by the Tribunal and to leave the Tribunal to adjust its decision under s. 66(5) in the light of the answer given by the supreme Court. The Supreme Court further observed, that to ask for a supplementary of the case would restrict the Tribunal to the evidence on the record which might result in injustice and, therefore, it would be appropriate instead of asking for a supplementary statement to decline to answer the question so that the Tribunal while finally disposing of the appeal under s. 66(5) would do so in the light of the observations made by the Supreme Court on this aspect of the case. Before us the argument sought to be advanced is a purely legal contention capable of being disposed of on a consideration of the provisions of s. 12B and on the facts which are already on the record. In the case of Gurjargravures P. Ltd. : 111ITR1(SC) , a claim for relief under s. 84 of the I.T. Act, 1961, was sought to be raised before the AAC. That appeal was dismissed on the ground that such a claim had not been made before the ITO. On a further appeal, the Tribunal held that since the entire assessment was open before the AAC, there was no reason for his not entertaining the claim, and directed the ITO to allow the appropriate relief. On a reference the High Court held that it was competent for the Tribunal to give such a direction. The Supreme Court reversed the Gujarat High Court's decision, holding that there was neither any claim made before the ITO with respect to the relief under s. 84 nor was there any material on the record in support thereof. The claim that no tax under s. 12B was attracted had been made by the assessee-company right from the very start of the assessment proceedings, and all that has happened is that contention is sought to be supported by the additional arguments.
20. Turning now to the merits of this contention raised by Mr. Dastur, in order to test its validity it is necessary to determine fist what goodwill is and the nature of goodwill. It is not disputed that goodwill is a property or asset of the business. It is equally not disputed that goodwill is a capital asset. In Devida Vithaldas & Co. v. CIT : 84ITR277(SC) , the Supreme Court has observed : 'Acquisition of the goodwill of the business is, without doubt, acquisition of a capital asset.' But merely because it is a capital asset, it does not mean that it becomes automatically subject to the charge of capital gains tax. In CIT v. B. C. Srinivasa Setty : 128ITR294(SC) , referred to earlier, the Supreme Court has held that the charging section and the computation provisions together constitute an integrated code and that when there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. The case before the Supreme Court was one where a new partnership took over all the assets including the goodwill and liabilities of a dissolved firm which had carried on the business of manufacture and sale of agarbattis, and the question was whether any capital gains could arise under s. 45 of the I.T. Act, 1961, on the transfer by the assessee-firm of its goodwill to the newly constituted firm. With reference to the corresponding sections of the 1961 Act, which we have reproduced above for facility of comparison with the section of the 1922 Act, with which we are concerned, the Supreme Court held, that all transactions encompassed by s. 45 of the 1961 Act, must fall under the governance of its computation provisions and a transaction to which those provisions cannot be applied must be regarded as never intended by s. 45 to be the subject of the charge, for, what is contemplated by cl. (ii) of s. 48 is an asset in the acquisition of which it is possible to envisage a cost, that is to say, it must be an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. The Supreme Court further held that none of the provisions pertaining to the head 'Capital gains' suggest that they include an asset in the acquisition of which no cost at all can be conceived and that when goodwill generated in a new business was sold and the consideration brought to tax, what was charged was the capital value of the asset and not any profit or gain. The supreme Court also held that the date of acquisition of the asset was a material factor in applying the computation provisions pertaining to capital gain, but in the case of goodwill generated in a new business it was not possible to determine the date when it came into existence.
21. The Supreme Court based its decision upon the nature of goodwill. Many definitions have been attempted for goodwill, but most of them have succeeded in being not definitions but descriptions. In Cruttwell v. Lye  17 Ves. 335 , Lord Eldon defined 'goodwill' as being 'nothing more than the probability that the old customers will resort to the old place'. This definition is obviously too narrow and has been criticized as being so by Lords Herschell, Macnaghten and Davey in Trego v. Hunt  AC 7 . In IRC v. Muller & Co.'s Margarine Ltd.  AC 217 , Lord Macnaghten said :
'What is goodwill It is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old established business from a new business at its first start.'
22. In the same case Lord Lindley said (p. 235) :
'I understand the word (that is, 'goodwill') to include whatever adds value to a business by reason of situation, name and reputation, connection, introduction to old customers, and agreed absence from competition, or any of these things.'
23. The various descriptions which different judges have given of 'goodwill' have been picturesquely catalogued by P. B. Mukharji J., who spoke for the court in CIT v. Chunilal Prabhudas & Co. : 76ITR566(Cal) as follows :
'Goodwill has been variously described. It has been horticultural and botanically viewed as 'a seed sprouting' or an 'acora growing into the mighty oak of goodwill'. It has been geographically described by locality. It has been historically explained as growing andcrystallising traditions in the business. It has been described in terms of a magnet as the 'attracting force'. In terms of comparative dynamics, goodwill has been described as the 'differential return of profit'. Philosophically it has been held to be intangible. Though immaterial, it is materially valued. Physically and psychologically, it is a 'habit' and sociologically it is a 'custom'. Biologically, it has been described by Lord Macnaghten in Trego v. Hunt  AC 7, as the 'sap and life' of the business. Architecturally, it has been described as the 'cement' binding together the business and its assets as a whole and a going and developing concern. It has been zoologically explained by Rich J. in Federal Commissioner of Taxation v. Williamson  7 ATD 272, quoted at pages 39-40 of the 4th Edn. of The Valuation of Company Shares and Business by Adamson and Coorey in these terms :
'In Whiteman Smith Motor Company v. Chaplin  2 KB 35, the types were zoologically classified into cats, dogs, rats and rabbits. The cat prefers the old home to the person who keeps it, and stays in the old home although the person who has kept the home leaves, and so it represents the customer who goes to the old shop whoever keeps it, and provides the local goodwill. The faithful dog is attached to the person rather than the place, he will follow the outgoing owner if he does not go too far. The rat has not attachments, and is purely casual. The rabbit is attracted by mere propinquity. He comes because he happens to live close by and it would be more trouble to go elsewhere. These categories serve as a reminder that the goodwill of a business is a composite thing referable in part to its locality, in part to the way in which it is conducted, and the personality of those who conduct it and in part to the likelihood of competition, many customers being no doubt actuated by mixed motives in conferring their custom'.'
24. The above passage, omitting the reference to the zoological explanation by Rich J., has been cited with approval by the Supreme Court in the case of B. C. Srinivasa Setty : 128ITR294(SC) . After citing the said passage the Supreme Court proceeded to observe as follows (pp. 298-9) :
'A variety of elements goes into its making, and its composition varies in different trades and in different business in the same trade, and while one element may preponderate in one business, another may dominate in another business. And yet, because of its intangible nature, it remains insubstantial in form and nebulous in character. Those features prompted Lord Macnaghten to remark in IRC v. Muller & Co.'s Margarine Ltd.  AC 217, that although goodwill was easy to describe, it was none the less difficult to define. In a progressing business goodwill tends to show progressive increase. And in a failing business it may begin to wane. Its value may fluctuate from one moment to another depending on changes in the reputation of the business. It is affected by everything relating to the business, the personality and business rectitude of the owners, the nature and character of the business, its name and reputation, its location, its impact on the contemporary market, the prevailing socioeconomic ecology, introduction to old customers and agreed absence of competition. There can be no account in value of the factors producing it. It is also impossible to predicate the moment of its birth. It comes silently into the world, unheralded and unpro claimed and its impact may not be visibly felt for an undefined period. Imperceptible at birth it exists enwrapped in a concept, growing or fluctuating with the numerous imponderables pouring into, and affecting the business. Undoubtedly, it is an asset of the business, but is it an asset contemplated by s. 45 ?'
25. To the question posed in the last sentence of the passage extracted above the answer which the Supreme Court gave was in the negative, for the reasons set out earlier, that it is not possible in the case of goodwill to determine either the date when it came into existence or the cost of acquisition.
26. Mr. Joshi, learned counsel for the department, however, submitted that the ratio of this decision applied only to the case of a new business and that it cannot apply, where the purchaser of a business has paid for the acquisition of the goodwill of that business and after some time sells that business along with its goodwill to another. In Mr. Joshi's submission the assessee-company had paid a sum of Rs. 47,781 for acquiring the goodwill of the firm of Evans Fraser and Company. This was sought to be countered by Mr. Dastur, learned counsel for the applicants, on the ground that this sum was not really paid for goodwill but was an entry made in order to balance the books as the double-entry system was used in keeping the books of the assessee-company. In support of his submission Mr. Dastur relied upon a statement in M. C. Shukla and T. C. Grewal's Advance Accounts, seventh revised and enlarged edition, Vol. II, p. 299, where, setting out the entries in the books of a purchasing company, it is stated under item 2 as follows :
'2. Debit the various assets (excluding goodlwill) taken over at the values put on them by the purchasing company.
Credit the various liabilities taken over by the purchasing company at the amounts agreed upon between the company and the creditors.
Credit the Business purchase Account with the purchaser consideration. If the debits exceed the credits, a profit has been made and should be credited to Capital Revenue Account.
If the credits exceed the debits, the difference should be debited to Goodwill Account. (In business purchases, goodwill or capital reserve is always ascertained in this manner for accounting purposes).'
27. We fail to see how this passage in any way helps Mr. Dastur's case. As expressly stated, the ascertainment of goodwill or capital reserve in business purchases is ascertained in the manner set out in the passage extracted above for accounting purposes. Apart from that, there is no material before us for us to say that is what was done in the books of account of the assessee-company. Assuming that the assessee-company paid more for the tangible assets, which it took over, than the market value of such assets, the additional payment could be only for the purchase of an intangible asset, namely, goodwill. Transactions such as sale or business or undertakings take place between businessmen, and a businessman does not pay more than the market value for what he purchases,and if he has paid more than the value of tangible assets, it could be only for the purchase of something other than tangible assets, it could be only for the purchase of something other than tangible assets which in such circumstances can be nothing else than goodwill. Mr. Joshi is, therefore, right when he has submitted that in the present case both the moment of acquisition of goodwill as also the cost of acquisition of goodwill have been pinpointed.
28. Does this, however, make any difference As we have seen earlier, goodwill is a fluctuating thing. It increases and it decreases, but such increase or decrease is not like the periodic waxing and waning of the moon nor is it like the tide which regularly ebbs and flows twice in twenty-four hours. Goodwill built up over the years can be destroyed in a matter of days, if not much less. Goodwill is never constant. Proteus-like it changes contantly, and as goodwill changes from time to time so does its value. It is possible to ascertain the value of goodwill at a particular point of time, and the modes of calculating such value can easily be found in any standard book on accountancy. Our attention has been drawn to several of them. It is, however, needless t burden the judgment with reference to any one of them. That, however, is not decisive of the matter. Merely because goodwill of a business which had been started by someone else had been acquired, and at the time of acquisition its value ascertained, it does not mean that some time or some years later the goodwill enjoyed by that business in the hands of the purchaser is qualitatively the same goodwill which had been enjoyed at the moment of sale by the vendor. If at the subsequent point of time the value of the goodwill had changed, it would be because the goodwill enjoyed by that business had changed qualitatively. Goodwill differs from a tangible asset such as an immovable property or a share in a joint stock company which retains its shape and form but of which the market value fluctuates. The market value of goodwill also fluctuates, but it fluctuates because of the fluid nature of goodwill. Just as it is impossible to pinpoint when goodwill came into existence, so it is equally impossible to pinpoint when goodwill came into existence. So it is equally impossible to pinpoint the moment at which goodwill waxed or increased or it waned or decreased, for, the process is imperceptible; and just a in the case of a newly started business it is not possible to ascertain in term of money the cost acquisition of goodwill; it is equally impossible to ascertain in terms of money the cost of addition or alternation to the quality of goodwill which led to the increase in its value. It, therefore, makes no difference whether starting from scratch a business builds up a goodwill of Rs. 1,00,000 or starting with an acquisition of goodwill of a business for a sum of Rs. 1,00,000 the business so purchased builds up a goodwill of Rs. 5,00,000. Neither the sum of Rs. 1,00,000 in the first case nor the addition of Rs. 4,00,000 in the second case can be taken either as fluctuation in the market value of goodwill, with the goodwill remaining constant, or as the cost of improving or adding to the quality of the goodwill. Such increase is really due to the fact that by further self-generation the goodwill has increased. The argument of Mr. Joshi, that the ratio of the Supreme Court decision in the case of B. C. Srinivasa Setty : 128ITR294(SC) applies only where there is no cost of acquisition is, therefore, not correct and cannot be accepted. In the judgment in that case the Supreme Court referred to the two views which had prevailed until it finally settled the law, the preponderance of judicial opinion being the same as the view taken by the Supreme Court in B. C. Srinivasa Setty's case, the only High Court in CIT v. Mohanbhai Pamabhai  91 ITR 393, and the Calcutta High Court in K. N. Daftary v. CIT : 106ITR998(Cal) . The Supreme Court has also mentioned in its judgment the decisions of High Courts. Amongst them is the decision of this High Court in CIT v. Home Industries & Co. : 107ITR609(Bom) , which has already been referred to by us earlier sin another context. In that case, Tulzapurkar Actg. C.J. (as he then was), speaking for the court, said as follows (at pp. 631-2) :
'However, the aspects that in the case of self-created or self-generated goodwill it is impossible to say that it has been acquired at any particular point of time and that the acquisition of such capital assets costs nothing to the owner of business in terms of money seem to us to be a very important aspect which have a bearing on the question as to whether the transfer of such capital asset should give rise to chargeable capital gains or not. Similarly, the aspect that the capital asset in question must be such that it is capable of improvement at an ascertainable cost in terms of money would be equally important.' (The emphasis has been supplied by us.)
29. Another case, also approved as aforesaid by the Supreme Court, is the decision of a Full Bench of the Kerala High Court in CIT v. E. C. Jacob : 89ITR88(Ker) , where it was held that in the case of certain categories of transfer of goodwill it is not possible to determine the 'cost of acquisition' and the 'cost of improvement' referred to in s. 48(ii) of the 1961 Act for the purpose of computation of 'capital gains' under s. 48 and that without computation of 'profit or gains' no tax can be levied under s. 45 of the 1961 Act.
30. In CIT v. Chunilal Prabhudas & Co. : 76ITR566(Cal) , the Calcutta High Court held as follows :
'It is difficult to imagine from the practical point of view or even in legal notion how there can be an expenditure which will separate the actual cost of goodwill in the assessee's capital asset and particularly for making any addition or alternation to such goodwill. These are compelling considerations which appear to exclude goodwill from the concept and ambit of section 12B of the Income-tax Act.' (The emphasis has been supplied by us.)
31. In CIT v. Jaswantlal Dayabhai : 114ITR798(MP) , the Madhya Pradesh High Court, after considering various authorities while summarizing its reasons for rejecting the contention of the department, said (at p. 801) :
'Firstly, section 45, which is the charging section, shows that the charge is on 'any profits or gains arising from the transfer of a capital asset' and not on the capital asset itself. The concept of 'profits or gains' made chargeable under section 45, itself implies that there is something received in excess of the cost of the capital asset which is transferred. In the case of a self-created or self-generated goodwill, the assessee incurs no cost in terms of money. On transfer of such a goodwill, it cannot be said that the assessee makes any 'profits or gains' chargeable under section 45. If the whole of the consideration received on such a transfer is taken to be 'profit or gains' to the assessee within the meaning of section 45, it would amount to taxing the capital asset itself and not 'profits or gains' arising from its transfer. Secondly, the above construction of section 45 is supported by the scheme of section 48 which provides that the income chargeable under section 45 is to be computed by deducting from the full value of the consideration 'the cost of acquisition of the capital asset and the cost of any improvement thereto'. The mode of computation provided in section 48 shows that the capital asset, a transfer of which is taxable under section 45, is one which costs in terms of money to the assessee, and is also one which can be improved by investing money.'
32. The above four decisions have been referred to by the Supreme Court in B. C. Srinivasa Setty's case : 128ITR294(SC) , as laying down the correct law. Mr. Joshi, however, submitted that since the Supreme Court's decision referred only to the cost of acquisition, it should follow that the Supreme Court only partially approved of these decisions, that is to say, it approved of these decisions, in so far as they held that the cost of acquisition cannot be ascertained, but did not approve of these decision in so far as they said that the cost of improvement cannot be ascertained. We find no warrant for this argument in the judgment of the Supreme Court. These reasons are integral reasons given by the above four High Courts for arriving at their conclusion that transfers of goodwill were not subject to the charge of capital gains tax under s. 12B of the 1922 Act or s. 45 of the 1961 Act. For the reasons given above, we hold that there was no capital gain made on the transfer of goodwill of its business by the assessee-company to the said public company and that the department was in error in taking into account the value of the goodwill while computing the capital gain made by the assessee-company in respect of the sale of its business together with all its assets and liabilities to the said public company.
33. This now brings us to the question whether there was any sale or transfer of the business of the assessee-company together with its assets, including the goodwill, and liabilities made by the assessee-company to the said public company. Three dates have been canvassed before us an being the date of such sale, namely, April 1, 1947, April 23, 1947, and some date subsequent to April 5, 1948. It is an admitted position that if the transfer took place on or after April 1, 1948, s. 12B will not apply to such transfer, and, therefore, the question of capital gains would not arise. In his assessment order the ITO had taken the date of sale as April 1,1947. The AAC, when the matter first came before him, had taken the date of sale as April 23, 1947. So far as the Bench of the Tribunal which heard the department's appeal was concerned, the Accountant Member held that the sale was effected in April, 1947. The judicial Member held that the finding of the AAC that the sale took place on April 23, 1947, had not been disputed before the Bench but that for clarity's sake he recorded his finding that the sale took place on that day. When the matter was remanded to the AAC. he held that as the whole business was transferred on April 1, 1947, goodwill stood transferred along with it on that day. The Tribunal, in the appeal filed by the assessee-company against the said order of the AAC, held that as the stock was transferred on April 23, 1947, the entire business along with the goodwill stood transferred on that day. Mr. Joshi, learned counsel for the department, began by contending that the transfer had taken place on April 23, 1947, and ended by submitting that it took place on April, 1, 1947. However, prior thereto, Mr. Joshi took another preliminary objection to Mr. Dastur arguing on the question as to the date of transfer. This preliminary objection was founded upon what was stated by the Judicial Member of the Tribunal in his order, namely, that the AAC's finding that the sale was effected on April 23, 1947, was no longer in dispute when the case was argued before the said Bench. We have already referred to this observation of the Judicial Member while setting out the history of this litigation, and have pointed out why this observation does not appear to be correct and cannot be accepted. To recapitulate, had that been the position, the Accountant Member would not have given an express finding thereon that the sale was effected in April, 1947, and was not made in the course of liquidation of the assessee-company, and further the President while disposing of the rectification application filed by the assessee-company would not have said that the date of transfer was a matter which related to the question of the quantum of capital gains and could be argued when the quantum came to be decided. What is, however, more important is that had the correct position been as Mr. Joshi contends, question No. 1 in Income-tax Reference No. 66 of 1979, would never have been referred o this High Court by the Tribunal. For the above reason we find that this preliminary objection taken on behalf of the department is as untenable as the earlier one was.
34. Before dealing with the rival submissions on this part of the case, it would be convenient now to briefly recapitulate the relevant facts and to analyse the said agreement dated April 5, 1948. The board of directors of the assessee-company had on April 19, 1947, resolved to call an extraordinary general meeting of the said company on April 23, 1947, for the purpose of passing special resolution, inter alia, to wind up the assessee-company and for the sale of the company's business to a public company to be registered in the name Evans Fraser and Company (India) Ltd. An extraordinary general meeting as then called on April 23, 1947, and at the said meeting it was, inter alia, resolved to wind up the assessee-company voluntarily and to authorize the liquidator, namely, the said Shroff, to consent to the registration of new public company to be named Evans Fraser and Company (India) Ltd. It also resolved to approve the draft agreement and authorize the liquidator to enter into such an agreement 'and carry the same into effect with such modifications, if any, as he (that is, the said liquidator) may think expedient'. The public company was incorporated later on the same day. It obviously by reason of s. 11(1) of the Indian Companies Act, 1913, could not have been incorporated earlier because under that section no company could be registered under a name identical with that by which a company in existence was already registered or so nearly resembling that name as to be calculated to deceive, the only exception being where a company in existence was in the course of being dissolved and signified its consent in such manner as the Registrar required. The consent of the assessee-company to the public company being incorporated with the name, Evans Fraser and Company (India) Ltd., was given by the resolution at the said extraordinary general meeting held on April 23, 1947, passed after it was resolved at the said meting to wind up voluntarily the assessee-company and to appoint the said Shroff as its liquidator. Under s. 204 of the Indian Companies Act, 1913, a voluntarily winding up is deemed to have commenced. at the time of the passing of the resolution for voluntary winding up. Thus, with the passing of the resolution to voluntarily wind up the assessee-company, the voluntary winding up of the assessee-company commenced. It was thereafter that the board of directors of the said public company met and approved the said draft agreement. This draft agreement was actually executed on April 5, 1948. It is expressed to be made between the assessee-company of the first part, the said Shroff and four others who were all the then members of the assessee-company as the party of the second part and the said public company as the party of the third part. After reciting that the total cost of the purchase of the shares of the assessee-company by the said Shroff and the said four others was Rs. 12,57,804 and that the said public company had been formed with a view amongst other things to the acquisition and taking over as a going concern of the assets and business belonging to and carried on by the assessee-company at the total cost incurred by the said Shroff and the said four others, the agreement proceeded to provide in cl. 1 as follows :
'The vendor company (that is, the assessee company) shall sell and the party of the second part shall confirm and the purchaser company (that is, Evans Fraser and Company (India) Limited) shall purchase as from the 1st day of April, 1947...'
35. Then follows a list of what has been agreed to be purchased as from April 1, 1947. This includes :
(1) the name and goodwill of the business carried on by the assessee-company in continuation and in succession thereto and the right to use the words 'Late of Evans Fraser & Company Ltd.' or any other words indicating that the business was carried on in continuation of or in succession to the assessee-company;
(2) all fittings, fixtures, office furniture, tools, implements, patents, licences, motor cars and other vehicles, stock-in-trade, etc., to which the assessee-company was entitled in connection with the said business;
(3) all trade marks, copyrights and other rights and properties of or in connection with the said business of the assessee-company;
(4) all books and other debts due to the assessee-company in connection with the said business and the full benefit of all securities for such debts;
(5) the full benefit (subject to the burden or obligations thereunder) of all contracts, engagements and orders in connection with the business of the assessee-company including the benefit of all insurance policies for fire, theft, riot or otherwise;
(6) all cash in hand and in bank and all bills and notes of the assessee-company in connection with the said business; and
(7) all other property to which the assessee-company was entitled i connection with the said business as appearing in its books on April 1, 1947, except the profits of the assessee-company accrued up to March 31, 1947, and the amount of the dividend account of the assessee-company.
36. Clause 2 relates to the consideration to be paid to the said Shroff and the said four others for the said transfer. The consideration was to be paid partly in cash is 'the payment or satisfaction to the party of the second part the sum of Rs. 4,98,987, for the value of the good will'. Clause 4, 5 and 6 of the said agreement provide as follows :
'4. The purchaser company shall without further investigation, objection or requisition accept such title as the vendor company has to the premise hereby agreed to be sold.
5. Possession of the premises shall as far as practicable be given to the purchaser company and the consideration shall be paid and satisfied subject to the provisions of this agreement within one month after the incorporation of the purchaser company and thereupon the vendor company shall at the expense of the purchaser company execute and do all such assurances and things for vesting the said premises in the purchaser company and giving to it the full benefit of this agreement as shall be reasonably required.
6. Until possession of the said premises is given premises is given to the purchaser company and until payment and satisfaction to the vendor company shall carry on the said business in the same manner as heretofore and maintain the same in the proper state of efficiency as a going concern and shall from the 1st day of April, 1947, be deemed to carry on such business on behalf of the purchaser company and shall account and be entitled to be indemnified accordingly.'
37. It was because cl. 1 of the said agreement of sale provided that the assessee-company should sell and the said public company should purchase the said business, etc., as from April 1, 1947, that the ITO and the AAC, on remand held that the sale took place on April 1, 1947. It is also by reason of this clause that the contention that this was the date of sale, was advanced on behalf of the Revenue. We are wholly unable to understand how any one with any idea of legal notions could ever take this date as the late of transfer. A sale of transfer postulates two persons, namely, a vendor or transferor and a vendee or transferee. How there could be a transfer by a living or an existing person to a non-existent person is something which at least we have not been able to follow. Chapter II of the Transfer of Property Act, 1882, is a chapter which deals with the general principles applying to transfer of property, whether movable or immovable. Section 5, which occurs in the said Chapter II, provides as follows :
'5. 'Transfer of property' defined - In the following section 'transfers of property' means an act by which a living person conveys property, in present or in future, to one more other living persons; and 'to transfer property' is to perform such act.
In this section 'living person' includes a company or association or body of individuals, whether incorporated or not, but nothing herein contained shall affect any law for the time being in force relating to transfer of property to or by companies, associations or bodies of individuals.'
38. It is obvious that when there is only one living person, he cannot convey property in vacuo. It is necessary to labour the point. At time parties to such transactions do make provisions for the transfer or sale to be operative from a prior date, which generally is the date of the beginning of the new accounting year for facilitating accounting and for division of profits. This, however, does not mean that in the eye of law the transfer took place on such anterior date. In this connection, we may refer to a decision of the Supreme Court in Western States Trading Co. P. Ltd. v. CIT : 80ITR21(SC) . In that case the appellant-company, which owned a colliery, entered into an agreement of sale to sell it to another company as and from September 1, 1954. The agreement was entered into on November 29, 1954. Pending completion of the sale the appellant-company was to carry on the business on behalf of the purchasing company and run the colliery as and from September 1, 1954, on the account and at the cost of the purchaser. Thus, as in the case before us, though no sale had taken place, the agreement was that it was to take effect or operate from an anterior date. The Supreme Court held (at p. 24) that be means of an agreement it was not possible to alter the actual state of affairs, namely, the carrying on of the business by the appellant-company, and to hold that it was being carried on by the purchasing company. Another case which may usefully be looked at is a decision of the King's Bench Division in Waddington v. O'Callaghan (H.M. Inspector of Taxes)  16 TC 187. In that case the appellant who was practicing as a solicitor desired to take his son as his partner with effect from January 1, 1929. He instructed another firm of solicitors to draw up a partnership deed. The partnership deed was executed on May 11, 1929, and was expressed to have effect as from January 1, 1929. It was held that the partnership constituted by the deed commenced on the date of the deed and not as from an anterior date. In support of his submission that because the parties had agreed that the sale would be effective from April 1, 1947, the sale should be considered to have taken place on that day. Mr. Joshi, learned counsel for thee Revenue, relied upon a passage in William Pickles' Accountancy, 4th Edn., pp. 21356-7. The passage reads as follows :
'Profit prior to incorporation. - A company cannot make profits nor incur losses prior to incorporation, so that where it is formed to take over a business from a date prior to its incorporation (usually being the date of the close of the last accounting period of the vendor concern) the profit or loss arising between the two dates must be kept quite apart from the profits or losses after incorporation. It may be noticed that the date of the certificate entitling the company to commence business (necessary in public companies) being purely a legal formality, is quite immaterial to the present topic.
The vendor, in realising his right to profit (a loss may be ignored at the moment), will normally require some compensation, either in the form of interest or an additional sum for goodwill. Therefore, it is first necessary to compute the amount of pre-incorporation profit, aginst which will be debited the interest (if any) payable to the vendor; if there still remains a balance of per-incorporation profit, this is in the nature of a capital profit and not available for distribution amongst the members of the company.'
39. This passage does not lay down that where it is agreed that a transfer shall be effective from an anterior date, in law it will take effect from such anterior date even when the purchaser-company is not incorporated is not incorporated and non-existent both in the eye of law and in fact. All that it provides is, as to how for the purpose of facilitating accounting and distribution of profits, parties can agree upon division of profits. It is arrangement inter se between the parties, and cannot thereby result in a legally valid transfer.
40. We will now see whether the transfer can be said to have taken place on April 23, 1947. It was Mr. Dastur' submission that before there can be a transfer or sale, the transfer or sale must be preceded by an agreement and in order to constitute an agreement there must be an offer and an acceptance. These are all propositions which are legally unassailable. Mr. Dastur further submitted that the resolutions passed by the assessee-company cannot be said to be an offer because as at that point of time the said public company had not come into existence, and in Mr. Dastur's submission the offer must be made by one party to another. Since the said resolutions could not be construed as an offer, the resolution passed later in the evening by the board of directors of the public company and after the public company was incorporated cannot be said to be an acceptance of that offer. Though looked at from a very narrow legalistic view this argument may be correct if one looks at the transaction in its entirety, the passing of the resolution by the board of directors of the public company when they had before it the draft agreement by the fact that the very next day a circular resolution was passed to pay Rs. 1,50,000 to the vendors towards the purchase price. From this, however, it cannot follow that his agreement amounted to a transfer or a sale. The agreement arrived at was to execute a formal agreement in terms of the said draft agreement and to implement the same with such modifications as the liquidator of the assessee-company may think proper. In CIT v. B. M. Kharwar : 72ITR603(SC) , referred to earlier, the Supreme Court has observed that it is well settled that the taxing authorities are not entitled to ignore the legal character of the transaction and to proceed on what they regard as 'the substance of the matter'. The Tribunal and the Assistant Commissioner when they hard the assessee's appeal have found the date to be April 23, 1947. The reason given is that the business carried on by the assessee-company was of general merchandise and since on that date the stock was handed over to the said public company, the entire business, including goodwill, stood transferred to it. We are unable to accept this line of reasoning. Handing over of the stock does not and cannot mean transfer of business. Supposing in voluntarily winding up the assessee-company had disposed of its stock by selling it and the purchaser had taken it away, would it have amounted to transfer or sale of the whole undertaking or business of the assessee-company The obvious answer is in the negative. In arriving at this conclusion the Tribunal has over looked that what had to be transferred under the said agreement was not merely the stock. The agreement itself listed the large number of things which formed the subject matter of sale, several of which being actionable claims would require to be transferred by writing in the manner provided for in s. 130 of the Transfer of Property Act; such as, for example, trade marks, copyrights, book debts, insurance policies, etc. Others would require execution of documents such as transfer of bank accounts or endorsement as in the case of bills and notes. An important part of the transaction of transfer was that possession of the premises of the assessee-company where its registered office was situate and its business carried on should be given to the public company and that the assessee-company should execute and do all things and execute all such documents as were necessary to vest such premises in the public company. The agreement itself provided that until the various things required to be done by the assessee-company and the public company had been carried out, the assessee-company would carry on the business in the same manner as it had done hitherto and should be deemed as from April 1, 1947, to carry on such business on behalf of the said public company and 'shall account and be entitled to be indemnified accordingly'. Thus, until all the above things were done and the agreement implemented, there could not be a completed transfer or sale. It may be that the business till then carried on for the purpose of accounting and the taking of its profits be considered by the parties inter se as carried on behalf of the said public company, but that cannot alter the legal incidence of a transfer. The agreement which was executed on April 5, 1948, was itself an executory agreement. Had after April 23, 1947, the provisions of the said agreement been implemented or carried out, the agreement would have so recited it and recorded the said fact. In this agreement would have so recited it and recorded the said fact. In this connection, it should be born in mind that this was not an agreement drafted by a layman but by a reputed and experienced firm of solicitors. Unless and until, therefor, the entire business was transferred, the goodwill of the business of the assessee-company could not have been transferred to the said public company.
41. A somewhat similar situation came up before the Supreme Court in the case of Alapati Venkataramiah v. CIT : 57ITR185(SC) . In that case the appellant, who owned certain lands and buildings, plant and machinery thereon, and carried on the manufacture of tiles and bricks entered into an agreement on March 17, 1948, with the another person to sell those assets including the stocks and the goodwill of the business for a certain sum of money. On March 17,1948, the appellant hand over possession of the land and buildings and machinery to the purchaser-company. On March 20, 1948, the company credited a sum of Rs. 2,00,000 in its account in its account in favour of the appellant, being the entire consideration in favour of the appellant, and the appellant also made appropriate entries in his account books. The sale deed in respect of the land was executed in favour of the company in November 22, 1948. The agreement was approved by the board of directors of the company only on March 16, 1949, and by the shareholders of the company at a general meeting held on April 10, 1949. The question was whether any capital gain arose from the sale in the previous year ended May 31, 1948, relevant to the assessment year 1948-49. The Supreme Court held, that before s. 12B could be attracted, title must pass by any of the modes mentioned in s. 12B, that is, by sale, exchange or transfer, and that in the context the term 'transfer' meant effective conveyance of the capital asset to the transferee. The Supreme Court further held that delivery of possession of immovable property could not by itself be treated as equivalent to conveyance of the immovable property. So far as the entries in the account books of the appellant and the company were concerned, the Supreme Court held that they were irrelevant for the purpose of determining the date when the sale or transfer took place. It further held that the title to the land and buildings and the plant and machinery and electrical fittings permanently embedded thereon could not pass to the company till the conveyance was executed and registered and that as the sale was executed and registered and that as the sale deed was executed and registered only on November 22, 1948, no sale or transfer of those assets had taken place prior to April, 1948, and no capital gains arose in the relevant previous year. It was further held that title to the furniture had passed upon delivery on March 17, 1948, but as goodwill was an intangible asset and ordinarily passed along with the transference of the whole business, it could not be said that goodwill was transferred before April 1, 1948. It may be mentioned that the record shows that the assessee-company owned plant and machinery. There is nothing on the record to show when or how any of the items mentioned in cl. 1 of the said agreement dated April 5, 1948, was transferred to the said public company. It is difficult to understand on what basis or on what materials the Tribunal came to the conclusion in the assessees' appeal that the stock was transferred on April 23,1947, because we do not find any material whatever on the record to bear out or substantiate this observation. It is also pertinent to not that it was only the board of directors of the said public company which had approved the said draft agreement on April 5, 1948, and that there is nothing to show that the said agreement was approved by the said company in any general meeting. It is true that the said agreement dated April 5, 1948, has executed on behalf of the said public company, but from that it does not follow either that it was approved by the said public company in a general meeting or if it was in fact so approved, that such general meeting took place prior to April 1,1948, assuming even it were possible to construe the said agreement dated April l5,1948, as a transfer.
42. In the result, we answer the one question referred to us in Income-tax Reference No. 146 of 1970 and the two questions referred to us in Income-tax Reference No. 66 of 1979 in the negative, that is, in favour of the assessees and against the department.
43. The respondent will pay to the applicants the costs of both these references quantified in all at Rs. 1,500.