R. S. PATHAK J - The assessee is a firm consisting of six partners. It carried on business in the manufacture and sale of sugar, molasses, confectionery and also in the extraction and sale of oils. It owned a sugar mill. On January 21, 1948, the business was transferred as a running concern by the assessee to a private limited company, R. B. Lachmandas Mohanlal and Sons, Ltd., which was incorporated the previous day. On the date on which the company was incorporated the assessee entered into an agreement to sell the business to the company, and on January 21, 1948, a sale deed was executed. Under the terms of the sale deed, the consideration for the land, buildings, machinery, plant and other assets was determined at Rs. 30,00,000. The original cost of the assets, on which depreciation was allowed to the assessee under the Income-tax Act, was Rs. 10,40,742 and the written down value of these assets was Rs. 5,34,185.
During the assessment proceedings for the assessment year 1949-50 (the relevant previous year being the year ending September 30,1948), the Income-tax Officer applied the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922, and held that a sum of Rs. 5,06,557 was liable to be included in the assessees total income. The Income-tax Officer also came to the opinion that the sale of the assets by the assessee to the company resulted in a capital gain of Rs. 19,59,258 and assessed this sum under section 12B of the Act. Besides, the assessee had also sold its stocks of sugar to the company resulting in a profit of Rs. 2,05,041. The Income-tax Officer treated this profit as arising out of the sale of the assessees stock-in-trade and accordingly included it in the assessable income of the assessee.
The Appellate Assistant Commissioner dismissed the assessees appeal against the inclusion of the amounts mentioned above in the assessment order, and an appeal before the Income-tax Appellate Tribunal by the assessee was also unsuccessful. The assessee then applied for a reference to this court under section 66(1) of the Act, and the Tribunal has referred the following questions :
'Whether on the facts and circumstances of the case the sale on January 21, 1948, was by the assessee-firm or by its partners in their individual capacity ?
(2) Whether on the facts and circumstances of the case the sum of Rs. 5,06,557 being the difference between the original cost and the written down value of assets in chargeable under section 10(2)(vii) of the Act ?
(3) Whether on the facts and circumstances of the case the sum of the Rs. 19,59,258 is chargeable as capital gains under section 12B of the Income-tax Act ?'
The assessee had also sought the reference of some other questions to this court, and as those questions were not referred by the Tribunal, an application was made to this court, purporting to be under section 66(4) of the Act, praying that a statement of the case in respect of those other questions should be requisitioned. This application was allowed on August 3, 1959, and consequently, the Tribunal submitted a supplementary statement of the case dated September 23, 1959, to this court for its opinion on the following further questions :
'Whether the excess receipts on the transfer (sale) of the stock of sugar to the limited concern is chargeable to tax under section 10 of the Income-tax Act ?'
Learned counsel on behalf of the Commissioner of Income-tax has raised a preliminary objection to our entertaining the supplementary statement of case. He urges that the application, upon which this court called for a statement in respect of a further question of law and consequent to which the supplementary statement was submitted to this court, was an application made under section 66(4) and was, therefore, not maintainable. Since the application was not maintainable, it is argued, no valid reference could be called for by this court nor made by the Tribunal. The Supreme Court in Kamlapat Motilal v. Commissioner of Income-tax has held that where the Tribunal does not refer all the questions of law raised by these assessee but only some of them, an assessee desiring that other questions of law should also be referred to the High Court must apply to the court under section 66(2) and not under section 66(4). It is not disputed that the application made by the assessee was an application under section 66(4). Learned counsel for the assessee, however, prays that the application under section 66(4) may be treated as one under section 66(2), and urges that if that be done then the reference subsequently made by the Tribunal is a competent reference. It is difficult to accede to this suggestions. The application disposed by this court on August 3, 1959, was dealt with as an application under section 66(4). Even if it were possible now to suppose that the application was disposed of under section 66(2), that cannot be done unless, inter alia, the assessee can show that it was made within the period of limitation for making an application under section 66(2). The application, ex facie, was one made under section 66(4), and the burden lies upon the assessee to show that it could have been treated as an application under section 66(2). The assessee has been unable to receipt of the order under section 66(1). It is also not possible to say that if the application was made beyond the period of limitation the delay in making it could be presumed to have been condoned by the court. When the plea that the application should be considered as one under section 66(2) was never raised before the court at that stage, the question whether the application was barred by limitation and, if so, whether the delay should be condoned, cannot be said to have been present in the mind of the court when disposing of the application. Neither is it possible for us to dispose of the applications under section 66(2) with retrospective effect from August 3, 1959, nor can we treat it as having been disposed of under section 66(2). It is then pointed out for the assessee that the order disposing of the application had become final much before the decision of the Supreme Court in kamlapat Motilals case and it is urged that we should hold that the decision of the Supreme Court cannot undo the effect of that order which had become final. It is pointed out that the supplementary statement of the case was also submitted before the date of the Supreme Court decision. There is no doubt that the order of this court on the application and the submission of the supplementary statement of the case precede in point of time the decision of the Supreme Court. But that circumstance, it seems to us, can be of no assistance to the assessee. The Supreme Court in Kamlapat Motilals case merely stated what the law always was. That being so, clearly the application was not maintainable under section 66(4), and the order of this court calling for a reference upon a further question was entirely without jurisdiction. The consequent reference made by the tribunal must, therefore, be considered as incompetent. We are, accordingly, of the opinion that the preliminary objection must be upheld. In the result, we decline to answer the question referred in the supplementary statement of the case.
Turning to the questions referred by the original statement of the case, it seems to us that the answer to the first questions is plainly that the sale on January 21, 1948, was effected by the assessee and not by its partners in their individual capacity. Learned counsel for the assessee has not seriously pressed the contention that the sale was by the individual partners. Indeed, it appears to us that the contention is not capable of serious consideration having regard to the several circumstances detailed in the appellate order of the Tribunal. The Tribunal has pointed out that there is no deed of dissolution of the firm nor any other evidence of its dissolution. The agreement of sale also discloses that the assessee was party to the agreement and not its partners as individuals. The agreement plainly shows that the business was transferred as a going concern. If the firm had suffered dissolutions and the assets had been divided, there would have been no occasion for transferring a running business. These and the other circumstances, including the fact that the memorandum of association of the company mentioned as one of its objects the acquisition as a going concern of the business carried on by the assessee, and that the certificate of the Controller of Capital Issues also contained a recital to the same effect, leave no doubt the firm was not dissolved at all at the time when its business and assets were transferred to the company.
In respect of the second question referred by the Tribunal, learned counsel for the assessee contends that there was no sale of the assets and, therefore, the second proviso to section 10(2) (vii) did not apply. The argument in substance is that inasmuch as the assets were transferred by the assessee to the company, and the persons constituting the assessee were also the shareholders of the company, it cannot be said that any sale, in the sense in which that terms is understood in commercial circles, has taken place, and learned counsel relies upon the decision of the Bombay High Court in Commissioner of Income-tax v. Sir Homi Mehtas Executors, It does not appear that the point was raised in this form before the Tribunal in appeal. But even assuming that question can be raised before us, we find it difficult to accept the contention on its merits. It seems to us that the decision of the Bombay High Court turned upon the consideration that the persons who originally held the shares and persons to whom the shares were allotted subsequently upon transfer when the limited company was incorporated were the same. Chagla C.J. who delivered the judgment of the court, observed :
(1) (1955) 28 I. T. R. 928.
(2) (1963) 47 I. T. R. 565.
(3) (1963) 49 I. T. R. 927.
Sir Homi Mehta owned these shares jointly with his sons. The result of the formation of this private limited company and the so-called sale of these shares to the limited company was that these very shares instead of being held by Sir Homi Mehta and his sons jointly in their individual capacity were held by these very persons constituted into a limited company. We are quite conscious of the distinction which has been constantly emphasised by the Advocate-General in this reference between an individual as an entity and a limited company as an entity. and there can be no doubt that in law Sir Homi Mehta and his sons were very different entities from Sir Homi Mehta & Sons Limited. But what the Advocate-General is doing is looking at the matter from a legal aspect but in truth and in substance the only result of this particular transaction was that Sir Homi Mehta and his sons held these very shares in a different way from the way they held before the transaction was completed. They adopted a different mode, the mode of the formation of the limited company with all its advantages, in order to hold these shares and to deal with these shares and to make profit out of these shares.'
Similarly, in Commissioner of Income-tax v. Mugneeram Bangur & Co. the Calcutta High Court, considering and transferred its entire share holding of 34,993 shares were allotted to the partners of the firm and the consideration for the transfer was the allotment of these shares, held on the basis of the principle that there cannot be sale by a person to himself that there was no profit in the transaction. Again in Commissioner of Income-tax v. Morning Star Bus Service the Kerala High Court held that the second proviso to section 10(2) (vii) would not apply where no sale or profit in any commercial sense occurs because of the virtual identity of the vendor and the vendee.
In the instant case there is nothing to show that the partners constituting the assessee were the only shareholders of the company or that they held almost all the shares issued by the company. The certificate issued by the Controller of Capital Issues on January 12,1948, discloses that shares of the value of Rs. 40,00,000 were to be issued by the company. Paragraph 7 of the statement of the case, however, indicates that the shares of company allotted to the partners of the assessee were of the total value of Rs. 30,00,000 only. This would seem to indicate that there were shareholders also. In any event, since the question was not raised before the Tribunal in the form in which it has now been argued before us, the Tribunal gave no finding of fact as to whether there was virtual identity between the shareholders of the company and the partners of the assessee. In the circumstances the principle invoked by the assessee cannot be applied in the instant case. Learned counsel for the Commissioner urged that the decision in the aforesaid cases did not lay down the correct law, and that even though the persons who were the only shareholders of the transferee company were also the partners constituting the transferor firm, a distinction had to be maintained between the company as a corporate entity and its shareholders. Reference was made in this behalf to the decision of the Patna High Court in Maharajadhiraj Sir kameshwar Singh v. Commissioner of Income-tax. In the view that we are taking it is not necessary to decide this issue. No other point has been pressed in respect of the second question. Accordingly, we answer that question in the affirmative.
The assessee contends that the gain of Rs. 19,59,258 is not chargeable as capital gains under section 12B because the instant case is covered by the terms of the third proviso to section 12B. That proviso protects profits or gains from the levy of tax under section 12B where there is a distribution of capital assets on the dissolution of a firm. It has been found in the instant case that the assessee was not dissolved on the date of the the sale and there was no distribution of its capital assets between the partners. The third proviso to section 12B, therefore, does not apply. Accordingly, we answer the third question in the affirmative.
(1) (1963) 48 I. T. R. 483.
A copy of this judgment under the seal of the court and the signature of Registrar shall be sent to the Appellate Tribunal. The Commissioner is entitled to his costs which we assess at Rs. 200. The counsels fee is assessed at Rs. 200.