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Smt. Regina Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIncome-tax Reference No. 73 of 1971
Judge
Reported in[1973]92ITR153(Ker)
ActsIncome Tax Act, 1922 - Sections 10(2)
AppellantSmt. Regina
RespondentCommissioner of Income-tax
Appellant Advocate B.S. Krishnan and; V. Ramachandran, Advs.
Respondent Advocate P.A. Francis, Adv.
Excerpt:
.....in assets of his business - transaction resulted in excess realisation over written down value of assets of business within scope of second proviso to section 10 (2) (vii) - liability to tax could not be avoided merely because in consequence of transfer of proprietary business of assessee he became shareholder along with others in company which owned assets. - - 5 lakhs is satisfied by adjustment of sums that i am to make good to the company for having allotted and given to the persons mentioned in b schedule, 200 fully paid up shares ofrs. for the application of the proviso, it is necessary to precisely determine the facts and to ascertain in which of the different categories a transaction falls, the tribunal cannot admit a transaction which has distinct characteristics to..........the transfer to the company is of a going concern. a consolidated amount has been fixed as the sale consideration for the land, buildings, machinery, stock-in-trade, etc. no depreciation has been allowed for some of the assets transferred and these assets are not separately valued and, therefore, it cannot be said that the depreciation allowed for the previous years for some of the items will constitute the profits of the transaction. this contention does not arise from the order of the tribunal or by the question referred to this court. the income-tax officer found the profits at rs. 61,330. this is not seen attacked either before the appellate assistant commissioner or before the tribunal. the only contention seen urged before the tribunal is that the transaction does not amount to.....
Judgment:

Viswanatha Iyer, J.

1. The following question has been referred by the Appellate Tribunal, Cochin Bench, for the opinion of this court:

'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the sum of Rs. 61,330 is assessable under Section 10(2)(vii) of the Indian Income-tax Act, 1922 ?'

2. The facts are these. The assessee was carrying on business at Trichur. The business consisted of oil mills, soap works and foundry. On September 27, 1954, a private limited company by name ' I. I. Iyyappan Mills Ltd.' was incorporated with a capital of Rs. 5 lakhs. The objects of the company were to acquire and take over the business which the assessee carried on as going concerns. The assessee was one of the promoters. On December 1, 1954, a deed of assignment was executed by the appellant in favour of the managing director of the company, Mr. Lonappan, transferring all his business with their assets and liabilities as going concerns for Rs. 5 lakhs. According to the deed, the consideration was paid by the allotment of 200 fully paid up shares of Rs. 2,500 each to the persons directed by the assessee. The assessee retained five shares of the value of Rs. 12,500. The other persons to whom the shares were allotted are his near relations. The Income-tax Officer held that the assessee sold away the assets which were previously used for his business in respect of which depreciation was allowed and in the transaction of sale to the company he realised a profit of Rs. 61,330. He, therefore, included this amount in the total income of the assessee for the previous year to the assessment year 1956-57. On appeal by the assessee the Appellate Assistant Commissioner reached the same conclusion as that arrived at by the Income-tax Officer. It was found that a sale within the meaning of Section 10(2)(vii) of the Indian Income-tax Act, 1922, has been effected and the profit realised therefrom was correctly included in the total income for assessment. On second appeal before the Tribunal it was again contended that there was no sale by the assessee to the limited company and that there was no profit liable to tax under Section 10(2)(vii) of the Act. According to the assessee, the transaction was a mere conversion of the proprietary concern into a limited company and was only a mere adjustment of rights. Alternatively, the transaction was a mere exchange and was not a sale and, hence, Section 10(2)(vii) had no application. The Tribunal rejected these contentions and held that the transaction amounted to a sale. The second contention that the assessee did not derive any pecuniary gain in the transfer of assets to the limited company was also rejected. On these findings the Tribunal reached the conclusion that the second proviso to Section 10(2)(vii) of theAct applies and sustained the assessment orders. On this a reference of the above question was asked for and allowed.

3. The relevant portion of Section 10(2)(vii) reads as follows:

'Such profits or gains shall be computed after making the following allowances, namely: . . . .

(vii) in respect of any such building, machinery or plant which has been sold or discarded or demolished or' destroyed, the amount by which the written down value thereof exceeds the amount for which the building, machinery or plant, as the case may be, is actually sold or its scrap value:

Provided further that where the amount for which any such building, machinery or plant is sold, whether during the continuance of the business or after the cessation thereof, exceeds the written down value, so much of the excess as does not exceed the difference between the original cost and the written down value shall be deemed to be profits of the previous year in which the sale took place :. . . .'

and 'written down value' as defined in Sub-section (5)(b) of Section 10 is relevant here to find out the profits mentioned in the above provision and that is quoted below :

'In the case of assets acquired before the previous year the actual cost to the assessee less all depreciation actually allowed to him under this Act, or any Act repealed thereby, or under executive orders issued when the Indian Income-tax Act, 1886 (II of 1886), was in force.'

4. A reading of these provisions shows that all depreciation actually allowed to the assessee under the Act shall be deemed to be the profits of the previous year in which the sale took place if the sale amount exceeds the written down value.

5. The first contention that is urged by the counsel on behalf of the assessee is that the transaction evidenced by the deed of transfer dated December 1, 1954, does not amount to a sale and, therefore, there is no scope for applying the provisions of Section 10(2)(vii). The operative portion of the transaction reads as follows :

'And the buildings relating thereto, machinery and other mechanical articles and equipments, tools, furniture, safes, necessary records, stocks in hand, cash in hand, van, car, bullock-carts, bulls, country crafts, small boats, iron cart and all other manner of things used for the purpose of the above establishments, push carts, etc., and all assets inclusive of the liabilities and outstandings described in schedules C & D and all rights, privileges and liberties existing and accruing together with all advantages for Rs. 5 lakhs. The consideration of Rs. 5 lakhs is satisfied by adjustment of sums that I am to make good to the company for having allotted and given to the persons mentioned in B schedule, 200 fully paid up shares ofRs. 2,500 each as directed by me, in their respective names and in the manner mentioned in B schedule and subject to the provisions contained in the memorandum and articles of associations without in any way prejudicing or affecting the rights that shareholders have to get refund of income-tax on the dividend as declared in respect of their shares, the majors directly and the guardians on behalf of their wards and for which they are authorised.'

6. The legal effect of this transaction is contended to be only one of exchange and not a sale. According to the assessee, no amount is received as consideration for the transfer. In lieu of the transfer of the assets the company has allotted shares of equal value to the assessee and his relations. In other words, shares of the company are transferred to the assessee in exchange for the transfer of the assets to the company. This contention cannot be accepted. The document is an assignment deed in favour of the company. The company was already formed on the date of the assignment. The transfer to the company is for a money consideration of Rs. 5 lakhs. The fact that this Rs. 5 lakhs is adjusted towards the value of shares allotted by the company to the assessee and his relations will not in any way make the transaction anything other than a sale, A similar question arose for consideration of the Supreme Court in Commissioner of Income-tax v. R.R. Ramakrishna Pillai, [1967] 66 I.T.R. 725 (S.C.).In that case the business was transferred to a company in lieu of certain money consideration and in satisfaction of the liability to pay that money consideration shares of certain face value were allotted to the transferor. The Supreme Court on these facts held thus at page 728 :

'A transaction by which a person carrying on business transfers the assets of that business to another assessable entity may take different forms and may have different legal effect. The assets of a business may be sold at a fixed price to a company promoted by a person who carried on the business: if the price paid for or attributable to an asset exceeds the written down value of the asset, proviso 2 to Section 10(2)(vii) would ex facie be attracted. Where the person carrying on the business transfers the asset to a company in consideration of allotment of shares, it would be a case of exchange and not of sale, and the true nature of the transaction will not be altered, because for the purpose of stamp duty or other reasons the value of assets transferred is shown as equivalent to the face value of the shares allotted. A person carrying on business may, agree with a company floated by him that the assets belonging to him shall be transferred to the company for a certain money consideration and that in satisfaction of the liability to pay that money consideration, shares of a certain face value shall be allotted to the transferor. In that case there arein truth two transactions--one a transaction of sale and the other a contract under which shares are accepted in satisfaction of the liability to pay the price.

Section 10(2)(vii), proviso 2, on the plain terms used therein, is attracted if there be sale of the building, machinery or plant and the amount for which the sale takes place exceeds the written down value of the assets transferred. If there be no sale, the proviso has no application. For the application of the proviso, it is necessary to precisely determine the facts and to ascertain in which of the different categories a transaction falls, The Tribunal cannot admit a transaction which has distinct characteristics to exemption from tax liability on the broad ground that the substance of the transaction was to readjust the position of the transferor as holder of the assets transferred.'

7. In this case the terms of the assignment deed quoted above clearly show that there were in truth two transactions, one a transaction of sale and the other a contract under which shares were accepted in satisfaction of the liability to pay the price. Since there is a transaction of sale, proviso 2 to Section 10(2)(vii) applies.

8. The learned counsel referred to the decision of the Supreme Court in Commissioner of Income-tax v. Motors & General Stores (P.) Ltd., [1967] 66 I.T.R. 692 (S.C.) in support of his contention that the transaction in the instant case is only an exchange. In that case a cinema house was transferred by the assessee-company in consideration of the transfer of certain shares held by the transferees in other companies. The document itself was styled an exchange deed and the terms of the document showed that the cinema house was transferred in consideration of the transferred shares held by the transferee in other companies. Therefore, the Supreme Court construed the document as an exchange and the provisions of Section 10(2)(vii) were held to be not applicable. In this case, as stated earlier, there is no question of a transfer of the assets in consideration of transfer of other assets to it. The assets of the assessee were transferred for a consideration of Rs. 5 iakhs. This sum of Rs. 5 lakhs was accepted as satisfied by the allotment of certain shares of the transferee-company. It is only a sale coming within the scope of Section 10(2)(vii) and, therefore, the provisions of that section applied to the transaction.

9. A further contention was taken by the counsel that in substance the transaction amounts only to an exchange in that what has been obtained by the assessee as consideration for the transfer of the assets is shares in the transferee-company and the substance of the transaction must be looked into and not the form of the transfer. A similar contention was rejected by the Supreme Court in Commissioner of Income-tax v. R.R. RamakrishnaPillai, The law on the point is again stated by the Supreme Court in Commissioner of Income-tax v. B.M. Kharwar, [1969] 72 I.T.R. 603, 607, 608; [1969] 1 S.C.R. 651 (S.C.) thus :

'It is now well-settled that the taxing authorities are not entitled in determining whether a receipt is liable to be taxed to ignore the legal character of the transaction which is the source of the receipt and to proceed on what they regard as 'the substance of the matter'. The taxing authority is entitled and is indeed bound to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the device and to determine the true character of the relationship. But the legal effect of a transaction cannot be displaced by probing into the 'substance of the transaction'. This principle applies alike to cases in which the legal relation is recorded in a formal document and to cases where it has to be gathered from evidence--oral and documentary--and conduct of the parties to the transaction.'

10. These principles apply here. The business assets belonged to the assessee. They were transferred to a private limited company. The company is a legal entity distinct from the assessee, transfer of the assets was by the assessee to the company and the legal effect of the transaction was to convey for consideration the rights of the assessee in the assets of his business. The transaction resulted in excess realisation over the written down value of the assets of the business within the scope of the second proviso to Section 10(2)(vii) of the Act, The liability to tax arising under the Act could not be avoided merely because in consequence of the transfer of the proprietary business of the assessee, he became a shareholder along with others in the company which owned the assets. Thus the conclusion arrived at by the Tribunal, namely, that the true legal effect of the transaction evidenced by the deed of transfer is a sale and the profits derived are taxable is correct.

11. Then the assessee attempted to urge that even if the transaction is a sale it does not follow that by this transaction a profit of Rs. 61,330 has been made by the transferee. His counsel said that depreciation had been allowed only for a few of the items forming the subject of sale. The transfer to the company is of a going concern. A consolidated amount has been fixed as the sale consideration for the land, buildings, machinery, stock-in-trade, etc. No depreciation has been allowed for some of the assets transferred and these assets are not separately valued and, therefore, it cannot be said that the depreciation allowed for the previous years for some of the items will constitute the profits of the transaction. This contention does not arise from the order of the Tribunal or by the question referred to this court. The Income-tax Officer found the profits at Rs. 61,330. This is not seen attacked either before the Appellate Assistant Commissioner or before the Tribunal. The only contention seen urged before the Tribunal is that the transaction does not amount to a sale. The further question whether the profits can be determined at the figure mentioned above is not canvassed before the Tribunal and it cannot be allowed to be urged here as the same does not arise out of the order of the Tribunal. Therefore, this contention of the learned counsel for the assessee has only to be rejected.

12. In the result, the question referred for opinion has to be answered in the affirmative, i.e., in favour of the revenue and against the assessee. The revenue is entitled to the costs of this reference.

13. A copy of this judgment may be forwarded to the Appellate Tribunal as required by law.


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