A.N. Grover and; K.S. Hegde, JJ.
1. As directed by Their Lordships of the Hon'ble Calcutta High Court we hereby draw up the following agreed statement of the case and refer it to the High Court at Calcutta under Section 66(2) of the Indian Income Tax Act, 1922.
2. The assessment year concerned is 1951-52, for which the relevant accounting year is the financial year 1950-51.
3. There was a joint venture run by one Bhagwan Raja Patel & Co. and Premier Suppliers Ltd., for purchase and sale of machinery from the disposal department of Assam, and each was having half share in the joint venture. On the 22nd October, 1949 Premier Suppliers Ltd. sold their interest in the venture to the assessee-company and Bhagwan Raja Patel sold their interest to Patel Engineering Company, so that the persons now interested in the venture were the assessee-company and Patel Engineering Co. Ltd. The stock of the disposal machinery remaining unsold were thereafter divided between the assessee and Patel Engineering Co. Ltd. The assessee received machinery valued at Rs 2,06,372 as its share. In the Assessee's account books for 1949-50 the value was written up by Rs 4,00,000 an equivalent sum having been credited to a capital Reserve account. During this accounting period the assessee and Patel Engineering Co. Ltd., formed a partnership firm known as “Hind-Patel Co.” in which each had an eight annas share and the assessee transferred his stock of machinery at the book value of Rs 6,06,372 to the new firm. Patel Engineering Co. Ltd., also transferred their share of machinery, which they received on the dissolution of the joint venture, to the new firm after appreciating the value of their share of the machinery in the like manner as the assessee did. The machinery, thus valued at Rs 6,06,372 by each of the partners, remained the investment of each one of them in their partnership firm, Hind Patel Co. On 1st April, 1950 the first day of the accounting year in question, counter debit and credit entries were made in the assessee's and the firm's books, respectively. The firm credited the capital account of the assessee with Rs 6,06,372 and debited the machinery account with an equal amount. Same type of entries were made in the case of the other partner, Patel Engineering Company. It may be mentioned here that no depreciation was allowed either on the original cost or on the appreciated value of such machinery in Assessment Year 1950-51 nor during the year under consideration.
4. It was contended before the Income Tax Officer that the aforesaid sum of Rs 4,00,000 could not be treated as the assessee's profits on the ground, inter alia, (1) that the assessee had never dealt in the purchase and sale of machinery either before or after; (2) that the capital appreciation by Rs 4 lakhs was made in the financial year 1949-50, which was not the relevant accounting year for the purpose of assessment for the year in question; and (3) that the disposal machinery which were acquired at Assam were mainly for the purpose of executing their own contracts, namely, the contracts of earth work etc. which required such machinery as had been obtained and not for sale.
5. The Income Tax Officer held, disagreeing with the assessee's contention, that it was a sale of machinery and the amount for which it was actually sold to the firm fell not within the financial year 1949-50 but during the year under consideration. The Income Tax Officer further observed that earlier balance sheets of the assessee showed that it had transferred machinery, furniture, office-equipments, etc., from time to time as necessity arose to the firm Hind Patel Co. With regard to the purpose for which the machinery had been acquired at Assam as stated by the assessee, the Income Tax Officer observed that the purpose for which the machinery were actually acquired was not at all material for determining the question as to whether any profit had been made on the sale of those machinery. It was the manner in which the machinery had actually been dealt with which was the main criterion for determining the question. The Income Tax Officer, therefore, treated the transaction as a sale of machinery originally valued at Rs 2,06, 372 for a sum of Rs 6,06,372 and held that the amount of Rs 4 lakhs was profit of the assessee for business on the sale of disposal machinery in the year under consideration. A copy of the Income Tax Officer is Annexure ‘A’ hereto forming part of the case.
6. An appeal was taken to the Appellate Assistant Commissioner who, on a consideration of the facts of the case, came to the conclusion that neither had there been a sale of machinery by the assessee nor had the assessee entered into an adventure in the nature of trade; nor had any profit resulted to it. Relying upon the decision in the case of CIT v. Sir Homi Mehta's Executors1 and upon the reasons given by him in para 4 of his order, he held as aforesaid and on such conclusion deleted the addition of Rs 4,00,000 from the assessee's income. A copy of the order of the Appellate Assistant Commissioner is Annexure ‘B’ hereto forming part of the case.
7. The department being aggrieved by the said decision of the Appellate Assistant Commissioner preferred an appeal to the Tribunal which held that there could be no element of transfer or sale involved in a transaction between one's own self. The Tribunal observed that the capital in the partnership firm between the assessee and the aforesaid Patel Engineering Co. Ltd. was comprised of the written up value of the machinery which fell to each of the abovementioned partner's shares. The value of those machinery had not been written up in the firm's books but the partners themselves after having valued their shares of the machinery at an appreciated price in their own books contributed it as their capital in the partnership firm. The Tribunal further observed that the partnership was neither purchasing nor the partners were selling and what the two partners were actually doing was merely to accept an appreciated value of their already piled up resources. The written up value of the piled up resources was invested as capital by the partners and there could, therefore, be no element of purchase and sale involved. The appeal by the department was accordingly dismissed. A copy of the order of Tribunal is Annexure ‘C’ hereto forming part of the case.
8. It is on these facts that we refer the following question of law as desired by the Hon'ble Calcutta High Court:
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the sum of Rs 4,00,000 from the total income of the assessee?”
The Judgment of the Court was delivered by
K.S. HEGDE, J.
9. Civil Appeal No. 1287(NT) of 1971 is by special leave-and Civil Appeal No. 2001 of 1968 is by certificate. Both these appeals arise from a reference made to the High Court of Calcutta under Section 66(2) of the Indian Income Tax Act, 1922. The facts of the case are fully set out in the statement of case. There is no need to restate them. The finding of the Tribunal was that there was no sale either at the time when the assessee inflated the price of the machinery which fell to its share at the time of the division or at the time when the new partnership was created. Same is the finding of the High Court. We agree with these findings. The machinery that fell to the share of the assessee was never sold. Therefore, there was no question of the assessee making any profit out of them. No one can sell his goods to himself. A sale contemplates a seller and a purchaser. If a person revalues his goods and shows a higher value for them in his books, he cannot be considered as having sold these goods and made profits therefrom. Nor can a person by handing over his goods to a partnership of which he is a partner and that as his share of capital be considered as having sold the goods to the partnership. It is difficult to appreciate the arguments advanced on behalf of the department that there was a sale either at the time when the assessee showed an inflated price of the machinery that fell to its share at the division or when that machinery was used as the capital of the new firm of which he was a partner. We see no substance in Appeal No. 1287(NT) of 1971. This appeal is accordingly dismissed with costs.
10. Now coming to Civil Appeal No. 2001 of 1968, we revoke the certificate granted by the High Court as the same is not supported by any reason. Hence this appeal is not maintainable. It is dismissed but there will be no order as to costs.